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

FORM 10-K

ý

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2010ORo

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


COMMISSION FILE NUMBER 1-13495

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

DELAWARE(State or other jurisdiction
incorporation or organization)

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

02451-1212(Address of principal executive offices)

(Zip Code)


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

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

Title of Each Class

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

New York Stock ExchangePreferred Stock Purchase Rights

New York Stock Exchange


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

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

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

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

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

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

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

Large Accelerated Filer o

Accelerated Filer ý

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

Smaller reporting company o


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

The aggregate market value of the voting and non-voting stock of the registrant held by non-affiliates of the registrant as of
June 30, 2010 was $102,840,481.

As
of March 8, 2011, 14,192,689 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 18, 2011, are incorporated by reference into
Items 10, 11, 12, 13 and 14 of Part III of this report. Such Proxy Statement shall not be deemed to be "filed" as part of this Annual Report on Form 10-K, except for
those parts therein which have been specifically incorporated by reference herein.



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



PagePart IItem 1.

Business

1Item 1A.

Risk Factors

4Item 1B.

Unresolved SEC Staff Comments

10Item 2.

Properties

10Item 3.

Legal Proceedings

12Item 4.

(Removed and Reserved)

12Part IIItem 5.

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

13Item 6.

Selected Financial Data

14Item 7.

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

18Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

36Item 8.

Financial Statements and Supplementary Data

38Item 9.

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

38Item 9A.

Controls and Procedures

38Item 9B.

Other Information

39Part IIIItem 10.

Directors and Executive Officers of the Registrant

40Item 11.

Executive Compensation

40Item 12.

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

40Item 13.

Certain Relationships and Related Transactions

41Item 14.

Principal Accounting Fees and Services

41Part IVItem 15.

Exhibits, Financial Statements and Notes to Financial Statements

41


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PART I

Forward-Looking Statements

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

Item 1.    Business

Overview

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

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

We
derive our revenue principally as a laundry facilities management contractor for the multi-unit housing industry. We manage laundry rooms under long-term
leases with property owners, property management companies and colleges and universities. We refer to these leases as "laundry leases", or "management contracts," and this business as "laundry
facilities management business." In 2010, 95% of our consolidated revenue from continuing operations was derived from our laundry facilities management business. As of December 31, 2010, our
laundry facilities management business had revenue-generating laundry equipment operating in 43 states and the District of Columbia.

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

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

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Laundry Facilities Management Business

For the years ended December 31, 2009 and 2010, our laundry facilities management business accounted for approximately 95% of
our total revenue from continuing operations, and 94% and 95% of our gross margin from continuing operations, respectively. Through our laundry facilities management business, we act as a laundry
facilities management contractor with property owners or managers. We lease space within a property, in some instances improve the leased space with flooring, ceilings and other improvements
("betterments") and then install and service the laundry equipment and collect the payments. The property owner or manager is usually responsible for maintaining, cleaning, and securing the premises
and payment of utilities. Under our long-term leases, we typically receive the exclusive right to provide and service laundry equipment within a multi-unit housing property in
exchange for a negotiated percentage of the total revenue collected. We refer to this percentage as "facilities management rent." In each of the past five years, we have retained approximately 97% of
our equipment base per year. Our gross additions to our equipment base for each of the years ended December 31, 2009 and 2010 through internally generated growth equaled 2%. Our additions, net
of lost business, were -2% for the year ended December 31, 2009 and -1% for the year ended December 31, 2010. The machine base not retained is primarily
attributable to contracts the Company has chosen not to renew due to unacceptable profit margins (including some acquired contracts that did not meet our performance criteria) and to a lesser degree,
to property owners who chose to self-operate. We believe that our ability to maintain the relative size of our equipment base is indicative of our service of, and attention to, property
owners and managers. We also provide our customers with proprietary technologies such as LaundryView, LaundryLinx, ChangePoint and our Client Resource Center,
and we continue to invest in research and development of such technologies. We generally have the ability to set and adjust the vend pricing for our equipment based upon local market conditions.

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

We
also generate revenue by leasing equipment to laundry customers who choose neither to purchase equipment nor to become a laundry facilities management customer, but instead wish to
maintain their own laundry rooms. This leasing business generated revenue of $5 million for each of the years ended December 31, 2009 and 2010, and is included in the laundry facilities
management business.

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

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

Customers.As of February 1, 2011, we provided laundry equipment and related services to approximately 86,000 laundry rooms
located in 43
states throughout the continental United States and the District of Columbia. As of February 1, 2011, no customer contract accounted for more than 1% of our laundry facilities management
revenue. We serve customers in multi-unit housing facilities,

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

Seasonality.We experience moderate seasonality as a result of our operations in the college and university market. Revenues derived
from the college
and university market represented approximately 12% of the laundry facilities management revenue for 2010. Academic facilities management revenue is derived substantially during the school year in the
first, second and fourth calendar quarters. Conversely, during the third calendar quarter when most colleges and universities are not in session, the Company increases its operating and capital
expenditures when it has its greatest product installation activities in the college market.

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

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

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

Commercial Laundry Equipment Sales Business

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

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December 31,
2009 and 2010, our commercial laundry equipment sales business accounted for approximately 5% of our total revenue.

Employee Base

As of February 9, 2011, the Company employed 876 full-time employees. No employee is covered by a collective
bargaining agreement and the Company believes that its relationship with its employees is good.

Operating Characteristics

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

Backlog

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

Contact Information

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

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

Item 1A.    Risk Factors

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

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

Our laundry facilities management business, which provided 95% of our total revenue from continuing operations for the year ended
December 31, 2010, is highly dependent upon the renewal of

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leases
with property owners and property management companies. Approximately 87% of our leases have a weighted average remaining life of 4 years. In the next seven years, 8% to 10% of our
laundry room leases are up for renewal each year. We have traditionally relied upon exclusive, long-term leases with our customers, as well as frequent customer interaction and an emphasis
on customer service, to assure continuity of financial and operating results. We cannot guarantee that in the future we will be able to establish long-term leases with new customers or
renew existing long-term leases as they expire on favorable terms, or at all.

Failure
by us to continue to establish long-term leases with new customers, or to successfully renew existing long-term leases as they expire, could have a
material adverse effect on our business, results of operations, cash flows and financial condition. Further, approximately 13% of our customers are not subject to leases, are subject to
short-term leases of less than one year remaining, or have the right to terminate their lease with us at their option. Failure to retain these customers could have a material adverse
effect on our business, results of operations, cash flows and financial condition.

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

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

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

We purchase a large majority of the equipment that we use in our laundry facilities management business from Whirlpool. In addition, we
derive a portion of our commercial laundry equipment sales revenue from our position as a distributor of Whirlpool commercial laundry products. Our relationship with Whirlpool is governed by purchase
and distribution agreements and a termination of, or substantial revision of the terms of, the contractual arrangements or business relationships with Whirlpool could have a material adverse effect on
the Company's business, results of operations, financial condition and prospects. We cannot assure you that Whirlpool will continue its relationship with us. If Whirlpool terminates its relationship
with us, our results of operations, cash flows and financial condition could be materially and adversely affected, and further, we may be unable to replace our relationship with Whirlpool with a
comparable manufacturer on favorable terms, or at all.

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

Our laundry facilities management revenue from our operation of card- and coin-operated laundry equipment,
particularly in the multi-unit housing sector, depends partially upon the level of tenant occupancy. The number of apartments occupied in an apartment building with a vended laundry
facility directly affects our revenue. Extended periods of reduced occupancy in our clients' buildings could adversely affect our operations. The level of occupancy can be adversely affected by many
market and general economic conditions, all of which are beyond our control, including:



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

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

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

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

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

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



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Acquisitions carry risks that could adversely affect our business.

We have engaged in the past, and intend to engage in the future, in acquisitions to continue the expansion of our laundry facilities
management business.

Any
future acquisitions could involve numerous risks, including:



We
may not be successful in addressing these risks or any other problems encountered in connection with any acquisitions, which could adversely affect our business, results of operations
and financial condition.

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

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

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

We rely on patents, copyrights, trademarks, trade secrets, confidentiality provisions, and employee and third party
non-disclosure and non-solicitation agreements to establish and protect our intellectual property and proprietary rights. We cannot be certain that steps we have taken to
protect our intellectual property and proprietary rights will be adequate or that third parties will not infringe or misappropriate any of our intellectual property or proprietary rights. While we
have periodically made filings with the U.S. Patent and Trademark Office, we have traditionally relied upon the protections afforded by contract rights and common law ownership rights, and we cannot
assure you that these contract rights and common law ownership rights will adequately protect our intellectual property and proprietary rights. Any infringement or misappropriation of our intellectual
property and proprietary rights could damage their value and could have a material adverse effect on our business, results of operations and financial condition. We may have to engage in litigation to
protect our rights to our intellectual property and proprietary rights, which could result in significant litigation expenses and require a significant amount of management's time.

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

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

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

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

The Company assesses goodwill for impairment at least annually and whenever events or circumstances indicate that the carrying amount
of the goodwill may be impaired. Important factors that could trigger an impairment review include significant under-performance relative to historical or projected future operating results;
significant negative industry or economic trends; and the Company's market capitalization relative to its book value. The Company evaluated its goodwill for impairment as of December 31, 2010
and determined there was no impairment. The goodwill impairment review consists of a two-step process of first assessing the fair value and comparing to the carrying value. If this fair
value exceeds the carrying value, no further analysis or goodwill impairment charge is required. If the fair value is below the carrying value, we would proceed to the next step, which is to measure
the amount of the impairment loss. The impairment loss is measured as the difference between the carrying value and implied fair value of goodwill. Any such impairment loss would be recognized in the
Company's results of operations in the period the impairment loss arose. Any charge could have a significant negative effect on our reported earnings. In addition, our financial results could be

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negatively
impacted by the application of existing and future accounting policies or interpretations of existing accounting policies.

We face risks associated with environmental regulation.

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

A small group of stockholders own a substantial percentage of our common stock, and their interests could be in conflict with yours.

As of December 31, 2010, our directors, executive officers, and certain of our stockholders related to such persons and their
affiliates beneficially owned in the aggregate approximately 32.4% of the outstanding shares of our common stock. (See Item 12, "Security Ownership of Certain Beneficial Owners and Management
and Related Stockholders Matters" below.) This percentage ownership does not include options to purchase 1,221,393 shares of our common stock held by some of these persons, which options were
exercisable at, or within 60 days subsequent to, December 31, 2010. If all of these options had been exercised as of December 31, 2010, then these stockholders and their
affiliates would have beneficially owned 37.8% of the outstanding shares of our common stock. Additionally, we are party to a stockholders' agreement with some of these stockholders that gives them
rights of first offer to purchase shares of our common stock offered for sale by another stockholder party thereto (See Item 13, "Certain Relationships and Related Transactions" below.) As a
result of this concentration in ownership, should these stockholders act together, they have the ability to influence the outcome of the election of directors and all other matters requiring approval
by stockholders. Circumstances may arise in which the interests of this group of stockholders could be in conflict with the interests of other stockholders.

Provisions in our charter and bylaws, Delaware law, and shareholder rights plan could have the effect of discouraging takeovers.

Specific provisions of our charter and bylaws, as described below and in Footnote 11 to the Consolidated Financial Statements; sections
of the corporate law of Delaware; our shareholder rights plan, and powers of our Board of Directors may discourage takeover attempts not first approved by the Board of Directors, including takeovers
which some stockholders may deem to be in their best interests. The shareholder rights plan described below could make it more difficult for a third party to acquire, or could discourage a third party
from acquiring, us or a large block of our common stock without the support of our Board of Directors. These provisions and powers of the Board of Directors could delay or prevent the removal of
incumbent directors or the assumption of control by stockholders, even if the particular removal or assumption of control would be beneficial to stockholders. These provisions and powers of the Board
of Directors could also discourage or make more difficult a merger, tender offer or proxy contest, even if these events would be beneficial, in the short term, to the interests of some shareholders.
The anti-takeover provisions and powers of the Board of Directors include, among other things:



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Item 1B.    Unresolved SEC Staff Comments.

None.

Item 2.    Properties.

Mac-Gray leases approximately 32,000 square feet in Waltham, Massachusetts that it uses as its corporate headquarters and
which houses the Company's administrative and central services. At December 31, 2010, Mac-Gray leased the regional facilities listed below, which are largely operated as

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sales
and service facilities, although limited administrative functions are also performed at many of them. Mac-Gray also leased storage facilities at various locations.

Location

Approximate
Square Footage

Expiration
DateAlbany, New York


1,500


7/2012Albuquerque, New Mexico


6,600


8/2015Beltsville, Maryland


22,432


8/2012Buda, Texas


7,000


7/2015Buffalo, New York


10,000


9/2015Carlstadt, New Jersey


17,094


5/2015Charlotte, North Carolina


10,640


3/2013Chesapeake, Virginia


6,430


7/2013College Station, Texas


1,250


12/2011Colorado Springs, Colorado


4,800


5/2011Denver, Colorado


21,688


3/2013East Hartford, Connecticut


14,900


5/2013El Paso, Texas


6,250


3/2012Eugene, Oregon


2,500


12/2013Euless, Texas


10,000


4/2012Grand Junction, Colorado


3,575


5/2011Gurnee, Illinois


22,521


4/2011Gurnee, Illinois


12,000


7/2012Hollywood, Florida


16,494


10/2015Houston, Texas


10,687


11/2012Jessup, Maryland


10,361


3/2012Lake City, Florida


1,125


4/2012Lithia Springs, Georgia


10,675


2/2016Lynnwood, Washington


17,467


6/2013Madison, Tennessee


17,625


4/2017Memphis, Tennessee


11,250


10/2014Metairie, Louisiana


4,000


4/2012Oklahoma City, Oklahoma


2,250


11/2011Orlando, Florida


2,100


12/2012Pelham, Alabama


9,000


4/2013Phoenix, Arizona


25,920


8/2015Portland, Oregon


10,000


5/2016Riverview, Florida


17,518


4/2017Salt Lake City, Utah


6,675


6/2013Syracuse, New York


8,400


10/2013Tucson, Arizona


6,265


4/2014Walpole, Massachusetts


3,000


5/2011Waltham, Massachusetts


32,000


11/2015Westbrook, Maine


5,625


4/2017Woburn, Massachusetts


40,000


2/2016


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

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

11

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Table of Contents

Item 3.    Legal Proceedings

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

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

Item 4.    (Removed and Reserved)

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Table of Contents

PART II

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

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

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

December 31, 2009

December 31, 2010High

Low

High

LowFirst Quarter

$
7.62

$
4.60

$
11.45

$
8.59Second Quarter

$
14.36

$
4.95

$
12.63

$
10.63Third Quarter

$
13.79

$
9.57

$
12.49

$
10.01Fourth Quarter

$
11.73

$
7.84

$
16.00

$
11.30


As
of March 7, 2011 there were 109 shareholders of record of our common stock.

On
February 5, 2010, the Company's Board of Directors approved the initiation of a quarterly dividend policy for its common stock. The Company had not previously paid dividends on
any of its shares of capital stock. The Company declared dividends of $0.05 per share payable on April 1, 2010, July 1, 2010, October 1, 2010 and January 3, 2011. All
dividends were paid and have been reflected in the current financial statements.

On
January 20, 2011, the Company's Board of Directors approved an increase to the quarterly dividend policy to $0.055 per share ($0.22 per share on an annualized basis).

