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

FORM 10-K

|(Mark One)                                        |                                                                                         
|------------------------------------------------- | ----------------------------------------------------------------------------------------
|ý                                                 | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934    
|For the fiscal year ended December 31, 2003      
|OR                                               
|o                                                 | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|For the transition period from _______ to _______

COMMISSION FILE NUMBER 1-13495

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

DELAWARE(State or other jurisdiction
incorporation or organization)

04-3361982Employer Identification No.)22 WATER STREET,
CAMBRIDGE, MASSACHUSETTS(Address of principal executive offices)

02141(Zip Code)


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

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

Title of Each Class

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

New York Stock ExchangePreferred Stock Purchase Rights

New York Stock Exchange


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

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

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

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

The aggregate market value of the voting stock of the registrant held by non-affiliates of the registrant as of June 30, 2003 was $50,274,373.

As
of March 26, 2004, 12,637,421 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 20, 2004 are incorporated by reference into
Part III of this report.



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PART I

Forward-Looking Statements

Some of the statements made in this report under the captions "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. The Company's actual
results may differ materially from such forward-looking statements since they involve known and unknown risks, uncertainties and other factors, which are, in some cases, beyond the Company's control.
Factors that could cause actual results, performance or achievements to differ materially from those expressed or implied by these forward-looking statements include, without limitations, the factors
described under Item 7, "Management's Discussion and Analysis of Financial Condition and Results of OperationsRisk Factors". Readers should carefully review all of the factors described
herein, which may not be an exhaustive list of the factors that could cause these differences. We undertake no obligation to update our forward-looking statements, except as may be required by law.

Item 1. Business



Mac-Gray was founded in 1927. Unless the context requires otherwise, all references in this Report to we, us, Mac-Gray or the Company
means Mac-Gray Corporation and its subsidiaries and predecessors. Mac-Gray Corporation was incorporated in Delaware in 1997.

We
operate three business segments, based on different product and service categories: laundry (including facilities management and equipment sales); MicroFridge®; and
reprographics. The two laundry business units (facilities management and equipment sales) and the reprographics business unit have been aggregated into one reportable segment (laundry and
reprographics) since many operating functions of the laundry and reprographics operations are commingled. Financial information with regard to reportable business segments is reported under
Note 13 to the consolidated financial statements included in this report and is incorporated into this Item 1 by reference.

Our
laundry services segment derives revenue principally by managing laundry facilities for the multi-housing industry. Mac-Gray operates laundry rooms, under
long-term leases with property owners, colleges and universities and governmental agencies. Mac-Gray's laundry services segment is comprised of revenue-generating laundry
machines. As of March 22, 2004 these machines were operated in approximately 34,000 multi-housing laundry rooms located in 27 states and the District of Columbia.

Our
laundry services segment also sells and services commercial laundry equipment manufactured by The Maytag Corporation ("Maytag"), and sells laundry equipment manufactured by The
Dexter Company, Whirlpool Corporation, and American Dryer Corp. Additionally, the Company sells or rents laundry equipment to restaurants, hotels, health clubs and similar institutional users that
operate their own on-premise laundry facilities.

The
MicroFridge® services segment derives revenue through the sale and rental of a family of patented combination refrigerator/freezer/microwave ovens ("Units") to colleges
and universities, military bases, the hotel and motel market, assisted living facilities and through retail channels.

The
reprographics services segment derives its revenue principally through managing college and municipal library's card/coin-operated reprographic equipment.
Mac-Gray's reprographics segment is concentrated in the northeastern United States, with smaller operations in the Mid-Atlantic, and the Midwest.

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On January 16, 2004, we acquired all of Web Service Company Inc.'s ("Web") laundry facilities management assets in 13 eastern and southeastern
states and the District of Columbia. The purchase price of approximately $39 million in cash included the sale to Web of certain of our laundry facilities management assets and related
contracts in western states valued at approximately $2 million. This acquisition will add approximately $29 million of annual net revenue, representing approximately 28% of our 2003
revenue derived from laundry facilities management operations. Concurrent with the Web acquisition, we entered into an amended Senior Secured Credit Facility with our lenders to increase the facility
from $80 million to $105 million, consisting of a $70 million three-year revolving credit line and a $35 million five-year term loan. In addition to
the increased borrowing capacity and providing for the acquisition of Web's assets and the sale of certain of our assets to Web, this amendment extends the terms of the revolving credit line and term
loan to June 30, 2006 and June 30, 2008, respectively. The amended Senior Secured Credit Facility continues to be collaterized by a blanket lien on the assets of the Company and each of
its subsidiaries, as well as a pledge by the Company of all the capital stock of its subsidiaries. The term loan amortization schedule has been amended to include nineteen quarterly payments of
$1,250,000 and a final payment of the remaining principal balance due at maturity.