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

13

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Table of Contents

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

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

Years Ended December 31,2006

2007(1)

2008(2)

2009

2010Statement of Income Data:Revenue from continuing operations

$
248,917

$
262,484

$
327,229

$
325,924

$
320,011Cost of revenue


201,988


214,705


271,681


270,832


267,259Operating expenses:General and administration


16,346


16,381


18,341


17,819


18,628Sales and marketing


13,361


13,097


14,970


14,249


14,185Incremental costs of proxy contest











971


235Depreciation and amortization


1,473


1,491


1,614


1,600


1,533Gain on sale of assets


(32
)

(302
)

(69
)

(648
)

(262
)Loss on early extinguishment of debt


73





207





Impairment of assets


2,502











Total operating expenses


33,723


30,667


35,063


33,991


34,319Income from continuing operations


13,206


17,112


20,485


21,101


18,433Interest expense, including the change in the fair value of non-hedged derivative instruments


13,330


15,158


22,409


18,782


13,428Income (loss) from continuing operations before provision for income taxes


(124
)

1,954


(1,924
)

2,319


5,005Provision for income taxes


(291
)

707


(758
)

1,278


2,176Income (loss) from continuing operations, net


167


1,247


(1,166
)

1,041


2,829Income from discontinued operations, net


689


1,272


1,707


1,074


44Loss from disposal of discontinued operation, net of tax of $384














(294
)Net income

$
856

$
2,519

$
541

$
2,115

$
2,579Earnings (loss) per sharebasiccontinuing operations

$
0.01

$
0.09

$
(0.09
)
$
0.08

$
0.21Earnings (loss) per sharedilutedcontinuing operations

$
0.01

$
0.09

$
(0.09
)
$
0.07

$
0.20Earnings (loss) per sharebasicdiscontinued operations

$
0.05

$
0.10

$
0.13

$
0.08

$
(0.02
)Earnings (loss) per sharediluteddiscontinued operations

$
0.05

$
0.09

$
0.13

$
0.08

$
(0.02
)Earnings per sharebasic

$
0.07

$
0.19

$
0.04

$
0.16

$
0.19Earnings per sharediluted

$
0.06

$
0.18

$
0.04

$
0.15

$
0.18Weighted average common shares outstandingbasic


13,008


13,209


13,346


13,529


13,797Weighted average common shares outstandingdiluted


13,448


13,680


13,346


13,940


14,379Cash dividend per common share














0.20


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Table of Contents



Years Ended December 31,2006

2007(1)

2008(2)

2009

2010Other Financial Data:EBITDA from continuing operations(3)

$
49,370

$
54,030

$
67,456

$
71,860

$
67,433Depreciation and amortization

$
36,260

$
38,655

$
48,775

$
49,866

$
47,546Capital expenditures(4)

$
25,332

$
26,711

$
24,313

$
21,341

$
26,580Cash flows provided by operating activities from continuing operations

$
35,957

$
43,202

$
55,735

$
60,720

$
54,080Cash flows used in investing activites from continuing operations

$
(44,396
)
$
(72,944
)
$
(130,111
)
$
(20,074
)
$
(25,973
)Cash flows provided by (used in) financing activities from continuing operations

$
9,416

$
31,073

$
79,887

$
(37,883
)
$
(36,673
)Balance Sheet Data (at end of period):Working capital from continuing operations

$
(1,497
)
$
671

$
(2,203
)
$
(11,038
)
$
(18,689
)Long-term debt and capital lease obligations, including current portion

$
177,068

$
208,521

$
301,292

$
263,868

$
225,936Long-term debt and capital lease obligations, net of current portion

$
175,823

$
207,169

$
295,821

$
258,325

$
221,425Total assets

$
339,004

$
383,537

$
490,004

$
464,276

$
424,083Stockholders' equity

$
91,640

$
97,844

$
97,964

$
104,535

$
108,051


(1)Includes
the results of operations of the Maryland laundry facilities management assets acquired on August 8, 2007 from Hof Service
Company, Inc. for approximately $43,000.(2)Includes
the results of operations of the western and southern region laundry facilities management assets acquired on April 1, 2008 from Automatic
Laundry Company, Ltd. for approximately $116,000.(3)EBITDA
from continuing operations is defined as income from continuing operations before provision for income taxes, depreciation and amortization expense
and interest expense. EBITDA from continuing operations and Adjusted EBIDTA from continuing operations are included in this report because they are a basis upon which our management and Board of
Directors assess our operating performance. EBITDA from continuing operations is not a measure of our liquidity or financial performance under GAAP and should not be considered as an alternative to
net income or any other performance measure derived in accordance with GAAP, or as an alternative to cash flows from operating activities as a measure of our liquidity. The use of EBITDA from
continuing operations instead of net income has limitations as an analytical tool, including the exclusion of interest expense and depreciation and amortization expense, which represent significant
and unavoidable operating costs given the level of indebtedness and the capital expenditures needed to maintain our business. Management compensates for these limitations by relying primarily on our
GAAP results and by using EBITDA from continuing operations only supplementally. Our management believes EBITDA from continuing operations is useful to investors because it helps enable investors to
evaluate our business in the same manner as our management and because it is frequently used by securities analysts, investors and other interested parties in the evaluation of companies with
substantial financial leverage. Our measure of EBITDA from continuing operations is not necessarily comparable to other similarly titled captions of other companies due to potential inconsistencies in
the methods of calculation.(4)Excludes
$1,776, $2,003, $1,774, $1,628 and $2,421 in 2006, 2007, 2008, 2009, and 2010 respectively, of capital leases associated with vehicles acquired and
used in the operation of the Company.


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Table of Contents




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

Years Ended December 31,2006

2007(1)

2008(2)

2009

2010Income (loss) from continuing operations, net

$
167

$
1,247

$
(1,166
)
$
1,041

$
2,829Income (loss) from discontinued operations, net


689


1,272


1,707


1,074


(250)
(10)Net income

$
856

$
2,519

$
541

$
2,115

$
2,579Net income (loss) from continuing operations

$
167

$
1,247

$
(1,166
)
$
1,041

$
2,829Add:Provision for income taxes


(291
)

707


(758
)

1,278


2,176Cost of revenue depreciation and amortization expense


34,787


37,164


47,161


48,266


46,013Operating expense depreciation and amortization expense


1,473


1,491


1,614


1,600


1,533Interest expense, net(8)


13,234


13,421


20,605


19,675


14,882EBITDA from continuing operations(3)


49,370


54,030


67,456


71,860


67,433Add (Subtract):Gain on sale of certain assets, net











(403
)(7)

Impairment of assets(4)


2,502











(Gain) loss related to derivative instruments(5)


96


1,737


1,804


(893
)

(1,454
)Loss on early extinguishment of debt(6)


73





207





Incremental costs of proxy contest(9)











971


235Adjusted EBITDA from continuing operations(3)

$
52,041

$
55,767

$
69,467

$
71,535

$
66,214


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


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Table of Contents

EBITDA
from continuing operations are useful to investors because they help enable investors to evaluate our business in the same manner as our management and because they are frequently used by
securities analysts, investors and other interested parties in the evaluation of companies with substantial financial leverage. Our measures of EBITDA from continuing operations and Adjusted EBITDA
from continuing operations are not necessarily comparable to other similarly titled captions of other companies due to potential inconsistencies in the methods of calculation. (4)Represents
a pre-tax charge associated with our former reprographics business unit.(5)The
(gain) loss related to derivative instruments is the consequence of interest rate swaps which do not qualify for hedge accounting treatment. For
interest rate swaps that do qualify as hedged instruments, changes in fair value are recorded in Other Comprehensive Income and not in the income statement. Including the fluctuation in the fair value
of the derivative instruments in the reconciliation of net income as reported to net income as adjusted allows for a more consistent comparison of the operating results of the Company. The fair value
of the derivatives is ultimately zero at the time of settlement provided that the Company holds the contract through the date of maturity. Thus, over the life of the derivative instruments the net
impact of the unrealized gain or loss to the Company's operating results will ultimately be zero as any income or loss recorded in prior periods will be offset in subsequent periods if the contract is
held to its maturity date. However the Company will be impacted by the realized settlements of the derivative instruments on a quarterly basis.(6)Each
of the losses on early extinguishment of debt resulted from separate and distinct refinancings of our senior credit facility in 2006 and 2008 and is
not related to the performance of the Company's business. Each of the losses reflects only the unamortized cost of the prior bank financing which had been allocated to banks which did not participate
in the replacement financing agreement. Because the losses were triggered by refinancings of our senior credit facility and the Company does not currently expect further refinancings of the facility
prior to its maturity in 2013, management believes that the impact of this item on the Company's financial results will not continue beyond 2008.(7)Represents
a pretax gain recognized in connection with the sale of a facility in Tampa, Florida on January 2, 2009.(8)Interest
expense, net, does not include the change in the fair value of non-hedged derivative instruments.(9)Represents
additional costs incurred for legal advice and proxy solicitation in response to proxy contests relating to the Company's 2009 and 2010 annual
meetings.(10)Includes
the loss on disposal of discontinued operations of $294, net of tax.


17

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Table of Contents

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

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

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

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

Overview

Mac-Gray was founded in 1927 and re-incorporated in Delaware in 1997. We derive our revenue principally as a
laundry facilities management contractor for the multi-unit housing industry. We also derive revenue through the sales of commercial laundry equipment primarily to public retail
laundromats, as well as to the multi-unit housing industry. In addition, we sell commercial laundry equipment directly to institutional purchasers such as hotels, for use in their own
on-premise laundry facilities. Our core business model is built on a stable demand for laundry services, combined with long-term leases, strong customer relationships, a broad
customer base and predictable capital needs. For the years ended December 31, 2009 and 2010, our total revenue was $325,924 and $320,011, respectively. Approximately 95% of our total revenue
for these periods was generated by our laundry facilities management business. We generate laundry facilities management revenue primarily through long-term leases with property owners or
property management companies granting us the exclusive right to install and maintain laundry equipment in common area laundry rooms within their properties, in exchange for a negotiated portion of
the revenue we collect. As of December 31, 2010, approximately 87% of our installed machine base was located in laundry facilities subject to long-term leases, with a weighted
average remaining term of approximately four years. Our capital costs are typically incurred in connection with new or renewed leases, and include investments in laundry equipment and
card- and coin-operated systems, incentive payments to property owners or property management companies and/or expenses to refurbish laundry facilities. Our capital
expenditures consist of a large number of relatively small amounts associated with our entry into or renewal of leases. Accordingly, our capital needs are predictable and largely within our control.
For the years ended December 31, 2009 and 2010, we incurred $21,341 and $26,580 of capital expenditures, respectively. In addition, we make incentive payments to property owners and property
management companies to secure our lease arrangements. We paid $1,807 and $3,045 in incentive payments in the years ended December 31, 2009 and 2010, respectively.

In
addition, through our Commercial Laundry Equipment Sales business, we generate revenue by selling commercial laundry equipment. For the years ended December 31, 2009 and 2010,
our Commercial Laundry Equipment Sales business accounted for approximately 5% of our total revenue for both 2009 and 2010, and 6% and 5% of our gross margin for 2009 and 2010, respectively. We

18

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Table of Contents

anticipate
that tight credit markets for our customers will continue to challenge our ability to maintain or grow our revenue from laundry equipment sales.

Our
financial objective is to maintain and enhance profitability by retaining existing customers, adding customers in areas in which we currently operate, selectively expanding our
geographic footprint and density through acquisitions, and controlling costs. One of the key challenges we face is maintaining and expanding our customer base in a competitive industry. We experience
competition from other industry participants, including national, regional and local laundry facilities management operators and from property owners and property management companies who
self-operate their laundry facilities. We devote substantial resources to our marketing and sales efforts and we focus on continued innovation in order to distinguish us from competitors.
Apartment vacancy rates pose an additional challenge. We have begun to see some improvement in vacancy rates; however we expect vacancy rates above the historical norm to continue to have a negative
impact, but to a lesser extent than in prior years, on our laundry facilities management business in 2011. Approximately 8% to 10% of our laundry room leases are up for renewal each year. Over the
past five calendar years, we have been able to retain, on average, approximately 97% of our total installed equipment base each year. Our gross additions to our equipment base for each of the years
ended December 31, 2009 and 2010 through internally generated growth equaled 2%. Our additions, net of lost business, were -2% for the year ended December 31, 2009 and
-1% for the year ended December 31, 2010. The machine base not retained is primarily attributable to contracts we have has chosen not to renew due to unacceptable profit margins,
(including some acquired contracts that did not meet our performance criteria,) and to a lesser degree, to property owners who chose to self-operate.

On
January 4, 2010, we entered into an interest rate swap agreement to manage the interest rate risk associated with our debt. The swap agreement effectively converts a portion
($100 million) of our fixed rate senior notes to a variable rate. Under this agreement, we receive the fixed rate on our senior notes (7.625%) and pay a variable rate of LIBOR plus the
applicable margin charged by the banks. This swap agreement has an associated call feature that allows the counterparty to terminate this agreement at their option.

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

On
February 5, 2010, our Board of Directors approved the initiation of a quarterly dividend policy for our common stock. We had not previously paid dividends on any of our shares
of capital stock. We paid aggregate dividends of $0.20 per share in 2010.

On
January 20, 2011, the Company's Board of Directors approved an increase to the quarterly dividend policy to $0.055 per share ($0.22 per share on an annualized basis).

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

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

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Revenue from continuing operations

2009

2010

Increase (Decrease)

% ChangeLaundry facilities management revenue

$
309,028

$
304,040

$
(4,988
)

(2
)%Commercial laundry equipment sales revenue


16,896


15,971


(925
)

(5
)%Total revenue from continuing operations

$
325,924

$
320,011

$
(5,913
)

(2
)%


Fiscal year ended December 31, 2010 compared to fiscal year ended December 31, 2009

Total revenue decreased by $5,913 or 2%, to $320,011 for the year ended December 31, 2010 compared to $325,924 for the year
ended December 31, 2009.

Laundry facilities management revenue.Laundry facilities management revenue decreased by $4,988, or 2%, to $304,040 for the year ended
December 31, 2010 compared to $309,028 for the year ended December 31, 2009. The decrease in revenue is attributable to the termination of contracts we have chosen not to renew, the
decision of some customers to operate their own laundry rooms and reduced usage of our equipment in apartment building laundry rooms as a result of the continued level of higher apartment vacancy
rates in some markets. These decreases are partially offset by our ability to add new contracts and our vend increase program. We have begun to see some decrease in vacancy rates; however we expect
vacancy rates above the historical norm to continue to have a negative impact, but to a lesser extent than in prior years, on our laundry facilities management business in 2011. We track the change in
revenue month over month and quarter over quarter in our markets to better understand the revenue trend for our multi-family housing customers. This analysis is used to enable us to respond to
changing trends in different geographic markets and to enable us to better allocate capital spending.

Commercial laundry equipment sales revenue.Revenue in the commercial laundry equipment sales business decreased $925, or 5%, to
$15,971 for the year
ended December 31, 2010 compared to $16,896 for the year ended December 31, 2009. Sales in the commercial laundry equipment sales business are sensitive to the strength of the local
economy, consumer confidence, local permitting, and the availability and cost of financing to small businesses, and therefore, tend to fluctuate from period to period. We anticipate that tight credit
markets for our customers will continue to challenge our ability to maintain or grow our revenue from laundry equipment sales in 2011.

Cost of revenue

Cost of laundry facilities management revenue.Cost of laundry facilities management revenue includes rent paid to customers as well as
costs
associated with installing and servicing machines, costs of collecting, counting, and depositing facilities management revenue and the costs of delivering and servicing rented facilities management
equipment. Cost of laundry facilities management revenue decreased $773, or less than 1%, to $208,141 for the year ended December 31, 2010, as compared to $208,914 for the year ended
December 31, 2009. The decrease is due primarily to decreased rent paid to customers as a result of lower revenues. These decreases were offset by higher transportation costs and branch
operating expenses. As a percentage of facilities management revenue, cost of facilities management revenue was 68% for each of the years ended December 31, 2010 and 2009. Facilities management
rent as a percentage of facilities management revenue was 49% and 48% for the years ended December 31, 2010 and 2009, respectively. Facilities management rent can be affected by new and renewed
laundry leases, lease portfolios acquired and by other factors such as the amount of incentive payments and laundry room betterments invested in new or renewed laundry leases. As we vary the amount
invested in a facility, the facilities management rent as a function of facilities

20

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Table of Contents

management
revenue can vary. Incentive payments and laundry room betterments are amortized over the life of the related lease.

Depreciation and amortization related to operations.Depreciation and amortization related to operations decreased by $2,253, or 5%, to
$46,013 for
the year ended December 31, 2010 as compared to $48,266 for the year ended December 31, 2009. The decrease in depreciation and amortization for the year ended December 31, 2010 as
compared to the same period in 2009 is primarily attributable to the fact that most of the equipment we acquired as part of the acquisitions we made in 2004 and 2005 was fully depreciated in 2009. The
pool of equipment we acquired was assigned an average life of 5 years.

Cost of commercial laundry equipment sales.Cost of commercial laundry equipment sales consists primarily of the cost of laundry
equipment and parts
and supplies sold, as well as salaries, warehousing and distribution expenses. Cost of commercial laundry equipment sales decreased by $547, or 4%, to $13,105 for the year ended December 31,
2010 as compared to $13,652 for the year ended December 31, 2009. As a percentage of sales, cost of commercial laundry equipment sales was 82% for the year ended December 31, 2010
compared to 81% in 2009. The gross margin in the commercial laundry equipment sales business unit decreased to 18% for the year ended December 31, 2010 as compared to 19% for the same period in
2009. The change in gross margin from period to period is primarily a function of the mix of products sold.

Operating expenses

General and administration, sales and marketing, related depreciation and amortization, and incremental proxy costs.General and
administration,
sales and marketing, related depreciation and amortization, and incremental proxy costs decreased by $58, or less than 1%, to $34,581 for the year ended December 31, 2010 as compared to $34,639
for the year ended December 31, 2009. As a percentage of total revenue, these expenses were 11% for the years ended December 31, 2010 and 2009. The decrease in expenses for the year
ended December 31, 2010 as compared to December 31, 2009 is primarily attributable to a reduction in professional fees.

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

Income from continuing operations.

Income from continuing operations decreased by $2,668, or 13%, to $18,433 for the year ended December 31, 2010 as compared to
$21,101 for the year ended December 31, 2009. Excluding the gain on sale of real estate in 2009, income from continuing operations, as adjusted, decreased by $2,265 or 11% from $20,698 for the
year ended December 31, 2009, to $18,433 for the year ended 2010. We have supplemented the consolidated financial statements presented according to generally accepted accounting principles
(GAAP), using a non-GAAP financial measure of adjusted income from continuing operations. Non-GAAP financial measures are not in accordance with, or an alternative for,
generally accepted accounting principles in the United States. Our non-GAAP financial measures are not meant to be considered in isolation or as a substitute for comparable GAAP financial
measures, and should be read only in conjunction with our consolidated financial statements prepared in accordance with GAAP. Management believes presentation of this measure is useful to investors to
enhance an overall understanding of our historical financial performance and future prospects. Adjusted income from continuing operations, which is adjusted to exclude certain gains and losses from
the comparable GAAP income from operations, is an indication of our baseline performance before

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gains,
losses or other charges that are considered by management to be outside of our core operating results. The presentation of this additional information is not meant to be considered in isolation
or as a substitute for income from operations or other measures prepared in accordance with GAAP.

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

Years Ended December 31,2009

2010Income from continuing operations

$
21,101

$
18,433Gain on sale of real estate(1)


(403
)

Income from continuing operations, as adjusted

$
20,698

$
18,433


(1)Represents
a pretax gain recognized in connection with the sale of a facility in Tampa, Florida on January 2, 2009.


Interest expense, including the change in the fair value of non-hedged derivative instruments

Interest expense, including the change in the fair value of non-hedged derivative instruments, decreased by $5,354, or 29%,
to $13,428 for the year ended December 31, 2010 as compared to $18,782 for the year ended December 31, 2009. The decrease is due to lower outstanding debt balances attributable to
operations generating free cash flow, the $8,000 reduction in debt from the proceeds of the February 5, 2010 sale of Intirion Corporation, the interest rate savings achieved from the fixed to
floating interest rate swap agreement we entered into
during the first quarter of 2010, and the increase in the unrealized gain on interest rate protection contracts which do not qualify for hedge accounting. Interest expense, excluding the change in
fair value of non-hedged derivative instruments was $14,882 and $19,675 for the years ended December 31, 2010 and 2009, respectively. Our average effective interest rates are not
significantly affected by fluctuations in the market as a significant amount of our debt have fixed rates through our derivative instruments. Our average effective borrowing rate was 6.1% for the year
ended December 31, 2010 as compared to 7.1% for the year ended December 31, 2009.

We
are party to interest rate swap agreements which we entered into to hedge the interest rates on our debt. Certain of these swap agreements do not qualify as cash flow hedges. In
accordance with the guidelines for accounting for derivatives, non-cash gains of $1,454 and $893 have been recorded in the income statement for the years ended December 31, 2010 and
2009, respectively.

Provision for income taxes

The provision for income taxes increased by $898, or 70%, to $2,176 for the year ended December 31, 2010 compared to an expense
of $1,278 for the year ended December 31, 2009. The increase is primarily the result of increased income before the provision for income taxes in 2010 compared to the income before provision
for income taxes in 2009. The effective tax rate for 2010 is 43.4%. The effective tax rate is comprised of the federal statutory rate of 34%, the state rate net of federal taxes of 6.9%, permanent
book/tax differences of 3.5% and changes to deferred rates and valuation reserves of -1%. The most significant reductions of the effective tax rate in 2010 compared to 2009 are lower state
income taxes as a percentage of pretax income and a smaller change to the valuation allowance.

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Income from continuing operations, net

As a result of the foregoing, income from continuing operations, net, increased by $1,788 to $2,829 for the year ended
December 31, 2010 as compared to $1,041 for the year ended December 31, 2009. Income from continuing operations, net, as adjusted for the items in the table below, increased by $1,245 to
$2,140 for the year ended December 31, 2010 as compared to $895 for the year ended December 31, 2009.

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

Years Ended December 31,2009

2010Income from continuing operations, net, as reported

$
1,041

$
2,829Income (loss) from discontinued operations, net


1,074


(250
)Net income, as reported

$
2,115

$
2,579Income from continuing operations before provision for income taxes, as reported

$
2,319

$
5,005Gain related to derivative instruments(1)


(893
)

(1,454
)Gain on sale of real estate(2)


(403
)

Incremental costs of proxy contests(3)


971


235Income from continuing operations before provision for income taxes, as adjusted


1,994


3,786Provision for income taxes, as adjusted


1,099


1,646Income from continuing operations, net, as adjusted

$
895

$
2,140Diluted earnings per share from continuing operations, net, as adjusted

$
0.06

$
0.15


(1)Represents
the unrealized gain on interest rate protection contracts, which do not qualify for hedge accounting treatment. For interest rate swaps that do
qualify as hedged instruments, changes in mark to market are recorded in Other Comprehensive Income and not in the income statement. Including the fluctuation in the fair value of the derivative
instruments in the reconciliation of net income as reported to net income as adjusted allows for a more consistent comparison of the operating results of the Company.(2)Represents
the sale of a facility in Tampa, Florida on January 2, 2009.(3)Represents
additional costs incurred for legal advice and proxy solicitation in response to proxy contests relating to our 2009 and 2010 annual meetings.


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

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

Income from Discontinued Operations, net

Income from discontinued operations, net, excluding the loss on disposal of $294, decreased to $44 for the year ended
December 31, 2010 as compared to $1,074 for the year ended December 31, 2009. Revenue from the discontinued operation decreased to $2,200 for the year ended December 31, 2010 as
compared to $30,298 for the year ended December 31, 2009.

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

The information presented below for the years ended December 31, 2008 and 2009 is derived from Mac-Gray's
consolidated financial statements and related notes included in this report.

Revenue from continuing operations

2008

2009

Increase (Decrease)

% ChangeLaundry facilities management revenue

$
306,089

$
309,028

$
2,939


1
%Commercial laundry equipment sales revenue


21,140


16,896


(4,244
)

(20
)%Total revenue from continuing operations

$
327,229

$
325,924

$
(1,305
)

0
%


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

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

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

24

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Cost of revenue

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

Depreciation and amortization related to operations.Depreciation and amortization related to operations increased by $1,105, or 2%, to
$48,266 for
the year ended December 31, 2009 as compared to $47,161 for the year ended December 31, 2008. The increase in depreciation and amortization for the year ended December 31, 2009 as
compared to the same period in 2008 is primarily attributable to having a full year of depreciation and amortization in 2009 associated with the contract rights and equipment we acquired as part of
our acquisition of a laundry facilities management business on April 1, 2008 compared to only nine months of such depreciation and amortization in the comparable period in 2008. Laundry
facilities management equipment and contract rights are depreciated and amortized using the straight-line method. In addition, due to management's decision not to recondition and redeploy
equipment that is in need of significant repairs and is not as energy efficient as newer equipment, we disposed of certain laundry equipment in 2009 and 2008 that had a remaining net book value of
$662 and $642, respectively. These costs are included in depreciation expense.

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

Operating expenses

General and administration, sales and marketing, related depreciation and amortization, and incremental proxy costs.General and
administration,
sales and marketing, related depreciation and amortization, and incremental proxy costs decreased by $286, or 1%, to $34,639 for the year ended December 31, 2009 as compared to $34,925 for the
year ended December 31, 2008. Such decrease for the year ended December 31, 2009 includes incremental costs of our proxy contest of $971. Excluding these costs, the decrease would have
been $1,257. As a percentage of total revenue these expenses were 11% for the years ended December 31, 2009 and 2008. The decrease in expenses for the year ended

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Table of Contents

December 31,
2009 as compared to December 31, 2008 is primarily attributable to a reduction in professional fees and outside services.

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

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

Income from continuing operations

Income from continuing operations increased by $616, or 3%, to $21,101 for the year ended December 31, 2009 as compared to
$20,485 for the year ended December 31, 2008. Excluding loss on early extinguishment of debt and the gain on sale of real estate, income from continuing operations, as adjusted, would have been
$20,692 for the year ended December 31, 2008, compared to $20,698 for the year ended 2009. We have supplemented the consolidated financial statements presented according to generally accepted
accounting principles (GAAP), using a non-GAAP financial measure of adjusted income from continuing operations. Non-GAAP financial measures are not in accordance with, or an
alternative for, generally accepted accounting principles in the United States. The Company's
non-GAAP financial measures are not meant to be considered in isolation or as a substitute for comparable GAAP financial measures, and should be read only in conjunction with the Company's
consolidated financial statements prepared in accordance with GAAP. Management believes presentation of this measure is useful to investors to enhance an overall understanding of our historical
financial performance and future prospects. Adjusted income from continuing operations, which is adjusted to exclude certain gains and losses from the comparable GAAP income from operations, is an
indication of our baseline performance before gains, losses or other charges that are considered by management to be outside of our core operating results. The presentation of this additional
information is not meant to be considered in isolation or as a substitute for income from operations or other measures prepared in accordance with GAAP.

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

Years Ended December 31,2008

2009Income from continuing operations

$
20,485

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


207


Gain on sale of real estate(2)





(403
)Income from continuing operations, as adjusted

$
20,692

$
20,698


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


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Interest expense, including the change in the fair value of non-hedged derivative instruments

Interest expense, including the change in the fair value of non-hedged derivative instruments, decreased by $3,627, or 16%,
to $18,782 for the year ended December 31, 2009 as compared to $22,409 for the year ended December 31, 2008. The decrease is due to lower outstanding debt balances resulting from our
concerted effort to reduce interest-bearing debt. Included in interest expense for the year ended December 31, 2008 is nine months interest on our debt resulting from the April, 2008 ALC
acquisition. Included in the year ended December 31, 2009 is twelve months interest on our debt resulting from the ALC acquisition. Interest expense, excluding the change in the fair value of
non-hedged derivative instruments, was $19,675 and $20,605 for the years ended December 31, 2009 and 2008, respectively. Our average effective interest rates are not significantly
affected by fluctuations in the market as a significant amount of our debt have fixed rates through our derivative instruments. Our average effective borrowing rate was 7.1% for the year ended
December 31, 2009 as compared to 6.7% for the year ended December 31, 2008.

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

Provision for income taxes

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

Income from continuing operations, net

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

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Table of Contents

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

Years Ended December 31,2008

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

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


1,707


1,074Net income, as reported

$
541

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

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


1,804


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


207


Gain on sale of real estate(3)





(403
)Incremental costs of 2009 proxy contest





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


87


1,994Provision for income taxes, as adjusted


34


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

$
53

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

$


$
0.06


(1)Represents
the unrealized loss (gain) on interest rate protection contracts, which do not qualify for hedge accounting treatment. For interest rate swaps
that do qualify as hedged instruments, changes in mark to market are recorded in Other Comprehensive Income and not in the income statement. Including the fluctuation in the fair value of the
derivative instruments in the reconciliation of net income as reported to net income as adjusted allows for a more consistent comparison of the operating results of the Company.(2)The
loss on early extinguishment of debt resulted from a refinancing of our senior credit facility and is not related to the performance of the Company's
business. The loss reflects only the unamortized cost of the prior bank financing which had been allocated to banks which did not participate in the replacement financing agreement. Because the loss
was triggered by a refinancing of the Company's senior credit facility and the Company does not currently expect further refinancings of the facility prior to its maturity in 2013, management believes
that the impact of this item on the Company's financial results will not continue beyond 2008.(3)Represents
the sale of a facility in Tampa, Florida on January 2, 2009.


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

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

Income from Discontinued Operations, net

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

Liquidity and Capital Resources (Dollars in thousands)

We believe that we can satisfy our working capital requirements and funding of capital needs with internally generated cash flow and,
as necessary, borrowings under our revolving loan facility described below. Capital requirements for the year ending December 31, 2011, including contract incentive payments, are currently
expected to be between $33,000 and $36,000. Included in the capital requirements that we expect to be able to fund during 2011 are purchases of
new laundry equipment, laundry room betterments, and contract incentives incurred in connection with new customer leases and the renewal of existing leases.

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

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

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

Operating Activities

For the years ended December 31, 2008, 2009 and 2010, cash flows provided by operating activities from continuing operations
were $55,735, $60,720, and $54,080 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 most significant changes to cash flows in 2010 compared to 2009 were decreases in depreciation and amortization
expense and related deferred taxes, an increase in accounts receivable, a decrease in the change in accounts payable, accrued facilities management rent, accrued expenses and an increase in
non-cash derivative income. The decrease in depreciation and amortization expense and related deferred income taxes is primarily attributable to the fact that most of the equipment from
our acquisitions in 2004 and 2005 was fully depreciated in 2009.

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Table of Contents

Investing Activities

For the years ended December 31, 2008, 2009 and 2010, cash flows used in investing activities from continuing operations were
$130,111, $20,074, and $25,973 ,respectively. Included in the cash flows used in investing activities is a payment for acquisition of $106,213 in 2008. and the proceeds from the sale of Intirion
Corporation of $8,274 in 2010. Other capital expenditures for the years ended December 31, 2008, 2009, and 2010 totaled $24,313, $21,341, and $26,580, respectively. We realized additional cash
flows from the proceeds received from the disposal of our discontinued operation of $8,274.