Laundry Services

Mac-Gray believes that it is the third largest North American supplier of card/coin-operated laundry equipment services in multi-housing
facilities such as apartment buildings, colleges and universities and public housing complexes. Based upon Mac-Gray's ongoing survey of colleges and universities, the Company believes it
is North America's largest supplier of such services to the college and university market. As of March 22, 2004, Mac-Gray owned or leased card/coin-operated washers and
dryers in approximately 34,000 multi-housing laundry rooms located in 27 states and the District of Columbia. Mac-Gray also believes that it is the largest user and purchaser of commercial
laundry products manufactured by Maytag for both its own use and for resale.

A
substantial portion of Mac-Gray's revenue is derived as a laundry facilities contractor under long-term leases with property owners. Under
Mac-Gray's long-term leases, the Company typically receives the exclusive right to service laundry rooms within a multi-housing property in exchange for a negotiated percentage
of the revenue collected (referred to herein as "route rent"). During the past five years, Mac-Gray has been able to retain in excess of an average of 97% of its machine base per year,
while also adding an average of approximately 4.0% per year to its machine base through internally generated growth. Mac-Gray believes that its ability to retain its existing machine base,
while growing that base through internally generated growth in machine installations, is indicative of its service of, and attention to, property owners and managers. The Company has also been able to
provide its customers with vending card and other technologies, and continues to invest in research and development of such technologies. The property owner or manager is usually responsible for
maintaining and cleaning, as
well as the security, of the premises and payment of the utilities. Mac-Gray leases space within a property, in some instances improves the leased space with flooring, ceilings and other
improvements ("betterments"), and then installs and services the laundry equipment and collects the payments. Mac-Gray sets and adjusts the pricing for its machines based upon local market
conditions.

Mac-Gray
is also a significant distributor for several major laundry equipment manufacturers, primarily Maytag. Maytag estimates that Mac-Gray distributes Maytag commercial
laundry equipment in 26% of the United States. As an equipment distributor, Mac-Gray sells commercial laundry equipment to public laundromats, as well as to the multi-unit
housing industry. Mac-Gray is certified by the manufacturers to service the commercial laundry equipment that it sells. Mac-Gray also sells commercial laundry equipment
directly to institutional purchasers, including hospitals, government bases, restaurants, and hotels, for use in their own on-premises laundry facilities.

2

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Mac-Gray
also has established a leasing program for commercial laundry customers who choose neither to purchase equipment nor to become a laundry route customer. This program
involves the leasing of commercial laundry equipment to customers who maintain their own laundry rooms.

Mac-Gray
has centralized its administrative, billing, marketing, purchasing and machine refurbishing operations at its corporate headquarters in Cambridge, Massachusetts.
Mac-Gray also operates sales and/or service centers in Connecticut, Florida (three locations), Georgia, Illinois, Maine, Maryland, New York (two locations), North Carolina, Tennessee, and
New Jersey.

Mac-Gray's
laundry services segment has certain intrinsic characteristics in both its industry and its customer base, including:

Recurring Revenue.Mac-Gray operates as a laundry facilities contractor under long-term leases with
property owners. In addition, Mac-Gray's efforts are designed to maintain customer relationships over the long-term. These leases have an original average term of approximately
seven years. Over the past five years, Mac-Gray has been able to retain in excess of an average of 97% of the machine base up for renewal in each year.

Diversified and Stable Customer Base.As of March 22, 2004, Mac-Gray provided laundry services to
approximately 34,000 laundry rooms located in 27 states in the Northeastern, Southeastern
and Midwestern United States, as well as the District of Columbia. As of March 22, 2004, no customer represented more than 1% of Mac-Gray's machine base. Mac-Gray serves
customers in a number of market segments including apartment buildings, colleges and universities, condominiums and public housing complexes.

Seasonality.The Company experiences moderate seasonality as a result of its significant operations in the college and
university market. Laundry facilities management revenues derived from the college and university market represented approximately 26% of the Company's total revenue for 2003. Academic route and
rental revenues are derived substantially during the school year in the first, second and fourth calendar quarters. Conversely, the Company increases its operating and capital expenditures during a
significant portion of the third calendar quarter, when it has its greatest product installation activities, and which is when most colleges and universities are not in session.