Financing Activities

For the years ended December 31, 2008, 2009 and 2010, cash flows provided by (used in) financing activities from continuing
operations were $79,887, ($37,883), and ($36,673), respectively. Cash flows provided by financing activities consist primarily of borrowings to fund acquisitions. Cash flows used in financing
activities consist primarily of repayments of bank
borrowings. We also paid $8,000 on our term loan from the proceeds we received from the disposal of our discontinued operation. In 2010, we also paid cash dividends of $2,763.

The
Company has a senior secured credit agreement (the "Secured Credit Agreement") pursuant to which the Company may borrow up to $151,750 in the aggregate, including $21,750 pursuant to
a Term Loan and up to $130,000 pursuant to a Revolver. The Term Loan requires quarterly principal payments of $750 at the end of each calendar quarter through December 31, 2012, with the
remaining principal balance of $15,750 due on April 1, 2013. The Secured Credit Agreement also provides for Bank of America, N. A. to make swingline loans to us of up to $10,000 (the "Swingline
Loans") and any Swingline Loans will reduce the borrowings available under the Revolver. Subject to certain terms and conditions, the Secured Credit Agreement gives the company the option to establish
additional term and/or revolving credit facilities there under, provided that the aggregate commitments under the Secured Credit Agreement cannot exceed $220,000.

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

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

Under
the Secured Credit Agreement, the Company is subject to customary lending covenants, including restrictions pertaining to, among other things: (i) the incurrence of
additional indebtedness, (ii) limitations on liens, (iii) making distributions, dividends and other payments, (iv) the making of certain investments and loans, (v) mergers,
consolidations and acquisitions, (vi) dispositions of assets, (vii) the maintenance of a maximum total leverage ratio of not greater than 4.25 to 1.00, a maximum senior secured leverage
ratio of not greater than 2.50 to 1.00, and a minimum consolidated cash flow coverage ratio of not less than 1.20 to 1.00, (viii) transactions with affiliates, and (ix) changes to
governing documents and subordinate debt documents, in each case subject to baskets, exceptions and thresholds. The Company was in compliance with these and all other financial covenants at
December 31, 2010.

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

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

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

As
of December 31, 2010, there was $50,353 outstanding under the Revolver, $21,750 outstanding under the Term Loan and $1,380 in outstanding letters of credit. The available
balance under the Revolver was $78,267 at December 31, 2010. The average interest rates on the borrowings outstanding under the Secured Credit Agreement at December 31, 2009 and 2010
were 6.69% and 5.56%, respectively, including the applicable spread paid to the banks.

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

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

Period

Redemption
Price2011


102.542
%2012


101.271
%2013 and thereafter


100.000
%


As
of December 31, 2010, the Company had not redeemed any of its senior notes.

The
terms of the senior notes include customary covenants, including, but not limited to, restrictions pertaining to: (i) incurrence of additional indebtedness and issuance of
preferred stock, (ii) payment of dividends on or making of distributions in respect of capital stock or making certain other restricted payments or investments, (iii) entering into
agreements that restrict distributions from restricted subsidiaries, (iv) sale or other disposition of assets, including capital stock of restricted subsidiaries, (v) transactions with
affiliates, (vi) incurrence of liens, (vii) sale/leaseback transactions, and (viii) merger, consolidation or sale of substantially all of our assets, in each case subject to
numerous baskets, exceptions and thresholds. The Company was in compliance with these and all other financial covenants at December 31, 2010.

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The
terms of the senior notes provide for customary events of default, including, but not limited to: (i) failure to pay any principal or interest when due, (ii) failure to
comply with covenants and limitations, (iii) certain insolvency or receivership events affecting us or any of our subsidiaries and (iv) unsatisfied material judgments, claims or
liabilities against us. There were no events of default under the senior notes at December 31, 2010.

Capital
lease obligations on the Company's fleet of vehicles totaled $3,276 and $3,833 at December 31, 2009 and 2010, respectively.

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

Amount2011

$
4,5112012


4,0902013


66,9312014


4022015


150,002Thereafter


$
225,936


Contractual Obligations

A summary of our contractual obligations and commitments related to our outstanding long-term debt and future minimum lease
payments related to our vehicle fleet, corporate headquarters and warehouse rent and minimum facilities management rent as of December 31, 2010 is as follows:

Fiscal Year

Long-term
debt

Interest on
senior notes

Interest on
variable rate
debt

Facilities
rent
commitments

Capital lease
commitments

Operating lease
commitments

Total2011

$
3,000

$
11,438

$
4,006

$
17,838

$
1,511

$
3,540

$
41,3332012


3,000


11,438


3,839


15,891


1,090


3,188

$
38,4462013


66,103


11,438


918


12,663


828


2,605

$
94,5552014





11,438





9,537


402


2,327

$
23,7042015


150,000


11,438





7,442


2


2,004

$
170,886Thereafter











14,484





520

$
15,004Total

$
222,103

$
57,190

$
8,763

$
77,855

$
3,833

$
14,184

$
383,928


Off Balance Sheet Arrangements

At the years ended December 31, 2008, 2009 and 2010, we had no relationships with unconsolidated entities or financial
partnerships, such as entities often referred to as structured finance or variable interest entities, which would have been established for the purpose of facilitating off balance sheet arrangements,
or other contractually narrow or limited purposes.

Seasonality

We experience moderate seasonality as a result of our operations in the college and university market. Revenues derived from the
college and university market represented approximately 12% of our total laundry facilities management revenue in 2010. Academic facilities management and rental revenues are derived substantially
during the school year in the first, second and fourth calendar quarters. Conversely, our operating and capital expenditures have historically been higher during the

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third
calendar quarter when we install a large amount of equipment in the college market while colleges and universities are on summer break.

Inflation

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

Critical Accounting Policies and Estimates

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

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

Cash and cash equivalents.We consider all highly liquid investments with original maturities of three months or less to be cash
equivalents.
Included in cash and cash equivalents is an estimate of cash not yet collected at period-end that remains at laundry facilities management locations. At December 31, 2010 and 2009,
this totaled $10,360 and $10,524, respectively. We record the estimated cash not yet collected as cash and cash equivalents and facilities management revenue. We also record the estimated related
facilities management rent expense. We calculate the estimated cash not yet collected at the end of a period by first identifying only those accounts that have had activity in the last ninety days of
the period, since each account is collected at least once every ninety days. We calculate the average collection per day by account for the corresponding period one year prior. The prior year per day
collection amount is multiplied by the number of days between the account's most recent collection prior to the end of the current period and the end of the current period. The corresponding period
one year prior is used to allow for any seasonality at each account. The average collection per day since inception of the account is used for accounts acquired subsequent to the corresponding period
in the prior year.

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

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

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

Allowance for doubtful accounts.On a regular basis, we review the adequacy of our provision for doubtful accounts for trade accounts
receivable
based on historical collection results and current economic conditions, using factors based on the aging of our trade accounts receivable. In addition, we

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estimate
specific additional allowances based on indications that a specific customer may be experiencing financial difficulties.

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

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

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

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

We
also evaluate our trade names annually for impairment using the relief from royalty method. We estimate what it would cost to license the trade names based upon estimated future
revenue, an estimated royalty rate, a capitalization rate and a discount rate which is subject to change from year to year. If the discounted present value of future tax effected royalty payments is
less than the carrying value, the trade name would be written down to its implied fair value. Our evaluation in 2010 did not result in an impairment.

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

Assets
acquired in business combinations, which include contract rights, an amortizing intangible asset, and equipment are defined to be the asset group for which the portfolio of
contracts was acquired. The contract rights were fair valued and recorded in purchase accounting on an aggregate basis for each market and are being amortized over
15 - 20 years. Triggering events that could indicate the carrying value of the contract rights intangible is not fully recoverable may include the loss of significant
customers, adverse changes to volumes and/or profitability in specific markets and changes in the Company's business strategy that result in a significant reduction in cash flows generated in a
specific market. Management also performs an annual assessment of the useful lives of the contract

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rights
and accelerates amortization, if necessary. The results of this analysis may also indicate potential impairment triggering events. For contract rights the useful life assessment consists
primarily of comparing the percent of revenue declines for acquired contracts in the market where the contract right was acquired to the percent of amortization recorded on the contract rights. A
triggering event is deemed to have occurred if the revenues are declining at a rate in excess of the amortization rate. If a triggering event has occurred the recoverability of the carrying amount of
the contract rights and fixed assets for that acquired asset group is calculated by comparing the carrying amount of the asset group to the projected future undiscounted cash flows from the operation
and disposition of the assets, taking into consideration the remaining useful life of the assets, the length of the contract for that acquisition, as well as any expected renewals. If it is determined
that the carrying value of the assets is not recoverable, the Company would write down the long-lived assets by the amount by which the carrying value exceeds fair value.

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

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

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

Fair value of financial instruments.For purposes of financial reporting, we have determined that the fair value of financial
instruments
approximates book value at December 31, 2010 and 2009, based upon terms currently available to us in financial markets. The fair value of the interest rate swaps is the estimated amount that we
would receive or pay to terminate the agreement at the reporting date, taking into account current interest rates and the credit worthiness of the counter party.

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

New Accounting Pronouncements

In December 2010, the Financial Accounting Standards Board issued an update to accounting guidance for business combinations related to
the disclosure of supplementary pro forma information. Accounting guidance for business combinations requires a public entity to disclose pro forma revenue and earnings for the combined entity as
though the combination occurred at the beginning of the reporting period. This update clarifies that if a public entity presents comparative financial statements, the pro forma information for all
business combinations occurring during the current year should be reported as though the combination occurred at the beginning of the prior annual reporting period. This update also expands the
disclosure requirement to include the nature and amount of pro forma adjustments made to arrive at the disclosed pro forma revenue and earnings. This
update is effective for business combinations for which the acquisition date is on or after annual reporting periods beginning after December 15, 2010. The effect of adoption will depend
primarily on the Company's acquisitions occurring after such date, if any.

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

Item 7A.    Quantitative and Qualitative Disclosures About Market Risk

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

Interest Rates

The table below provides information about our debt obligations that are sensitive to changes in interest rates. For debt obligations,
the table presents principal cash flows and related weighted average interest rates by expected maturity dates. The fair market value of long-term variable rate debt approximates book
value at December 31, 2010.

December 31, 2010Expected Maturity Date (In Thousands)2011

2012

2013

2014

2015

Thereafter

TotalLong-Term Debt:Variable rate ($US)

$
3,000

$
3,000

$
66,103

$


$


$


$
72,103Average interest rate


5.56
%

5.56
%

5.56
%










5.56
%


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

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

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

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

The
Company has entered into standard International Swaps and Derivatives Association ("ISDA") interest rate swap agreements (the "Swap Agreements") to manage the interest rate risk
associated with its debt. The Swap Agreements effectively convert a portion of the Company's variable rate debt to a long-term fixed rate. Under these agreements the Company receives a
variable rate of LIBOR plus a markup and pays a fixed rate.

The
Company has also entered into an interest rate swap agreement to manage the interest rate associated with its senior unsecured notes. This swap agreement effectively converts a
portion ($100 million) of our fixed rate senior unsecured notes to a variable rate. Under this agreement the Company receives the fixed rate on our senior unsecured notes (7.625%) and pays a
variable rate of LIBOR plus the applicable margin charged by the banks. The fair value of these interest rate and fuel commodity derivatives are based on quoted prices for similar instruments from a
commercial bank and, therefore, the interest rate derivatives are considered a Level 2 item.

In
December 2010 the Company entered into a fuel commodity derivative to manage the fuel cost of its fleet of vehicles. The derivative is effective April 1, 2011 and expires
December 31, 2011. The derivative has a monthly notional amount of 80,000 gallons from April 1, 2011 through December 31, 2011 for a total notional amount of 720,000 gallons. The
Company has a put price of $3.015 per gallon and a strike price of $3.50 per gallon.

Certain
of the Company's Swap Agreements qualify as cash flow hedges while others do not. During the fourth quarter of 2010, the Company paid $1,478 to terminate two of its
non-hedged Swap Agreements. The change in the fair value of the remaining Swap Agreements that do not qualify for hedge accounting treatment is recognized in the income statement in the
period in which the change occurs. The effective portion of the Swap Agreements that qualify for hedge accounting is included in Other Comprehensive Income in the period in which the change occurs,
while the ineffective portion, if any, is recognized in income in the period in which the change occurs. During the first quarter of 2010 the Company no longer qualified for hedge accounting treatment
for one of its swap agreements. Accordingly, $1,260 was reclassified as an earnings charge from Accumulated Other Comprehensive Income in the year ended December 31, 2010.

The
remaining balance of $600 associated with this swap and included in Accumulated Other Comprehensive Income will be charged against income through the maturity date of the swap
agreement on April 1, 2013.

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

Date of Origin

Original
Notional
Amount

Fixed/
Amortizing

Notional
Amount
December 31,
2010

Expiration
Date

Fixed
RateMay 8, 2008

$
45,000

Amortizing

$
30,000


Apr 1, 2013


3.78
%May 8, 2008

$
40,000

Amortizing

$
29,000


Apr 1, 2013


3.78
%January 4, 2010

$
100,000

Fixed

$
100,000


Aug 15, 2015


7.63
%


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. With regard to the
Company's floating to fixed rate swap agreements, 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. With regard to the

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Company's
fixed to floating rate swap agreement, if interest expense, as calculated, is greater based on the 90-day LIBOR, the Company pays the difference to the financial institution. If
interest expense, as calculated, is greater based on the fixed rate, the financial institution pays the difference to the Company.

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

As
of December 31, 2010, there was $50,353 outstanding under the 2008 Secured Revolver, $21,750 outstanding under the 2008 Secured Term Loan and $1,380 in outstanding letters of
credit. The available balance under the 2008 Secured Revolver was $78,267 at December 31, 2010. The average interest rate on the borrowings outstanding under the 2008 Secured Credit Facility at
December 31, 2009 and December 31, 2010 were 6.69% and 5.56%, respectively, 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-35 hereto.

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

None.

Item 9A.    Controls and Procedures

(a)   Disclosure Controls and Procedures

As of the end of the period covered by this report, an evaluation was carried out by our management, with the participation of our chief executive officer and
chief financial officer, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15(d)-15(e) under the Securities
Exchange Act of 1934, as amended (the "Exchange Act")). Based upon that evaluation, our chief executive officer and chief financial officer concluded that these disclosure controls and procedures were
effective as of December 31, 2010 in providing reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the SEC's rules and forms. In designing and evaluating the disclosure controls and procedures, our management recognized that
any controls and procedures, no matter how well designed and operated, can provide only reasonable assurances of achieving the desired control objectives and management necessarily was required to
apply its judgment in designing and evaluating the controls and procedures. On an on-going basis, we review and document our disclosure controls and procedures and our internal control
over financial reporting and may from time to time make changes aimed at enhancing their effectiveness and to ensure that our systems evolve with our business. There were no changes in our internal
control over financial reporting (as defined in Rule 13a-15(f) or Rule 15(d)-15(f) under the Exchange Act) that occurred during the fourth quarter of our fiscal
year ended December 31, 2010 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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

The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. The Company's
internal control over financial reporting is a process designed under the supervision of the Company's principal executive and

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principal
financial officers to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company's financial statements for external reporting purposes
in accordance with accounting principles generally accepted in the United States. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements
and even when determined to be effective, can only provide reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

As
of the end of the Company's 2010 fiscal year, management conducted assessments of the effectiveness of the Company's internal control over financial reporting based on the criteria
set forth by the Committee of Sponsoring Organizations of the Treadway Commission inInternal ControlIntegrated Framework. Based on these
assessments, management has determined that the Company's internal control over financial reporting as of December 31, 2010 was effective. Our internal control over financial reporting includes
policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of our assets; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States, and
that receipts and expenditures are being made only in accordance with authorizations of management and the directors of the Company; and (3) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use or disposition of the Company's assets that could have a material effect on our financial statements.

The
Company's internal control over financial reporting as of December 31, 2010 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting
firm, as stated in their report appearing on page F-2, which expresses an unqualified opinion on the effectiveness of the firm's internal control over financial reporting as of
December 31, 2010.

NYSE Annual CEO Certification.On June 18, 2010, Stewart Gray MacDonald, Jr., Chief Executive Officer of the Company, submitted to
the New
York Stock Exchange (the "NYSE") the Annual CEO Certification required by Section 303A of the Corporate Governance Rules of the NYSE certifying that he was not aware of any violation by the
Company of NYSE corporate governance listing standards.

(c)   Changes in Internal Control over Financial Reporting

There were no material changes to management's internal control over financial reporting during the year ended December 31, 2010.

Item 9B.    Other Information

None.

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PART III

Item 10.    Directors, Executive Officers and Corporate Governance

We will furnish to the SEC a definitive Proxy Statement with respect to our 2011 annual meeting of stockholders (the "Proxy Statement")
no later than 120 days after the close of our fiscal year ended December 31, 2010. Certain information required by this Item 10 is incorporated herein by reference to the Proxy
Statement.

Item 11.    Executive Compensation

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

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

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

Stock Option Plan Information and Employee Stock Purchase Plan Information

The following tables provide information as of December 31, 2010 regarding shares of our common stock that may be issued under
our equity compensation plans consisting of the 1997 Stock Option and Incentive Plan (the "1997 Plan"), the 2001 Employee Stock Purchase Plan (the "ESPP"), the 2005 Stock Option and Incentive Plan
(the "2005 Plan") and the 2009 Stock Option and Incentive Plan (the "2009 Plan"). There are no equity compensation plans that have not been approved by our stockholders.

Plan category

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

Weighted average
exercise price of
outstanding options,
warrants and rights

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

(b)

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


2,349,887

$
9.64


835,628
(3)Equity compensation plans not approved by security holders








Total


2,349,887

$
9.64


835,628
(3)


(1)Represents
outstanding options and restricted shares granted but not yet issued under the 1997 Plan, the 2005 Plan and the 2009 Plan. There are no options,
warrants or rights outstanding under the ESPP (does not include the purchase rights accruing under the ESPP because the purchase price, and therefore the number of shares to be purchased, is not
determinable until the end of the purchase period).(2)Includes
an aggregate of 149,760 shares underlying restricted stock units granted under the 2005 Plan and the 2009 Plan for which the performance criteria
have not yet been established. Accordingly, for accounting purposes, such awards are not considered to be granted under FAS 123R.(3)Includes
639,241 shares available for future issuance under the 2009 Plan, and 196,387 shares available for future issuance under the ESPP. No new awards
may be granted under the 1997 Plan or the 2005 Plan.


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

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

Item 14.    Principal Accounting Fees and Services

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

PART IV

Item 15.    Exhibits, Financial Statement Schedules

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

3.
Exhibits:

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

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

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

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

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

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

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

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

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

41

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Table of Contents

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

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

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

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

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

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

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

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

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

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

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

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

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

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

42

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Table of Contents

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

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

Each
exhibit marked by a (nn) was previously filed as an exhibit to Mac-Gray's Form 10-K filed on March 16, 2010 and the number in parentheses
following the description of the exhibit refers to the exhibit number in the Form 10-K.

Each
exhibit marked by a (mm) was previously filed as an exhibit to Mac-Gray's Form 10-Q filed on May 10, 2010 and the number in parentheses
following the description of the exhibit refers to the exhibit number in the Form 10-Q.

Each
exhibit marked by a (ll) was previously filed as an exhibit to Mac-Gray's Form 8-K filed on June 2, 2010 and the number in parentheses
following the description of the exhibit refers to the exhibit number in the Form 8-K.

Each
exhibit marked by a (kk) was previously filed as an exhibit to Mac-Gray's Form 8-K/A filed on October 29, 2010 and the number in parentheses
following the description of the exhibit refers to the exhibit number in the Form 8-K.

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

3.01

Amended and Restated Certificate of Incorporation (3.1)+3.02

Amendment No. 1 to Amendment and Restated Certificate of Incorporation (filed herewith)3.03

Amended and Restated By-laws (3.1)xx3.04

Amendment No. 1 to Amended and Restated By-laws (3.1)kk3.05

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

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

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

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

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

Form of Maytag Distributorship Agreements (10.13)+10.03

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

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

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


43

---



Table of Contents

10.06

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

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

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

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

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

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

Form of Non-Qualified Stock Option Agreement for Company Employees under the Mac-Gray Corporation 2005 Stock Option and Incentive Plan (10.3)p***10.13

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

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

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

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

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

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

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

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

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

Senior Secured Credit Agreement, dated as of April 1, 2008, among Mac-Gray Corporation, Mac-Gray Services, Inc., Intirion Corporation, the lenders party thereto, Bank of America, N.A., as Administrative
Agent and Collateral Agent, and Banc of America Securities LLC, as Sale Lead Arranger and Sole Book Manager (10.3)a10.23

Form of Revolving Note pursuant to the Senior Secured Credit Agreement in favor of the Secured Revolving Lenders, in an aggregate total amount of up to $130,000,000 (10.4)a10.24

Form of Swingline Note pursuant to the Senior Secured Credit Agreement in favor of the Swingline Lenders, in an aggregate total amount of up to $10,000,000 (10.5)a10.25

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


44

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Table of Contents

10.26

Guarantee and Collateral Agreement, dated as of April 1, 2008, among Mac-Gray Corporation, Mac-Gray Services, Inc., Intirion Corporation, the Subsidiaries of the Borrowers identified therein, and Bank of America,
 N.A., as Administrative Agent (10.7)a10.27

Mac-Gray Corporation Director Stock Ownership Guidelines, effective as of July 1, 2008 (10.1)yy***10.28

Form of Indemnification Agreement between the Registrant and each of its non-employee directors (10.1)xx ***10.29

Form of second amendment to executive severance agreement, dated December 22, 2008, between the Registrant and each of Stewart MacDonald, Michael Shea and Neil MacLellan III (10.59)
vv***10.30

Form of second amendment to employment agreement, dated December 22, 2008, between the Registrant and each of Stewart MacDonald, Michael Shea and Neil MacLellan III (10.60)vv***10.31

Form of first amendment to executive severance agreement, dated December 22, 2008, between the Registrant and each of Linda Serafini, Robert Tuttle and Phil Emma (10.61)vv***10.32

Amendment No. 1 to Senior Secured Credit Agreement, dated as of May 1, 2009, among Mac-Gray Corporation, Mac-Gray Services, Inc., Intirion Corporation, the lenders party thereto, and Bank of America,
N.A., as Administrative Agent and Collateral Agent (10.1)uu10.33

Mac-Gray Corporation 2009 Stock Option and Incentive Plan (10.1)tt***10.34

Amendment No. 1 to Mac-Gray Corporation 2009 Stock Option and Incentive Plan (10.1)ll***10.35

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

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

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

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

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

Mac-Gray Corporation Non-Employee Director Compensation Policy (10.6)mm***10.41

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

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

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

Mac-Gray Corporation Long Term Incentive Plan (10.44)nn***10.45

Mac-Gray Corporation 2001 Employee Stock Purchase Plan (Amended and Restated January 1, 2011) (filed herewith)***


45

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Table of Contents

21.1

Subsidiaries of the Registrant (21.1)z23.1

Consent of PricewaterhouseCoopers LLP (filed herewith)31.1

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

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

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


***Management
compensatory plan or arrangement


46

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Table of Contents

SIGNATURES

PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY
CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, THIS 14th DAY OF MARCH, 2011.

MAC-GRAY CORPORATIONBy:

/s/ STEWART GRAY MACDONALD, JR. Stewart Gray MacDonald, Jr. Chief Executive Officer
(Principal Executive Officer)Date: March 14, 2011


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

Signature

Title

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

Director

March 14, 2011/s/ THOMAS E. BULLOCK Thomas E. Bullock

Director

March 14, 2011/s/ BRUCE C. GINSBERG Bruce C. Ginsberg

Director

March 14, 2011/s/ CHRISTOPHER T. JENNY Christopher T. Jenny

Director

March 14, 2011/s/ EDWARD F. MCCAULEY Edward F. McCauley

Director

March 14, 2011/s/ WILLIAM F. MEAGHER William F. Meagher

Director

March 14, 2011/s/ ALASTAIR G. ROBERTSON Alastair G. Robertson

Director

March 14, 2011/s/ MARY ANN TOCIO Mary Ann Tocio

Director

March 14, 2011/s/ MICHAEL J. SHEA Michael J. Shea

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

March 14, 2011


47

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Table of Contents

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

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND  FINANCIAL STATEMENT SCHEDULE

Item 15(a)(1)

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



MAC-GRAY CORPORATIONReport of Independent Registered Public Accounting Firm


F-2Consolidated Balance Sheets at December 31, 2009 and 2010


F-3Consolidated Income Statements for the Years Ended December 31, 2008, 2009 and 2010


F-4Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2008, 2009 and 2010


F-5Consolidated Statements of Cash Flows for the Years Ended December 31, 2008, 2009 and 2010


F-6Notes to Consolidated Financial Statements


F-7


Item 15(a)(2)

The following consolidated financial statement schedule of Mac-Gray Corporation should be read in conjunction
with the financial statements included herein.

Schedule II Valuation and Qualifying Accounts


F-35


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

F-1

---





Table of Contents

Report of Independent Registered Public Accounting Firm

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

In
our opinion, the accompanying consolidated financial statements listed in the index appearing under Item 15(a)(1) present fairly, in all material respects, the financial
position of Mac-Gray Corporation (the "Company") and its subsidiaries at December 31, 2010 and December 31, 2009, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 2010 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the
financial statement schedule listed in the index under 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated
financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010, based on criteria
established inInternal ControlIntegrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
The Company's management is responsible for these financial statements and financial statement schedule, for maintaining effective
internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management's Annual Report on Internal Control Over
Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company's internal control
over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over
financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control
over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and
operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our
audits provide a reasonable basis for our opinions.

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

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

/s/
PricewaterhouseCoopers LLP

Boston,
Massachusetts
March 14, 2011

F-2

---





Table of Contents

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

December 31,
2009

December 31,
2010AssetsCurrent assets:Cash and cash equivalents

$
21,599

$
13,013Trade receivables, net of allowance for doubtful accounts


5,081


6,105Inventory of finished goods, net


2,172


1,580Deferred income taxes


559


963Prepaid facilities management rent and other current assets


14,286


9,916Current assets from discontinued operations


6,864


Total current assets


50,561


31,577Property, plant and equipment, net


130,541


128,068Goodwill


59,043


58,608Intangible assets, net


208,499


195,144Prepaid facilities management rent and other assets


11,199


10,686Non-current assets from discontinued operations


4,433


Total assets

$
464,276

$
424,083Liabilities and Stockholders' EquityCurrent liabilities:Current portion of long-term debt and capital lease obligations

$
5,543

$
4,511Trade accounts payable


6,957


8,673Accrued facilities management rent


21,075


21,084Accrued expenses and other current liabilities


21,160


15,998Current liabilites from discontinued operations


3,087


Total current liabilities


57,822


50,266Long-term debt and capital lease obligations


258,325


221,425Deferred income taxes


39,159


41,823Other liabilities


3,011


2,518Non-current liabilities from discontinued operations


1,424


Total liabilities


359,741


316,032Commitments and contingencies (Note 15)





Stockholders' equity:Preferred stock ($.01 par value, 5 million shares authorized no shares issued or outstanding)





Common stock ($.01 par value, 30 million shares authorized, 13,631,706 issued and 13,631,530 outstanding at December 31, 2009, and 14,026,919
issued and 14,026,743 outstanding at December 31, 2010)


136


140Additional paid in capital


78,032


81,296Accumulated other comprehensive loss


(2,048
)

(1,563
)Retained earnings


28,417


28,180104,537


108,053Less common stock in treasury, at cost (176 shares at December 31, 2009 and 2010)


(2
)

(2
)Total stockholders' equity


104,535


108,051Total liabilities and stockholders' equity

$
464,276

$
424,083


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

F-3

---





Table of Contents

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

Years Ended December 31,2008

2009

2010Revenue from continuing operations:Laundry facilities management revenue

$
306,089

$
309,028

$
304,040Commercial laundry equipment sales


21,140


16,896


15,971Total revenue


327,229


325,924


320,011Cost of revenue:Cost of laundry facilities management revenue


207,233


208,914


208,141Depreciation and amortization


47,161


48,266


46,013Cost of commercial laundry equipment sales


17,287


13,652


13,105Total cost of revenue


271,681


270,832


267,259Gross margin


55,548


55,092


52,752Operating expenses:General and administration


18,341


17,819


18,628Sales and marketing


14,970


14,249


14,185Depreciation and amortization


1,614


1,600


1,533Gain on sale of assets, net


(69
)

(648
)

(262
)Incremental costs of proxy contest





971


235Loss on early extinguishment of debt


207





Total operating expenses


35,063


33,991


34,319Income from continuing operations


20,485


21,101


18,433Interest expense, including the change in the fair value of non-hedged derivative instruments


22,409


18,782


13,428Income (loss) before provision for income taxes from continuing operations


(1,924
)

2,319


5,005Provision (benefit) for income taxes


(758
)

1,278


2,176Income (loss) from continuing operations, net


(1,166
)

1,041


2,829Income from discontinued operations, net


1,707


1,074


44Loss from disposal of discontinued operations, net of tax of $384








(294
)Net income

$
541

$
2,115

$
2,579Earnings (loss) per sharebasiccontinuing operations

$
(0.09
)
$
0.08

$
0.21Earnings (loss) per sharedilutedcontinuing operations

$
(0.09
)
$
0.07

$
0.20Earnings (loss) per sharebasicdiscontinued operations

$
0.13

$
0.08

$
(0.02
)Earnings (loss) per sharediluteddiscontinued operations

$
0.13

$
0.08

$
(0.02
)Earnings per sharebasic

$
0.04

$
0.16

$
0.19Earnings per sharediluted

$
0.04

$
0.15

$
0.18Weighted average common shares outstandingbasic


13,346


13,529


13,797Weighted average common shares outstandingdiluted


13,346


13,940


14,379


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

F-4

---



Table of Contents

MAC-GRAY CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(In thousands, except share data)

Common stock









Treasury StockAccumulated
Other
Comprehensive
(Loss) GainNumber
of shares

Value

Additional
Paid in
Capital

Comprehensive
Income

Retained
Earnings

Number
of shares

Cost

TotalBalance, December 31, 2007


13,443,754

$
134

$
72,586

$
45




$
26,812


166,890

$
(1,733
)
$
97,844Net income













$
541


541








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











(3,162
)

(3,162
)










(3,162
)Comprehensive income













$
(2,621
)










Options exercised

















(69
)

(26,333
)

273


204Stock compensation expense








2,120

















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








(44
)
















(44
)Stock issuanceEmployee Stock Purchase Plan

















(34
)

(36,545
)

380


346Stock granted








7








(325
)

(41,645
)

433


115Balance, December 31, 2008


13,443,754


134


74,669


(3,117
)