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

Impact of Economic Downturns.The Company believes that the national multi-housing vacancy rate increase, when weighted for
the areas of the United States where the Company conducts business, negatively affected laundry facilities management revenue by between 2% and 3% in 2003. Apartment vacancy rates have increased in
those southern states where the Company conducts business, particularly Florida, Georgia and North Carolina, and the Company believes this increase in vacancy rates has led to a decline in revenue.
Vacancy rates have not increased to the same extent in the Company's northern markets although they are still at historically high levels. Despite the impact multi-housing vacancy rates have had on
the Company's revenue, total laundry facilities management revenue increased approximately 1% in 2003 as compared to 2002 due to: internally generated increase in the

3

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pieces
of laundry equipment under contract, vending price increases, and conversion of cash operated equipment to card operated equipment, which increases machine usage and therefore revenue.

Dependence On Suppliers.The Company currently purchases a large portion of the equipment that it utilizes in its laundry
services segment from Maytag. In addition, the Company derives a portion of its revenue, as well as certain competitive advantages, from its position as a distributor of Maytag
commercial laundry products. The Company's relationship with Maytag began in 1927. Although the purchase and distribution agreements between the Company and Maytag may be terminated by either party
upon written notice, the Company has never had such an agreement terminated by Maytag. A termination of, or substantial revision of the terms of, the contractual arrangements or business relationships
with Maytag could have a material adverse effect on the Company's business, results of operations, financial condition and prospects.

MicroFridge® Services

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

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

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

The
MicroFridge® segment revenues are derived from both the sale and rental of MicroFridge® Units. MicroFridge® brand products are sold to the
hospitality lodging industry and assisted living market throughout the United States, directly and through an independent dealer network. In 2003, the largest market was government living, consisting
principally of military bases. In this market, the MicroFridge® product line is available through government contract with the General Services Administration and the U.S. Air Force.
MicroFridge® Units have been installed at selected government facilities throughout the world. MicroFridge® Units are also sold and leased to colleges and universities across
the United States. The academic living market is composed of more than 1,800 colleges and universities that have on-campus residence halls.

The
MicroFridge® segment maintains original equipment manufacturer ("OEM") arrangements with three primary manufacturers: Sanyo E&E Corporation ("Sanyo"), Nisshin Industry
Co. Ltd. and Haier America Trading. The principal patent underlying the MicroFridge® product is held jointly by the MicroFridge® segment and Sanyo.
MicroFridge®'s patented circuitry is marketed under the trade name Safe Plug. In 1997, Sanyo signed a non-competition agreement with the MicroFridge®
segment whereby Sanyo is precluded from entering the MicroFridge® market, provided that certain minimum annual quantities of products are purchased from Sanyo. These quantity requirements
were met in 2003. The OEM agreement with Nisshin Industry Co. Ltd. is renewable year to year unless terminated with proper notice.

The
refrigerator/freezer/microwave industry is highly competitive. In addition to large direct sellers, the MicroFridge® segment also competes with the major retail stores
and local and regional distributors who sell various brand-name compact refrigerators as well as microwave ovens in the markets served by MicroFridge®. Although the
MicroFridge® segment holds a patent on combination units utilizing

4

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internal
circuitry, there has been increased competition from "similar look" products utilizing an external circuitry control mechanism. There also exists local and regional competition in the
MicroFridge® rental business. Management believes that its expertise gained from being the first entrant in the market enables it to compete effectively against new entrants in the
combination appliance business. MicroFridge®'s principal competitors include Absocold, Avanti, General Electric, Sanyo Fisher Sales, Sears, Tatung, Home Depot, Lowe's,
Wal-Mart, and several companies focused on the college rental marketplace.

In
2003 our MicroFridge® segment entered into an agreement with Maytag to become a national distributor of its Amana®, Magic Chef® and Maytag brands
of appliances. Excluding Maytag laundry equipment sales, which were included with laundry equipment sales, for the year ended December 31, 2003 total sales of these appliances were
insignificant.

Reprographics Services

Our reprographic services segment, Copico, is a provider of card/coin-operated reprographics equipment and services to the academic and public library
markets in New England, New York, the Mid-Atlantic, and the Midwest. Copico provides and services copiers and laser printers for the libraries of colleges, universities, graduate schools
and public libraries. The reprographics services business segment represented approximately 3% of the Company's total revenue in 2003.

In
December 1999, the Company recorded an impairment charge of $8,474,000 related to its long-lived assets, primarily goodwill, of the Copico business segment and, in
2002, as a result of the adoption of Statement of Financial Accounting Standard No. 142, "Goodwill and Other
Intangible Assets", ("FAS 142"), an additional impairment charge of $906,000 was recorded against the remaining goodwill.

Copico's
revenues and corresponding operating income have been declining since 1999 when college libraries, followed by public libraries, began to make reference material available
electronically to patrons. This advancement, the wide spread conversion to laser printers (free of charge in many libraries) and other technical advancements have led to reduced revenue at several
accounts. As a result, since 2002 the Company elected either not to renew, or to terminate contracts with approximately 120 customers, which were either not sufficiently profitable or forecasted to be
unprofitable. The Company expects this trend to continue.

Employee Base

As of March 22, 2004, the Company employed 539 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

The Company maintains a corporate staff including centralized finance, human resources, legal services, information technology and marketing functions.
Regionally, the Company maintains service centers and warehouses staffed by service technicians, collectors, customer service representatives and inventory handlers. These facilities service the
laundry and reprographics business segments.

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

5

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We
operate three business segments, based on different product and service categories: laundry (including facilities management and equipment sales); MicroFridge®; and
reprographics. The two laundry business units (facilities management and equipment sales) and the reprographics
business unit have been aggregated into one reportable segment (laundry and reprographics) since many operating functions of the laundry and reprographics operations are commingled. Financial
information with regard to reportable business segments is reported under Note 13 to the consolidated financial statements included in this report and is incorporated into this Item 1 by
reference.

Backlog

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

Contact Information

The Company files its annual report on Form 10-K, quarterly reports on Form 10-Q, and current reports on
Form 8-K with the Securities and Exchange Commission (the "SEC"). Company reports filed with the SEC are available at the SEC's website at www.sec.gov.

The
Company's corporate offices are located at 22 Water Street, Cambridge, Massachusetts, 02141. The Company's telephone number is (617) 492-4040; its fax number is
(617) 492-5386, and its email address for investor relations isir@macgray.com.The address of the Company's Internet website is www.macgray.com.The
information contained on our website is not included as a part of, or incorporated by reference into, this annual report on
Form 10-K.

Item 2. Properties

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

Location

Approximate
Square Footage

Annual
Rental Rate

Expiration
DateBuffalo, New York

9,500

$
48,000

9/2005Charlotte, North Carolina

9,900


57,000

2/2005East Brunswick, New Jersey

9,600


53,000

5/2005East Hartford, Connecticut

14,900


63,000

5/2006Gainesville, Florida

750


6,000

at willGurnee, Illinois

12,000


114,000

6/2006Miramar, Florida

18,490


158,000

11/2004Orlando, Florida

2,100


17,000

12/2004Syracuse, New York

7,800


45,000

10/2005Westbrook, Maine

6,035


37,000

7/2006Walpole, Massachusetts

19,000


113,000

5/2006


All
properties are primarily utilized for the laundry segment except for the Walpole, Massachusetts facility, which is utilized by both the MicroFridge® and reprographics
business segments. The reprographics segment uses several of the laundry segment's facilities on a limited basis. The MicroFridge® segment also leases space at public warehouses, where
rent is based on handling and the number of Units stored.

6

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The
laundry segment is currently renting space in several markets from Web, on a month-to-month basis, in connection with the acquisition of Web assets in these
regions. It is the Company's intention to lease three of these facilities, or similar facilities in Tennessee, Maryland and Florida, on a long-term basis.

Mac-Gray
believes that its properties are generally well maintained and in good condition. Mac-Gray believes that its properties are adequate for present needs
and that suitable additional or replacement space will be available as required.

Item 3. Legal Proceedings

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

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

No matters were submitted to a vote of security holders during the fourth quarter of 2003.

PART II

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

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

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

Year Ended
December 31,
2002

Year Ended
December 31,
2003High

Low

High

LowFirst Quarter

$
3.50

$
2.60

$
3.38

$
3.04Second Quarter


4.05


3.27


3.97


3.05Third Quarter


3.40


2.90


4.65


3.98Fourth Quarter


3.55


2.75


5.43


4.65


As
of March 2, 2004 there were 936 shareholders of record of Mac-Gray common stock.