26,925


62,367


(647
)

97,964Net income














2,115


2,115








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











1,069


1,069











1,069Comprehensive income













$
3,184











Options exercised


102,746


1


683








(14
)

(9,597
)

113


783Stock compensation expense








2,213

















2,213Purchase of common stock




















9,597


(113
)

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








(47
)
















(47
)Stock issuanceEmployee Stock Purchase Plan


67,372


1


363











0


0


364Stock granted


17,658





151








(609
)

(62,191
)

645


187Balance, December 31, 2009


13,631,530


136


78,032


(2,048
)




28,417


176


(2
)

104,535Net income














2,579


2,579








2,579Other comprehensive income:Unrealized gain on derivative instruments, net of tax benefit of $305 (Note 6)











485


485











485Comprehensive income













$
3,064











Options exercised


260,045


3


195

















198Stock compensation expense








2,540

















2,540Purchase of common stock


























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


























Cash Dividends, $.20 per share








52








(2,815
)







(2,763
)Stock issuanceEmployee Stock Purchase Plan


25,821





245

















245Stock granted


109,523


1


232








(1
)







232Balance, December 31, 2010


14,026,919

$
140

$
81,296

$
(1,563
)



$
28,180


176

$
(2
)
$
108,051


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

F-5

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Table of Contents

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

Years Ended December 31,2008

2009

2010Cash flows from operating activities:Net income

$
541

$
2,115

$
2,579Adjustments to reconcile net income to net cash flows provided by operating activities, net of effects of acquisitions:Depreciation and amortization


48,775


49,866


47,546Loss on early extinguishment of debt


207





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


60


(159
)

131Gain on disposition of assets


(69
)

(648
)

(262
)Stock grants


115


187


232Non-cash derivative interest expense (income)


1,804


(893
)

(1,454
)Deferred income taxes


(1,842
)

4,781


2,428Excess tax benefits from share based payment arrangements


(20
)

(136
)

Non cash-stock compensation


2,120


2,213


2,540Loss from Disposal of discountinued operations








294Decrease (increase) in accounts receivable


222


1,766


(1,155
)Decrease in inventory


1,911


93


592(Increase) decrease in prepaid facilities management rent and other assets


(1,235
)

(1,329
)

347Increase in accounts payable, accrued facilities management rent, accrued expenses and other liabilities


4,842


3,920


12Increase in deferred revenues and customer deposits


11


18


Net cash flows used in operating activities from discontinued operations


(717
)

(738
)

(44
)Net cash flows provided by operating activities


56,725


61,056


53,786Cash flows from investing activities:Capital expenditures


(24,313
)

(21,341
)

(26,580
)Payments for acquisitions


(106,213
)




Proceeds from sale of assets


415


1,267


607Proceeds from disposal of discontinued operations








8,274Net cash flows used in investing activities from discontinued operations


(990
)

(336
)

Net cash flows used in investing activities


(131,101
)

(20,410
)

(17,699
)Cash flows from financing activities:Payments on capital lease obligations


(1,943
)

(1,705
)

(1,864
)Borrowings on 2005 secured revolving credit facility


8,000





Payments on 2005 secured revolving credit facility


(63,000
)




Payments on 2008 secured revolving credit facility


(33,500
)

(118,154
)

(140,756
)Borrowings on 2008 secured revolving credit facility


134,440


94,806


113,517Borrowings on 2008 secured term credit facility


40,000





Payments on 2008 secured term credit facility


(3,000
)

(4,000
)

(3,250
)Borrowings on 2008 unsecured revolving credit facility


1,781





Payments on 2008 unsecured revolving credit facility


(1,781
)




Payments on acquisition note





(10,000
)

(2,000
)Financing costs


(1,680
)




Excess tax benefits from share based payment arrangements


20


136


Purchase of common stock





(113
)

Proceeds from exercise of stock options


204


783


198Proceeds from issuance of common stock


346


364


245Cash Dividend paid








(2,763
)Cash flows used to pay down term facility from discountinued operations








(8,000
)Net cash flows (used in) provided by financing activities


79,887


(37,883
)

(44,673
)Increase(decrease) in cash and cash equivalents


5,511


2,763


(8,586
)Cash and cash equivalents, beginning of period


13,325


18,836


21,599Cash and cash equivalents, end of period

$
18,836

$
21,599

$
13,013Supplemental cash flow information:Interest paid

$
20,919

$
19,967

$
17,234Income taxes paid

$
211

$
227

$
179


Supplemental disclosure of non-cash investing activities:

During
the years ended December 31, 2008, 2009 and 2010, the Company acquired various vehicles under capital lease agreements totaling $1,774, $1,628 and $2,421, respectively.

During
the year ended December 31 2008, the Company incurred liabilities in the amount of $10,000 in the form of future cash payments related to acquisition.

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

F-6

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Table of Contents

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

1. Description of the Business and Basis of Presentation

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

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

2. Significant Accounting Policies

Cash and Cash Equivalents.The Company considers all highly liquid investments with original maturities of three months or less to be
cash
equivalents. Included in cash and cash equivalents is an estimate of cash not yet collected at period-end that remains at laundry facilities management customer locations. At
December 31, 2009 and 2010, this totaled $10,524 and $10,360, respectively. The Company monitors current collection levels and economic conditions and adjusts the estimate as circumstances
warrant. The Company records the estimated cash not yet collected as cash and cash equivalents and facilities management revenue. The Company also records the estimated related facilities management
rent expense. The Company calculates the estimated cash not yet collected at the end of a period by first identifying only those accounts that have had activity in the last ninety days of the period,
since each account is collected at least once every ninety days. The Company calculates the average collection per day by account for the corresponding period one year prior. The prior year per day
collection amount is multiplied by the number of days between the account's most recent collection prior to the end of the current period and the end of the current period. The corresponding period
one year prior is used to allow for any seasonality at each account. The average collection per day since inception of the account is used for accounts acquired subsequent to the corresponding period
in the prior year.

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

Revenue Recognition.The Company recognizes facilities management revenue on the accrual basis. Rental revenue is recognized ratably
over the related
contractual period. The Company recognizes revenue from sales upon shipment of the products, unless otherwise specified. Shipping and handling fees charged to customers are recognized upon shipment of
the products and are included in revenue with the related cost included in cost of sales. Installation and repair services are provided on

F-7

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Table of Contents

MAC-GRAY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except per share data)

2. Significant Accounting Policies (Continued)

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.

Allowance for Doubtful Accounts.On a regular basis, the Company reviews the adequacy of its provision for doubtful accounts for trade
accounts
receivable based on historical collection results and current economic conditions using factors based on the aging of its trade accounts. In addition, the Company estimates specific additional
allowances based on indications that a specific customer may be experiencing financial difficulties. The Company maintains an allowance for doubtful trade accounts of $198 and $329 at
December 31, 2009 and 2010, respectively.

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

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

Provision for Inventory Reserves.On a regular basis, the Company reviews the adequacy of its reserve for inventory obsolescence based
on historical
experience, product knowledge and frequency of shipments. The Company maintains an inventory reserve of $230 and $252 at December 31, 2009 and 2010, respectively.

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

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

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

Advertising Costs.Advertising costs are expensed as incurred. These costs were $696, $553, and $1,153 for the years ended
December 31, 2008,
2009 and 2010, respectively.

Goodwill and Intangible Assets.Intangible assets primarily consist of various non-compete agreements, goodwill, trade name and
contract
rights recorded in connection with acquisitions. The non-compete agreements are amortized using the straight-line method over the life of the agreements,

F-8

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Table of Contents

MAC-GRAY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except per share data)

2. Significant Accounting Policies (Continued)

which
range from five to fifteen years. The majority of contract rights are amortized using the straight-line method over twenty years, with the balance amortized on a
straight-line method over fifteen years. The life assigned to acquired contracts is based on several factors, including: the seller's renewal rate of the contract portfolio for the most
recent years prior to the acquisition, the number of years the average contract has been in the seller's contract portfolio, the overall level of customer satisfaction within the contract portfolio
and the ability of the Company to maintain or exceed the level of customer satisfaction maintained by the seller prior to the
acquisition by the Company. The Company is accounting for acquired contract rights on a pool-basis based on the fact that, in general, no single contract accounts for more than 2% of the
revenue of any acquired portfolio and the fact that few of the contracts are predicted to be terminated, either prior to or at the end of the contract term.

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

We
also evaluate our trade names annually for impairment using the relief from royalty method. We estimate what it would cost to license the trade names based upon estimated future
revenue, an estimated royalty rate, capitalization rate and a discount rate which is subject to change from year to year. If the discounted present value of future tax effected royalty payments is
less than the carrying value of the trade names, the trade name would be written down to its implied fair value. Our evaluation in 2010 did not result in an impairment.

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

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

F-9

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Table of Contents

MAC-GRAY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except per share data)

2. Significant Accounting Policies (Continued)

deemed
to have occurred if the revenues are declining at a rate in excess of the amortization rate. If a triggering event has occurred the recoverability of the carrying amount of the contract rights
and fixed assets for that acquired asset group is calculated by comparing the carrying amount of the asset group to the projected future undiscounted cash flows from the operation and disposition of
the assets, taking into consideration the remaining useful life of the assets, the length of the contract for that acquisition, as well as any expected renewals. If it is determined that the carrying
value of the assets is not recoverable, the Company would write down the long-lived assets by the amount by which the carrying value exceeds fair value.

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

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

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

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

F-10

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Table of Contents

MAC-GRAY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except per share data)

2. Significant Accounting Policies (Continued)

employee
is required to provide service in exchange for the awardthe requisite service period (usually the vesting period).

The
grant-date fair value of employee share options and similar instruments is estimated using the Black-Scholes option-pricing model. The expected life of options and the
expected forfeiture rates are estimated based on historical experience. The weighted average volatility of the Company's stock price over the prior number of years equal to the expected life and the
two most recent years is used to estimate the expected volatility at the measurement date. Awards for which the recipient has the choice of receiving equity instruments or cash are valued at the
market price of the underlying equity instrument as of the reporting date.

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

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

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

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

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

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

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

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

F-11

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Table of Contents

MAC-GRAY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except per share data)

2. Significant Accounting Policies (Continued)

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

Fair Value of Financial Instruments.For purposes of financial reporting, the Company has determined that the fair value of financial
instruments
approximates book value at December 31, 2009 and 2010, based upon terms currently available to the Company in financial markets. The fair value of the Company's interest rate swaps is the
estimated amount that the Company would receive or pay to terminate the agreement at the reporting date, taking into account current interest rates and the credit worthiness of the counter party.

New Accounting Pronouncements.In December 2010, the Financial Accounting Standards Board issued an update to accounting guidance for
business
combinations related to the disclosure of supplementary pro forma information. Accounting guidance for business combinations requires a public entity to disclose pro forma revenue and earnings for the
combined entity as though the combination occurred at the beginning of the reporting period. This update clarifies that if a public entity presents comparative financial statements, the pro forma
information for all business combinations occurring during the current year should be reported as though the combination occurred at the beginning of the prior annual reporting period. This update
also expands the disclosure requirement to include the nature and amount of pro forma adjustments made to arrive at the disclosed pro forma revenue and earnings. This update is effective for business
combinations for which the acquisition date is on or after annual reporting periods beginning after December 15, 2010. The effect of adoption will depend primarily on the Company's acquisitions
occurring after such date, if any.

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

3. Revisions to Balance Sheet Presentation

During the December 31, 2010 year end closing process, the Company determined that the December 31, 2009 fair value of derivative instruments was not properly
classified on the balance sheet between current and long term liabilities. The Company previously classified their derivative instruments as current versus long term liabilities based on the maturity
date of their derivative contracts. The Company currently bases their classification on the estimated timing of the cash flows associated with their derivative contracts. This change in classification
does not impact the consolidated statement of operations or the consolidated statement of cash flows for any period. Accordingly, to correct the error in the classification of derivative instruments,
the Company has revised its balance sheet as of December 31, 2009 by increasing other current liabilities and decreasing other long term liabilities by $3,382 (See Note 6 "Fair Value
Measurements".)

4. Discontinued Operations

On February 5, 2010, the Company sold its MicroFridge® (Intirion Corporation) business to Danby Products. The transaction is valued at approximately $11,500. Danby
Products paid Mac-Gray $8,500 in cash, and assumed existing liabilities and financial obligations for MicroFridge totaling approximately $3,000. The operations and cash flows of this
business have been eliminated from the ongoing

F-12

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Table of Contents

MAC-GRAY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except per share data)

4. Discontinued Operations (Continued)

operations
of the company as the result of this disposal transaction. Since the Company will not have any significant continuing involvement in the operations of this business, the Company has
accounted for this business as a discontinued operation. All current and prior period financial information has been restated to reflect Intirion Corporation as a discontinued operation. The Company
recorded a loss, net of taxes, as a result of this transaction, in the amount of $294. Concurrent with this transaction, the Company paid $8,000 on its Secured Term Loan.

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

2008

2009

2010Revenue

$
36,364

$
30,298

$
2,200Interest expense, net(1)

$
428

$
262

$
20Income before provision for income taxes

$
2,742

$
1,742

$
83Income taxes on income from discontinued operations


1,035


668


39Loss from disposal of discontinued operations, net of tax of $384








294Income (loss) from discontinued operations, including loss on disposal of discontinued operations, net

$
1,707

$
1,074

$
(250
)


(1)Represents
the amount of interest allocated to the discontinued operation as a result of a requirement to pay $8,000 on the Company's Term Loan. The average
interest rate used to calculate this allocation was 5.3%, 3.3%, and 2.5% for the years ended December 31, 2008, 2009 and 2010, respectively.


5. Long-Term Debt

The Company has a senior secured credit agreement (the "Secured Credit Agreement") pursuant to which the Company may borrow up to $151,750 in the aggregate, including $21,750 pursuant to
a Term Loan and up to $130,000 pursuant to a Revolver. The Term Loan requires quarterly principal payments of $750 at the end of each calendar quarter through December 31, 2012, with the
remaining principal balance of $15,750 due on April 1, 2013. The Secured Credit Agreement also provides for Bank of America, N. A. to make swingline loans to us of up to $10,000 (the "Swingline
Loans") and any Swingline Loans will reduce the borrowings available under the Revolver. Subject to certain terms and conditions, the Secured Credit Agreement gives the company the option to establish
additional term and/or revolving credit facilities there under, provided that the aggregate commitments under the Secured Credit Agreement cannot exceed $220,000.

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

F-13

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Table of Contents

MAC-GRAY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except per share data)

5. Long-Term Debt (Continued)

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

Under
the Secured Credit Agreement, the Company is subject to customary lending covenants, including restrictions pertaining to, among other things: (i) the incurrence of
additional indebtedness, (ii) limitations on liens, (iii) making distributions, dividends and other payments, (iv) the making of certain investments and loans, (v) mergers,
consolidations and acquisitions, (vi) dispositions of assets, (vii) the maintenance of a maximum total leverage ratio of not greater than 4.25 to 1.00, a maximum senior secured leverage
ratio of not greater than 2.50 to 1.00, and a minimum consolidated cash flow coverage ratio of not less than 1.20 to 1.00, (viii) transactions with affiliates, and (ix) changes to
governing documents and subordinate debt documents, in each case subject to baskets, exceptions and thresholds. The Company was in compliance with these and all other financial covenants at
December 31, 2010.

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

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

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

As
of December 31, 2010, there was $50,353 outstanding under the Revolver, $21,750 outstanding under the Term Loan and $1,380 in outstanding letters of credit. The available
balance under the Revolver was $78,267 at December 31, 2010. The average interest rates on the borrowings outstanding under the Secured Credit Agreement at December 31, 2009 and 2010
were 6.69% and 5.56%, respectively, including the applicable spread paid to the banks.

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

F-14

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Table of Contents

MAC-GRAY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except per share data)

5. Long-Term Debt (Continued)

down
senior bank debt. Since the senior notes are not widely traded, the market value of these notes approximates book value at December 31, 2010.

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

Period

Redemption Price2011


102.542
%2012


101.271
%2013 and thereafter


100.000
%


As
of December 31, 2010, the Company had not redeemed any of its senior notes.

The
terms of the senior notes include customary covenants, including, but not limited to, restrictions pertaining to: (i) incurrence of additional indebtedness and issuance of
preferred stock, (ii) payment of dividends on or making of distributions in respect of capital stock or making certain other restricted payments or investments, (iii) entering into
agreements that restrict distributions from restricted subsidiaries, (iv) sale or other disposition of assets, including capital stock of restricted subsidiaries, (v) transactions with
affiliates, (vi) incurrence of liens, (vii) sale/leaseback transactions, and (viii) merger, consolidation or sale of substantially all of our assets, in each case subject to
numerous baskets, exceptions and thresholds. The Company was in compliance with these and all other financial covenants at December 31, 2010.

The
terms of the senior notes provide for customary events of default, including, but not limited to: (i) failure to pay any principal or interest when due, (ii) failure to
comply with covenants and limitations, (iii) certain insolvency or receivership events affecting us or any of our subsidiaries and (iv) unsatisfied material judgments, claims or
liabilities against us. There were no events of default under the senior notes at December 31, 2010.

Capital
lease obligations on the Company's fleet of vehicles totaled $3,276 and $3,833 at December 31, 2009 and 2010, respectively.

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

Amount2011

$
4,5112012


4,0902013


66,9312014


4022015


150,002Thereafter


$
225,936


F-15

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Table of Contents

MAC-GRAY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except per share data)

5. Long-Term Debt (Continued)

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

6. Fair Value Measurements

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

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

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

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

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

Basis of Fair Value MeasurementsBalance at
December 31,
2010

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

Significant
Other
Observable
Inputs
(Level 2)

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

$
483

$


$
483

$
Interest rate swap derivative financial instruments (included in other liabilities)

$
935

$


$
935

$
Fuel comodity derivative (included in accrued expenses)

$


$


$


$



The
Company has entered into standard International Swaps and Derivatives Association ("ISDA") interest rate swap agreements (the "Swap Agreements") to manage the interest rate risk
associated with its debt. The Swap Agreements effectively convert a portion of the Company's variable rate debt
to a long-term fixed rate. Under these agreements the Company receives a variable rate of LIBOR plus a markup and pays a fixed rate.

The
Company has also entered into an interest rate swap agreement to manage the interest rate associated with its senior unsecured notes. This swap agreement effectively converts a
portion

F-16

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Table of Contents

MAC-GRAY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except per share data)

6. Fair Value Measurements (Continued)

($100 million)
of our fixed rate senior unsecured notes to a variable rate. Under this agreement the Company receives the fixed rate on our senior unsecured notes (7.625%) and pays a variable
rate of LIBOR plus the applicable margin charged by the banks. This swap agreement has an associated call feature that allows the counterparty to terminate this agreement at their option. The fair
value of these interest rate and fuel commodity derivatives are based on quoted prices for similar instruments from a commercial bank and, therefore, are considered a Level 2 item.

In
December 2010 the Company entered into a fuel commodity derivative to manage the fuel cost of its fleet of vehicles. The derivative is effective April 1, 2011 and expires
December 31, 2011. The derivative has a monthly notional amount of 80,000 gallons from April 1, 2011 through December 31, 2011 for a total notional amount of 720,000 gallons. The
Company has a put price of $3.015 per gallon and a strike price of $3.50 per gallon.

Certain
of the Company's Swap Agreements qualify as cash flow hedges while others do not. During the fourth quarter of 2010, the Company paid $1,478 to terminate two of its
non-hedged Swap Agreements. The change in the fair value of the remaining Swap Agreements that do not qualify for hedge accounting treatment is recognized in the income statement in the
period in which the change occurs. The effective portion of the Swap Agreements that qualify for hedge accounting is included in Other Comprehensive Income in the period in which the change occurs,
while the ineffective portion, if any, is recognized in income in the period in which the change occurs.

During
the first quarter of 2010 the Company no longer qualified for hedge accounting treatment for one of its swap agreements. Accordingly, $1,260 was reclassified as an earnings charge
from Accumulated Other Comprehensive Loss in the year ended December 31, 2010. The remaining balance of $600 associated with this swap and included in Accumulated Other Comprehensive Loss will
be charged against income through the maturity date of the swap agreement on April 1, 2013.

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

Date of Origin

Original
Notional
Amount

Fixed/
Amortizing

Notional
Amount
December 31,
2010

Expiration
Date

Fixed
RateMay 8, 2008

$
45,000

Amortizing

$
30,000


Apr 1, 2013


3.78
%May 8, 2008

$
40,000

Amortizing

$
29,000


Apr 1, 2013


3.78
%January 4, 2010

$
100,000

Fixed

$
100,000


Aug 15, 2015


7.63
%


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. With regard to the
Company's floating
to fixed rate swap agreements, 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. With regard to the Company's fixed to floating rate swap agreement, if interest
expense, as calculated, is greater based on the 90-day LIBOR, the Company pays the difference to the financial institution. If interest expense, as calculated, is greater based on the
fixed rate, the financial institution pays the difference to the Company.

F-17

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Table of Contents

MAC-GRAY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except per share data)

6. Fair Value Measurements (Continued)

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

The
tables below display the impact the Company's derivative instruments had on the Consolidated Balance Sheets as of December 31, 2009 and 2010 and the Consolidated Income
Statements for the years ended December 31, 2009 and 2010.

Fair Values of Derivative Instruments

Liability DerivativesDecember 31, 2009

December 31, 2010Balance Sheet
Location

Fair Value

Balance Sheet
Location

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

Accrued expenses

$
2,270

Accrued expenses

$
1,015Interest rate contracts

Other liabilities


1,067

Other liabilities


931Derivatives not designated as hedging instruments under Statement 133:Interest rate contracts

Accrued expenses


1,112

Accrued expenses


(532
)Interest rate contracts

Other liabilities


692

Other liabilities


4Fuel commodity derivative






Accrued expenses


Total derivatives



$
5,141



$
1,418


F-18

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Table of Contents

MAC-GRAY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except per share data)

6. Fair Value Measurements (Continued)

The Effect of Derivative Instruments on the Consolidated Income Statements
For the Years Ended December 31, 2008, 2009 and 2010

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



Amount of Loss
Reclassified from
Accumulated OCI
into Income
December 31,



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

Location of Gain
or (Loss)
Reclassified from
Accumulated OCI into Income2008

2009

2010

2008

2009

2010

2008

2009

2010Interest rate contracts

$
(3,162
)
$
1,069

$
485

Interest expense, including the change in the fair value of non-hedged derivative instuments

$


$


$
(1,260
)
Interest rate contracts

Interest expense, including the change in the fair value of non-hedged derivative instuments

$
(1,804
)
$
893

$
2,714Fuel commodity derivative

$


$


$


Cost of revenue

$


$


$


Fuel commodity derivative

Cost of revenue

$


$


$



The net of the amount reclassified from Other Comprehensive Income and the unrealized gain recognized on the derivatives resulted in a loss of
$1,804 for the year ended December 31, 2008 and gains of $893 and $1,454 for the years December 31, 2009 and 2010, respectively.

7. Prepaid Facilities Management Rent and Other Current Assets

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

December 31,2009

2010Prepaid facilities managment rent

$
4,272

$
4,455Supplies


4,094


3,797Notes receivable


209


76Due from vendor


63


26Prepaid Marketing


132


97Income tax receivable


4,453


229Prepaid insurance


502


487Other


561


749$
14,286

$
9,916


F-19

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Table of Contents

MAC-GRAY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except per share data)

8. Prepaid Facilities Management Rent and Other Assets

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

December 31,2009

2010Prepaid facilities managment rent

$
10,412

$
10,173Notes receivable


385


123Deposits


122


94Other


280


296$
11,199

$
10,686


9. Property, Plant and Equipment

Property, plant and equipment consist of the following:

December 31,Estimated
Useful Life2009

2010Facilities management equipment

2-10 years

$
293,688

$
308,173Facilities management improvements

7-10 years


14,204


14,604Leasehold improvements

5-10 years


1,377


1,521Furniture, fixtures and computer equipment

2-7 years


14,752


15,727Trucks and autos

3-5 years


9,972


11,216333,993


351,241Less: accumulated depreciation




205,845


225,487128,148


125,754Facilities management equipment, not yet placed in service




2,393


2,314Property, plant and equipment, net



$
130,541

$
128,068


Depreciation
of property, plant and equipment totaled $33,373, $33,461, and $31,129 for the years ended December 31, 2008, 2009 and 2010, respectively.

At
December 31, 2009 and 2010, trucks and autos included $9,537 and $10,736, respectively, of equipment under capital lease with an accumulated amortization balance of $6,261 and
$6,903, respectively.

F-20

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Table of Contents

MAC-GRAY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except per share data)

10. Goodwill and Intangible Assets

Goodwill and intangible assets consist of the following:

As of December 31, 2009Cost

Accumulated Amortization

Net Book ValueGoodwill

$
59,043




$
59,043$
59,043




$
59,043Intangible assets:Trade Name

$
14,050

$


$
14,050Non-compete agreements


4,041


3,965


76Contract rights


238,008


48,800


189,208Distribution rights


1,623


459


1,164Deferred financing costs


6,798


2,797


4,001$
264,520

$
56,021

$
208,499




As of December 31, 2010Cost

Accumulated
Amortization

Net Book ValueGoodwill

$
58,608




$
58,608$
58,608




$
58,608Intangible assets:Trade Name

$
14,050

$


$
14,050Non-compete agreements


4,041


3,995


46Contract rights


237,888


60,966


176,922Distribution rights


1,623


621


1,002Deferred financing costs


6,798


3,674


3,124$
264,400

$
69,256

$
195,144


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

2011

$
12,7142012


12,4402013


12,1202014


12,0142015


11,846Thereafter


118,917$
180,051


Amortization
expense of intangible assets for the years ended December 31, 2008, 2009 and 2010 was $12,213, $13,139, and $13,234, respectively.

F-21

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Table of Contents

MAC-GRAY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except per share data)

11. Accrued Expenses

Accrued expenses consist of the following:

December 31,2009

2010Accrued interest

$
4,406

$
2,083Accrued salaries/benefits


1,245


1,491Accrued commission/bonuses


3,487


4,070Current portion of fair value of derivative instruments


3,382


483Accrued stock compensation


416


720Reserve for refunds


517


499Accrued rent


512


789Current portion of deferred retirement obligation


104


104Accrued professional fees


433


586Accrued personal property taxes


1,138


1,040Accrued sales tax


1,964


2,657Accrued benefit insurance


1,208


1,039Acquisition payment


1,936


Other accrued expenses


412


437$
21,160

$
15,998


12. Income Taxes

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

Years Ended December 31,2008

2009

2010Current state

$
(150
)
$
(129
)
$
1Deferred state


120


598


475Current federal


(1,149
)

(4,135
)

(2,963
)Deferred federal


421


4,944


4,663Total income taxes

$
(758
)
$
1,278

$
2,176


F-22

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Table of Contents

MAC-GRAY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except per share data)

12. Income Taxes (Continued)

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

2009

2010Current deferred tax assets (liabilities):Accounts receivable

$
154

$
284Inventory


89


97Accrued bonus and vacation


247


405Accrued rent


198


305Prepaid expenses


(194
)

(188
)Other


65


60559


963Non-current deferred tax (liabilities) assets:Depreciation


(30,193
)

(32,037
)Amortization


(15,547
)

(18,663
)Other comprehensive income


1,289


983Stock compensation


1,897


2,691Derivative instrument interest


697


(436
)Net operating loss carryforwards


2,740


4,769AMT credits





871Other


403


450(38,714
)

(41,372
)Valuation allowance against non-current deferred tax assets


(445
)

(451
)(39,159
)

(41,823
)Net deferred tax liabilities

$
(38,600
)
$
(40,860
)


For
the years ended December 31, 2008, 2009 and 2010, the statutory income tax rate differed from the effective rate primarily as a result of the following differences:

2008

2009

2010Taxes computed at federal statutory rate


34.0
%

34.0
%

34.0
%State income taxes, net of federal benefit


(1.3
)

11.7


6.9Change in state deferred rate


10.3


(1.1
)

(0.4
)Non-deductible compensation








1.8Change in valuation allowance


(6.2
)

4.1


0.1Tax settlement adjustments


10.6





Meals & entertainment


(5.0
)

3.3


1.6Non-deductible stock options


(2.4
)

2.1


0.3Other


(0.6
)

1.0


(0.9
)Income tax provision


39.4
%

55.1
%

43.4
%


F-23

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Table of Contents

MAC-GRAY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except per share data)

12. Income Taxes (Continued)

At
December 31, 2010, the Company had a federal net operating loss carryforward of $3,429, of which $520 expires in the year 2028 and $2,909 expires in the year 2029, and state
net operating loss carryforwards of $1,340 which expire at various times through the year 2030. The Company has evaluated the positive and negative evidence bearing upon the realization of the Net
Operating Losses and has increased the valuation allowance to $451 for the corresponding deferred tax asset, which is comprised principally of state net operating loss carryovers incurred not expected
to be utilized.

The
Company and its subsidiaries are subject to U.S. federal income tax as well as to income tax of multiple state jurisdictions. The Company has concluded all U.S. federal income tax
matters for years through 2006. All material state and local income tax matters have been concluded for years through 2005.

13. Acquisitions

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

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

AmountContract rights

$
79,800Equipment


24,313Goodwill


17,799Inventory


1,356Incentive payments


173Accrued expenses


(699
)122,742Deferred tax liability


(6,529
)Total Purchase Price

$
116,213


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

F-24

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Table of Contents

MAC-GRAY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except per share data)

13. Acquisitions (Continued)

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

The
following unaudited pro forma operating results of the Company assume the acquisition took place on January 1, 2008. Such information includes adjustments to reflect
additional depreciation, amortization and interest expense, and is not necessarily indicative of what the results of operations would have been or the results of operations in future periods.

Year Ended
December 31,
2008Net revenue from continuing operations

$
344,084Loss from continuing operations

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

$
(0.11
)Diluted

$
(0.11
)


14. Preferred Stock Purchase Rights

The Company has adopted a Shareholder Rights Agreement, the purpose of which is, among other things, to enhance the Board's ability to protect shareholder interests and to ensure that
shareholders receive fair treatment in the event any coercive takeover attempt of the Company is made in the future. The Shareholder Rights Agreement could make it more difficult for a third party to
acquire, or could discourage a third party from acquiring, the Company or a large block of the Company's Common Stock. The following summary description of the Shareholder Rights Agreement does not
purport to be complete and is qualified in its entirety by reference to the Company's Shareholder Rights Agreement, which has been previously filed with the Securities and Exchange Commission as an
exhibit to a Registration Statement on Form 8-A.