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

7

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

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

|                                                                                               |                                                                         | Year Ended December 31,  |        
|---------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------- | ------------------------ | -------
|
|Statement of Income Data:                                                                      |                                                                         |                          |        
|Revenue                                                                                        |                                                                         | $                        | 148,563
|Cost of revenue:                                                                               |                                                                         |                          |        
|                                                                                               | Facilities rent                                                         |                          |        
|                                                                                               | Facilities expenditures and other direct costs                          |                          |        
|                                                                                               | Depreciation and amortization                                           |                          |        
|                                                                                               | Cost of equipment sales                                                 |                          |        
|                                                                                               |                                                                         |                          |        
|                                                                                               |                                                                         | Total cost of revenue    |        
|                                                                                               |                                                                         |                          |        
|Operating expenses:                                                                            |                                                                         |                          |        
|                                                                                               | General and administration                                              |                          |        
|                                                                                               | Sales and marketing                                                     |                          |        
|                                                                                               | Depreciation                                                            |                          |        
|                                                                                               | Impairment of goodwill                                                  |                          |        
|                                                                                               | Loss on early extinguishment of debt                                    |                          |        
|                                                                                               |                                                                         |                          |        
|                                                                                               |                                                                         | Total operating expenses |        
|                                                                                               |                                                                         |                          |        
|Income from operations                                                                         |                                                                         |                          | 3,141  
|                                                                                               | Interest expense, net                                                   |                          |        
|                                                                                               | Gain on sale of lease receivables                                       |                          |        
|                                                                                               | Other income, net                                                       |                          |        
|                                                                                               |                                                                         |                          |        
|Income (loss) before provision for income taxes and effect of change in accounting principle   |                                                                         |                          | (2,824 
|Provision for income taxes                                                                     |                                                                         |                          | (2,727 
|                                                                                               |                                                                         |                          |        
|Net income (loss) before effect of change in accounting principle                              |                                                                         |                          | (5,551 
|Effect of change in accounting principle, net of tax                                           |                                                                         |                          |       
|                                                                                               |                                                                         |                          |        
|Net income (loss) available to common stockholders                                             |                                                                         | $                        | (5,551 
|                                                                                               |                                                                         |                          |        
|Net income (loss) per common share before the effect of change in accounting principlebasic   |                                                                         | $                        | (0.44  
|                                                                                               |                                                                         |                          |        
|Net income (loss) per common share before the effect of change in accounting principlediluted |                                                                         | $                        | (0.44  
|                                                                                               |                                                                         |                          |        
|Net income (loss) per common share-basic                                                       |                                                                         | $                        | (0.44  
|                                                                                               |                                                                         |                          |        
|Net income (loss) per common share-diluted                                                     |                                                                         | $                        | (0.44  
|                                                                                               |                                                                         |                          |        
|Weighted average common shares outstanding-basic                                               |                                                                         |                          | 12,661 
|                                                                                               |                                                                         |                          |        
|Weighted average common shares outstanding-diluted                                             |                                                                         |                          | 12,668 
|                                                                                               |                                                                         |                          |        
|Other Financial Data:                                                                          |                                                                         |                          |        
|                                                                                               | EBITDA(1)                                                               |                          |        
|                                                                                               | Depreciation and amortization                                           |                          |        
|                                                                                               | Capital expenditures(3)                                                 |                          |        
|                                                                                               | Cash flows provided by operating activities                             |                          |        
|                                                                                               | Cash flows used in investing activities                                 |                          |        
|                                                                                               | Cash flows provided by (used in) financing activities                   |                          |        
|Balance Sheet Data (at end of period):                                                         |                                                                         |                          |        
|                                                                                               | Working capital                                                         |                          |        
|                                                                                               | Long-term debt and capital lease obligations, including current portion |                          |        
|                                                                                               | Long-term debt and capital lease obligations, net of current portion    |                          |        
|                                                                                               | Total assets                                                            |                          |        

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8

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Year Ended December 31,1999

2000

2001

2002

2003Income before provision for income taxes and effect of change in accounting principle

$
(2,824
)
$
6,946

$
4,784

$
6,341

$
7,140Cost of revenue depreciation and amortization expense


18,202


18,980


19,276


16,501


16,723Operating expenses depreciation and amortization expense


905


1,225


1,201


1,197


1,100Impairment of goodwill


8,474











Interest expense, net


6,085


6,770


5,164


4,578


2,807EBITDA

$
30,842

$
33,921

$
30,425

$
28,617

$
27,770


Following
is the impact on earnings of implementing FAS 142 on the years ended December 31, 2003 and 2002, and what the impact on the same period in 1999, 2000 and 2001 would have been:

|                                                               |  | For the year ended December 31,
|-------------------------------------------------------------- |  | -------------------------------
|
|Reported earnings                                              |  | $                              
|Add: Impairment charge in accordance with FAS 142net of taxes |  |                                
|                                                               |  |                                
|                                                               |  | $                              
|Add: Goodwill amortizationnet of taxes                        |  | $                              
|                                                               |  |                                
|                                                               |  | $                              
|                                                               |  |                                

9

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

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

Overview

Mac-Gray derives its revenue principally as a laundry facilities contractor for the multi-housing industry. Mac-Gray also sells and
services commercial laundry equipment and MicroFridge® equipment and operates card/coin-operated reprographics equipment in academic and public libraries. Mac-Gray
operates laundry rooms, reprographics equipment and MicroFridge® equipment under long-term leases with property owners, colleges and universities, and governmental agencies.
Mac-Gray's laundry services segment is comprised of revenue-generating laundry machines, operated in approximately 34,000 multi-housing laundry rooms located in 27 states and the District
of Columbia. Mac-Gray's laundry facility management operations are conducted primarily in the Northeast, Mid-Atlantic, Southeast and Mid-Western United States.
Mac-Gray's reprographics segment is concentrated in the northeastern United States, with smaller operations in the Mid-Atlantic, and the Midwest.

Mac-Gray
sells and services commercial laundry equipment manufactured by Maytag, and sells and services laundry equipment manufactured by American Dryer Corp., The Dexter
Company, and Whirlpool Corporation. Additionally, the Company sells or rents laundry equipment to restaurants, hotels, health clubs and similar institutional users that operate their own
on-premise laundry facilities.

The
MicroFridge® services segment derives revenue through the sale and rental of its MicroFridge® Units to military bases, the hotel and motel market, colleges
and universities and assisted living facilities.



On January 16, 2004, we acquired substantially all of Web laundry facilities management assets in 13 eastern and southeastern states and the District of
Columbia. The purchase price consisted of approximately $39,000 in cash which included the sale to Web of certain of our laundry route equipment and related contracts in western states valued at
approximately $2,000. This acquisition will add approximately $29,000 of annual net revenue, representing approximately 28% of our 2003 revenue derived from laundry facility management operations.
Concurrent with the Web acquisition, we entered into an amended Senior Secured Credit Facility with our lenders to increase the facility from $80,000 to $105,000, consisting of a $70,000
three-year revolving credit line and a $35,000 five-year term loan. In addition to the increased borrowing capacity and providing for the acquisition of Web's assets and the
sale of certain of our assets to Web, this amendment extends the terms of the revolving credit line and term loan to June 30, 2006 and June 30, 2008, respectively. The amended Senior
Secured Credit Facility continues to be collaterized by a blanket lien on the assets of the Company and each of its subsidiaries, as well as a pledge by the Company of all the capital stock of its
subsidiaries. The term loan amortization schedule has been amended to include nineteen quarterly payments of $1,250 and a final payment of the preliminary principal balance due at maturity.

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Results of Operations (Dollars in Thousands)

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

Revenue in each of our facility management, rental and sales businesses for the years ended December 31, 2001, 2002 and 2003 were as follows:

Revenue

2001

2002

2003Laundry facilities management

$
104,159

$
103,710

$
104,789Laundry equipment sales


15,929


17,063


17,459Reprographics facilities management


6,127


5,915


5,087Total Laundry and Reprographics


126,215


126,688


127,335MicroFridge® equipment sales


23,226


22,178


21,292MicroFridge® rental


2,628


1,502


1,029Total MicroFridge®


25,854


23,680


22,321Total revenue

$
152,069

$
150,368

$
149,656


Revenue
decreased by $712, or less than 1%, to $149,656 for the year ended December 31, 2003 from the year ended December 31, 2002. This decrease was related to decreases
in MicroFridge® sales and rental revenue and reprographics facilities management revenue, offset by increases in laundry facilities management revenue, and laundry equipment sales. The
$1,359
decrease in MicroFridge® revenue, as compared to 2002, is attributable primarily to a decrease of $2,696, or 39%, in the Academic sales and rental business. The MicroFridge®
academic market decreases were offset, in part, by an increase in revenue of $1,090, or 14%, in the MicroFridge® Government and Military sales business. Revenues for the
MicroFridge® Hotel and Assisted Living business was essentially the same in 2003 as in 2002. The decrease in the 2003 Academic business, as compared to 2002, was caused primarily by fewer
sales of MicroFridge® units to colleges and universities, and less rental business on campuses, both rented to colleges and directly to students. We believe these lower numbers were due to
colleges and universities shifting the cost of purchasing certain amenities to the students as well as the increased availability of similar products at retail stores. The increased availability of
similar appliances at retail stores and our avoidance of low margin rental contracts are the primary reasons for MicroFridge® rental income decreasing in 2003 as compared to 2002. Although
it is the Company's strategy to convert school rental customers to a purchase program, the Company has not been successful in converting sufficient programs to offset losses resulting from this
ongoing decline in MicroFridge® rental revenue and does not believe it will be able to achieve this objective in the future. The increase in MicroFridge® Government and
Military sales is due primarily to the increased government spending on military base housing, and the Company's increased sales and marketing efforts toward this business segment.