Pursuant
to the terms of a Shareholder Rights Agreement (the "Rights Agreement"), the Board of Directors declared a dividend distribution on June 15, 2009 of one Preferred Stock
Purchase Right (a "Right") for each outstanding share of Common Stock of the Company (the "Common Stock") to stockholders of record as of the close of business on June 15, 2009 (the "Record
Date"). In addition, one Right will automatically attach to each share of Common Stock issued between the Record Date and the Distribution Date (as hereinafter defined). Under certain circumstances,
each Right entitles the holder thereof to purchase from the Company a unit consisting of one ten thousandth of a share (a "Unit") of Series A Junior Participating Cumulative Preferred Stock,
par value $.01 per share, of the Company (the "Preferred Stock"), at a cash exercise price of $45.00 per Unit, subject to adjustment. The Rights are not exercisable and are attached to and trade with
all shares of Common Stock outstanding as of, and issued subsequent to, the Record Date until the earlier to occur of (i) the close of business on the tenth calendar day following the first
public announcement that a person or group of affiliated or associated persons (an "Acquiring Person") has acquired beneficial ownership of 15% or more of the outstanding shares of Common Stock, other
than as a result of repurchases of stock by the Company or certain inadvertent actions by a stockholder (the date of said announcement being referred to as the "Stock Acquisition Date") or
(ii) the close of business on the tenth business day (or

F-25

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Table of Contents

MAC-GRAY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except per share data)

14. Preferred Stock Purchase Rights (Continued)

such
later day as the Board of Directors may determine) following the commencement of a tender offer or exchange offer that could result upon its consummation in a person or group becoming the
beneficial owner of 15% or more of the outstanding shares of Common Stock (the earlier of such dates being herein referred to as the "Distribution Date"). The Rights will expire at the close of
business on June 15, 2019 (the "Expiration Date"), unless previously redeemed or exchanged by the Company as described below. Until a Right is exercised, the holder will have no rights as a
stockholder of the Company (beyond those as an existing stockholder), including the right to vote or to receive dividends.

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

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

15. Commitments and Contingencies

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

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

F-26

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Table of Contents

MAC-GRAY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except per share data)

15. Commitments and Contingencies (Continued)

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

Capital
Leases

Operating
LeasesYear ended December 31,2011

$
1,511

$
3,5402012


1,090


3,1882013


828


2,6052014


402


2,3272015


2


2,004Thereafter





5203,833

$
14,184Less: future minimum lease payments due within one year


1,511Amounts due after one year

$
2,322


Rent
expense incurred by the Company under non-cancelable operating leases totaled $3,942, $3,966, and $4,338 for the years ended December 31, 2008, 2009 and 2010,
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, 2010:

2011

$
17,8382012


15,8912013


12,6632014


9,5372015


7,442Thereafter


14,484$
77,855


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, $1,410, $1,396 and $0 for the years ended December 31, 2008, 2009 and 2010,
respectively.

Stock Option and Incentive Plans.On April 7, 1997, the Company's stockholders approved the 1997 Stock Option and Incentive Plan
for the
Company (the "1997 Stock Plan"). On May 26, 2005, the Company's stockholders approved the 2005 Stock Option and Incentive Plan for the Company (the

F-27

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Table of Contents

MAC-GRAY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except per share data)

16. Employee Benefit and Stock Plans (Continued)

"2005
Stock Plan"). On May 8, 2009, the Company's stockholders approved the 2009 Stock Option and Incentive Plan for the Company which was amended by the stockholders on May 26, 2010
(the "2009 Stock Plan" and together with the 1997 and 2005 Stock Plans the "Stock Plans"). The Stock Plans are designed and intended as a performance incentive for officers, employees, and independent
directors to promote the financial success and progress of the Company. All officers, employees and independent directors are eligible to participate in the Stock Plans. Awards, when made, may be in
the form of stock options, restricted stock, restricted stock units, unrestricted stock options, and dividend equivalent rights. The Stock Plans require the maximum term of options to be ten years.
Costs under the Plans amounted to, $2,271, $2,593, and $3,195 for the years ended December 31, 2008, 2009 and 2010, respectively. The related income tax benefit recognized was $853, $1,350, and
$1,366 for the years ended December 31, 2008, 2009 and 2010, respectively.

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

The
fair values of the stock options granted in 2008, 2009, and 2010 were estimated using the following components:

2008

2009

2010Weighted average fair value of options at grant date

$3.74

$3.06

$3.77Risk free interest rate

2.68%  4.11%

1.695%  2.35%

2.167%  2.44%Estimated forfeiture rate

0.00%  15.00%

0.00%  11.00%

0.000%  16.00%Estimated option term

5.0  9.0 years

6.0  8.5 years

5.0  6.0 yearsExpected volatility

29.22%  36.17%

35.53%  43.40%

49.46%  51.53%


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

F-28

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Table of Contents

MAC-GRAY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except per share data)

16. Employee Benefit and Stock Plans (Continued)

The following is a summary of stock option plan activity under the Plans as of December 31, 2010, and changes during the year then ended:

Options

Weighted
Average
Exercise
Price

Weighted
Average
Grant Date
Fair ValueOutstanding at January 1, 2010


2,109,019

$
8.62

$
3.32Granted


291,994

$
9.31

$
3.77Exercised


(375,695
)
$
4.77

$
2.42Forfeited


(28,741
)
$
11.22

$
3.95Outstanding at December 31, 2010


1,996,577

$
9.40

$
3.54Exercisable at December 31, 2010


1,265,108

$
9.80

$
3.67Weighted average remaining life of the outstanding options


6.78Weighted average remaining life of the exercisable options


5.91Total intrinsic value of the outstanding options

$
11,099Total intrinsic value of the exercisable options

$
6,547




December 31,2008

2009

2010Weighted average fair value of options granted

$
3.74

$
3.06

$
3.77Intrinsic value of options exercised

$
74

$
468

$
3,243Fair value of shares vested in 2010

$
3,662

$
4,027

$
1,583


A
summary of the status of the Company's nonvested shares as of December 31, 2010 and changes during the year then ended is presented below:

Options

Grant Date
Fair ValueNonvested at January 1, 2010


906,910

$
3.27Granted


291,994

$
3.77Vested


(452,994
)
$
3.49Forfeited


(14,441
)
$
3.60Nonvested at December 31, 2010


731,469

$
3.32


In
the year ended December 31, 2010, the Company granted restricted stock units covering 89,835 shares of stock with an average fair market value on date of grant of $9.31
per share. The stock vests in one year upon the achievement of certain performance objectives as determined by the Board of Directors at the beginning of the fiscal year. In addition, the Company
granted a cash award equivalent to 46,375 restricted stock units and subject to the same performance criteria. The award had a fair market value of $14.95 per share at December 31, 2010. As
part of their annual compensation, the Company granted the independent directors 42,096 restricted stock units with a fair market value

F-29

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Table of Contents

MAC-GRAY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except per share data)

16. Employee Benefit and Stock Plans (Continued)

on
the date of grant of $11.40. The restricted stock units vest over three years. The Company also granted restricted stock units covering 5,812 shares of stock with a fair market value of $10.32 per
share that vest over three years which do not have a performance requirement. Restricted stock activity for fiscal 2010 is presented below:

Restricted
Stock

Weighted
Average
Grant Date
Fair ValueOutstanding at January 1, 2010, including restricted stock to be settled in cash


138,274

$
7.85Restricted Stock Granted


184,118

$
9.82Dividend Earned


6,064

$
Restricted Stock Issued


(88,837
)
$
7.12Restricted Stock Settled in Cash


(33,872
)
$
10.32Restricted Stock Forfeited


(2,197
)
$
7.83Outstanding at December 31, 2010


203,550

$
10.93Restricted stock earned during the year


104,028

$
9.39Cash award equivalent of restricted stock units earned during the year


42,187

$
14.95Weighted average remaining life of the outstanding restricted stock


0.73Total intrinsic value of the outstanding restricted stock

$
293


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

2011

$
2,2612012


1,0432013


99$
3,403


At
December 31, 2010, the stock plans provide for the issuance of up to 4,524,731 shares of Common Stock of which 1,385,843 shares have been issued pursuant to the exercise of
option agreements or restricted stock awards. At December 31, 2010 1,996,577 shares are subject to outstanding options, 203,550 shares have been granted, of which 136,210 are subject to certain
performance criteria and 938,761 shares remain available for issuance. Of the 938,761 shares, 299,520 shares have been committed to future restricted stock awards for which performance criteria have
not yet been established. Upon the adoption of the 2009 plan, no additional options can be issued from the 1997 and 2005 plans.

Mac-Gray Corporation 2001 Employee Stock Purchase Plan.The Company established the Mac-Gray Corporation 2001 Employee Stock
Purchase Plan (the "ESPP") in May 2001. Under the terms of the ESPP, eligible employees may have between 1% and 15% of eligible compensation deducted from their pay to purchase Company Common Stock.
The per share purchase price is the fair market value of the stock on, the lower of, the first day or the last day of each six month interval. Up to 500,000 shares may be offered pursuant to the ESPP.
The plan includes certain restrictions, such as

F-30

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Table of Contents

MAC-GRAY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except per share data)

16. Employee Benefit and Stock Plans (Continued)

the
holding period of the stock by employees. At December 31, 2010 there were 77 participants in the ESPP. The number of shares of Common Stock purchased through the ESPP was 67,372 and 25,821
for the years ended December 31, 2009 and 2010, respectively. There have been 303,613 shares purchased since the inception of the ESPP. At December 31, 2009 and 2010, the Company had
accumulated employee withholdings associated with this plan of $120 and $103 for acquisition of stock in 2010 and 2011, respectively.

17. Payment of dividends

On February 5, 2010, the Company's Board of Directors approved the initiation of a quarterly dividend policy for its common stock. The Company had not previously paid dividends on
any of its shares of capital stock. The Company declared dividends of $0.05 per share payable on April 1, 2010, July 1, 2010, October 1, 2010 and January 3, 2011. All
dividends were paid and have been reflected in the current financial statements.

18. Earnings Per Share

Year Ended December 31,2008

2009

2010Income (loss) from continuing operations, net

$
(1,166
)
$
1,041

$
2,829Income (loss)from discontinued operations, net


1,707


1,074


(250
)Net income

$
541

$
2,115

$
2,579Weighted average number of common shares outstandingbasic


13,346


13,529


13,797Effect of dilutive securites:Stock options





411


582Weighted average number of common shares outstandingdiluted


13,346


13,940


14,379Earnings(loss) per sharebasiccontinuing operations

$
(0.09
)
$
0.08

$
0.21Earnings(loss) per sharedilutedcontinuing operations

$
(0.09
)
$
0.07

$
0.20Earnings (loss) per sharebasicdiscontinued operations

$
0.13

$
0.08

$
(0.02
)Earnings (loss) per sharediluteddiscontinued operations

$
0.13

$
0.08

$
(0.02
)Earnings per sharebasic

$
0.04

$
0.16

$
0.19Earnings per sharediluted

$
0.04

$
0.15

$
0.18


There
were 1,189 shares at December 31, 2008, 850 shares at December 31, 2009 and 671 shares at December 31. 2010 under option plans that were excluded from the
computation of diluted earnings per share at December 31, 2008, 2009 and 2010, respectively, due to their anti-dilutive effects.

F-31

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Table of Contents

MAC-GRAY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except per share data)

19. Summary of Quarterly Financial Information (unaudited)

Year Ended December 31, 20091st Qtr

2nd Qtr

3rd Qtr

4th Qtr

TotalRevenue

$
85,284

$
80,832

$
78,364

$
81,444

$
325,924Cost of revenue


68,530


68,879


66,823


66,600


270,832Gross margin


16,754


11,953


11,541


14,844


55,092Operating expenses


8,420


9,138


8,334


8,099


33,991Income from operations


8,334


2,815


3,207


6,745


21,101Interest expense, including the change in the fair value of non-hedged derivative instruments


(4,942
)

(4,523
)

(4,754
)

(4,563
)

(18,782
)Income (loss) from continuing operations before provision for income taxes


3,392


(1,708
)

(1,547
)

2,182


2,319Provision for income taxes


1,508


(704
)

(813
)

1,287


1,278Income (loss) from continuing operations


1,884


(1,004
)

(734
)

895


1,041Income from discontinued operations, net


357


136


348


233


1,074Net income (loss)

$
2,241

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

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

$
0.14

$
(0.07
)
$
(0.05
)
$
0.07

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

$
0.14

$
(0.07
)
$
(0.05
)
$
0.06

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

$
0.03

$
0.01

$
0.03

$
0.02

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

$
0.03

$
0.01

$
0.03

$
0.02

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

$
0.17

$
(0.06
)
$
(0.03
)
$
0.08

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

$
0.16

$
(0.06
)
$
(0.03
)
$
0.08

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


13,406


13,498


13,587


13,622


13,529Weighted average common shares outstandingdiluted


13,612


13,498


13,587


14,018


13,940


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


F-32

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Table of Contents

MAC-GRAY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except per share data)

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

Year Ended December 31, 20101st Qtr

2nd Qtr

3rd Qtr

4th Qtr

TotalRevenue

$
81,503

$
78,541

$
78,241

$
81,726

$
320,011Cost of revenue


66,118


66,562


65,883


68,696


267,259Gross margin


15,385


11,979


12,358


13,030


52,752Operating expenses


8,467


8,274


8,265


9,313


34,319Income from operations


6,918


3,705


4,093


3,717


18,433Interest expense, including the change in the fair value of non-hedged derivative instruments


(4,127
)

(1,835
)

(2,690
)

(4,776
)

(13,428
)Income (loss) from continuing operations before provision for income taxes


2,791


1,870


1,403


(1,059
)

5,005Provision for income taxes


1,319


641


577


(361
)

2,176Income (loss) from continuing operations


1,472


1,229


826


(698
)

2,829Loss from discontinued operations, net


(250
)










(250
)Net income (loss)

$
1,222

$
1,229

$
826

$
(698
)
$
2,579Earnings (loss) per sharebasicfrom continuing operations

$
0.11

$
0.09

$
0.06

$
(0.05
)
$
0.21
(a)Earnings (loss) per sharedilutedfrom continuing operations

$
0.11

$
0.09

$
0.06

$
(0.05
)
$
0.20
(a)Earnings per sharebasicfrom discontinued operations

$
(0.02
)
$


$


$


$
(0.02
)(a)Earnings per sharedilutedfrom discontinued operations

$
(0.02
)
$


$


$


$
(0.02
)(a)Earnings (loss) per sharebasic

$
0.09

$
0.09

$
0.06

$
(0.05
)
$
0.19
(a)Earnings (loss) per sharediluted

$
0.09

$
0.09

$
0.06

$
(0.05
)
$
0.18
(a)Weighted average common shares outstandingbasic


13,677


13,791


13,807


13,913


13,797Weighted average common shares outstandingdiluted


14,005


14,405


14,402


13,913


14,379


---

F-33

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Table of Contents

MAC-GRAY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except per share data)

20. Subsequent Events

On January 20, 2011, the Company's Board of Directors approved an increase to the quarterly dividend policy to $0.055 per share ($0.22 per share on an annualized basis). The Board
declared a dividend of $0.055 per share payable on April 1, 2011, to stockholders of record at the close of business on March 15, 2011.

F-34

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Table of Contents



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

Balance
Beginning
of Year

Charged to
Cost and
Expenses

Deductions

Balance
at End
of YearYear Ended December 31, 2008:Allowance for doubtful accounts

$
296

$
79

$
18

$
357Inventory reserves

$
504

$
60

$
299

$
265Income tax valuation allowance

$
231

$
119

$


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

$
357

$
90

$
249

$
198Inventory reserves

$
265

$
69

$
104

$
230Income tax valuation allowance

$
350

$
95

$


$
445Year Ended December 31, 2010:Allowance for doubtful accounts

$
198

$
169

$
38

$
329Inventory reserves

$
230

$
245

$
223

$
252Income tax valuation allowance

$
445

$
6

$


$
451


F-35

---