Total
laundry facilities management revenue increased by $1,079, or 1%, to $104,789 for the year ended December 31, 2003, as compared to 2002. This increase is primarily due to an
increase in the number of machines in service, increases in vend rates, and continued conversion from coin-operated equipment to higher revenue generating card-operated
equipment, partially offset by a decrease in revenue caused by an increase in apartment vacancy rates in all of the Company's laundry facilities management markets. The apartment vacancy rates have
increased for the second consecutive year, particularly in Florida, Georgia, and North Carolina, where the Company generates approximately 50% of its laundry facilities management revenue. Vacancy
rates also continue to increase in the northeastern markets where the Company also conducts a significant portion of its business, though not to the extent of the increases in the southern markets.
Fourth quarter industry indicators show that

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growth
in the apartment vacancy rate is slowing in nearly all of the Company's markets. The increase in the number of machines placed in service was achieved through increases in all of the Company's
laundry facilities management service markets, particularly the northeast, where targeted marketing campaigns, and experienced sales personnel were added. Increases in machine vend rates are typically
made at locations which have not had an increase in vend price for over a year. An increase in vend price at a coin-operated location will typically be increments of $0.25 per use, whereas
at a card-operated location the increase may vary due to technology allowing for increases in more flexible increments.

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

Laundry
equipment sales increased by $396, or 2%, to $17,459 for the year ended December 31, 2003 as compared to 2002. This increase was attributable primarily to success at further
penetrating the government market. Sales to laundromat owners and other traditional customers were approximately even with 2002 results.

Facilities Rent.Facilities rent, the amount paid to property owners or managers and schools and public libraries, increased
by $770, or 2%, to $50,133 for the year ended December 31, 2003 from the year ended December 31, 2002. This increase was primarily attributable to an increase in laundry facilities
management revenue of $1,079 partially offset by a decrease in reprographics revenue of $828. The ratio of laundry facilities rent to laundry facilities management revenue did not change for the year
ended December 31, 2003 as compared to 2002. Laundry facilities rent can be affected by new and renegotiated contracts and by other factors such as the amount of "prepaid rent" payments and
laundry room betterments invested in new or renegotiated contracts. As the Company varies the amount invested in a property, the facilities rent as a derivative of facilities management revenue can
vary. Prepaid rent payments and betterments are amortized over the life of the contract. The percentage of facilities rent to revenue is also impacted by the rent rate structure in the reprographics
segment. Because this segment has a much lower rent rate structure than the laundry segment, any decrease in revenue will result in an increase in the overall facilities rent percentage of revenue.

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

Depreciation and Amortization.Depreciation and amortization include amounts included as a component of cost of revenue,
which are primarily related to laundry and MicroFridge® equipment in the field, and amounts included as an operating expense, which are primarily non-revenue-generating

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corporate
assets. Aggregate depreciation and amortization increased by $125, or 1%, from the year ended December 31, 2002, to $17,823 for the year ended December 31, 2003. Depreciation
expense of property, plant and equipment increased by 2% when compared to 2002 due to increased purchases of equipment in 2003 as compared to 2002.

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

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

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

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

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

Provision for Income Tax.The effective tax rate increased from 41% to 43% from the year ended December 31, 2002 to
the year ended December 31, 2003. The provision for income tax is higher than the Company's statutory tax rate primarily due to deductions recognized for financial reporting purposes, which are
not deductible for federal and state tax purposes.

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Following
is the impact on earnings of implementing FAS 142 on the years ended December 31, 2003 and 2002, and what the impact on the same period in 2001 would have been
(also see Note 6 of Notes to Consolidated Financial Statements):

|                                                               |  | For the year ended December 31,
|-------------------------------------------------------------- |  | -------------------------------
|
|Reported earnings                                              |  | $                              
|Add: Impairment charge in accordance with FAS 142net of taxes |  |                                
|                                                               |  |                                
|                                                               |  |                                
|Add: Goodwill amortizationnet of taxes                        |  |                                
|                                                               |  |                                
|                                                               |  | $                              
|                                                               |  |                                

Fiscal Year Ended December 31, 2002 Compared to Fiscal Year Ended December 31, 2001

Revenue decreased by $1,701, or 1%, to $150,368 for the year ended December 31, 2002 from the year ended December 31, 2001. This decrease is
primarily related to a decrease in MicroFridge® sales and rental revenue and, to a lesser extent, to decreases in laundry facilities management revenue and reprographics facilities
management revenue, partially offset by an increase in laundry equipment sales. The decrease in MicroFridge® revenue, as compared to 2001, is attributable primarily to a decrease of 19% in
the Academic sales and rental business and a 16% decrease in the Hotel and Assisted Living business. These MicroFridge® decreases were offset, in part, by a 20% increase in sales of
MicroFridge® products to the Government market. The decrease in 2002 Academic business, as compared to 2001, was caused primarily by less rental business on campus, both rented to colleges
and universities and rented directly to students. We believe these lower numbers were due to hesitation on the part of the schools to commit to such a program in such uncertain economic times, and to
students purchasing similar units at retail stores. We continue to avoid entering into rental contracts, which fail to reach an acceptable profit margin for the Company, and we continue our strategy
of attempting to convert our school rental customers to a purchase program. In any given period, the Company may be unable to offset losses resulting from this intended ongoing decline in
MicroFridge® rental revenue. We believe sales to the Academic, Hotel and Assisted Living markets have decreased, as compared to 2001, primarily due to the overall slower U.S. economy. Many
schools have deferred spending due to endowment contributions to operating budgets being lower than in past years. Further, hotels and assisted living facilities have reduced spending due, in part, to
the inability to finance expansion and remodeling of units as well as the overall decline in hotel occupancy due to the general U.S. economic slowdown.

Total
laundry facilities management revenue decreased by $449, or less than 1%, due primarily to an increase in apartment vacancy rates in all of the Company's laundry facilities
management markets. The apartment vacancy rates have increased in those southern states where the Company conducts business, particularly Florida, Georgia, and North Carolina where the Company
believes this increase in vacancy rates has led to a decline in revenue. Vacancy rates have not increased to the same extent in the Company's northern markets and the Company experienced revenue gains
in those markets in 2002. The decreases were partially offset by machines added to the total number in service, increases in vend rates, and continued conversion from coin-operated
equipment to higher revenue generating card-operated equipment. Increases in machine vend rates are typically taken at locations which have not had an increase in vend price for over a
year. An increase in vend price at a coin-operated location will typically be in increments of $0.25 per use, whereas at a card-operated location the increase may vary due to
technology allowing for increases at more flexible increments.

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Reprographics
facilities management revenue in 2002 decreased by $212, or 3%, as compared to 2001. This decrease was attributable to the decrease in machine use in libraries and similar
facilities, as compared to 2001, and a reduction in the number of locations operated by the Company. In the second half of 2002, the Company chose to not renew several contracts when it could not
negotiate acceptable terms. The Company also chose to terminate several small "at will" accounts which were no longer profitable due to declining revenue. In total, the Company eliminated
approximately 100 accounts, representing approximately 7% of its 2002 revenue.

Laundry
equipment sales increased in 2002 as compared to 2001 by $1,134, or 7%. This increase was attributable primarily to success at further penetrating the government market; offset
somewhat by a decrease of sales to laundromats and other traditional customers.

Facilities Rent.Facilities rent, the amount paid to property owners or managers and school and public libraries, decreased
by $676, or 1%, to $49,363 for the year ended December 31, 2002 from the year ended December 31, 2001. This decrease was primarily attributable to a decrease in laundry facilities
management revenue of $604 and reprographics revenue of $212, and an improvement in the ratio of laundry facilities rent to laundry facilities management revenue. The improvement of laundry facilities
management rent as a percentage of laundry facilities management revenue in 2002 is primarily attributable to new and renegotiated laundry facilities management contracts having improved facilities
rent formulas. In addition to laundry facilities rent being affected by new and renegotiated contracts, laundry facilities rent can be affected by other factors such as the amount of "prepaid rent"
payments and laundry room betterments invested in new or renegotiated contracts. As the Company varies the amount invested in a property, the facilities rent as a derivative of facilities management
revenue can vary. Prepaid rent payments and betterments are amortized over the life of the contract. The percentage of facilities rent to revenue is also impacted by the rent rate structure in the
reprographics segment. Because this segment has a much lower rent rate structure than the laundry segment, any
decrease in revenue will result in an increase in the overall facilities rent percentage of revenue. Reprographics facilities management revenue decreased in 2002 as compared to 2001 by $212.

Facilities Expenditures and Other Direct Costs.Facilities expenditures and other direct costs include costs associated with
installing and servicing laundry and reprographics facilities machines, as well as the costs of collecting, counting and depositing the revenue. Facilities expenditures also include the costs of
delivering and servicing sold and rented laundry and MicroFridge® equipment. Facilities expenditures increased by $109, or 4%, to $24,895 for the year ended December 31, 2002 from
the year ended December 31, 2001. Facilities expenditures were 16% and 17%, respectively, of total revenues for the years ended December 31, 2001 and December 31, 2002. Despite a
decrease in total revenue of $1,701 in 2002 as compared to 2001, facilities expenditures and other direct costs remained nearly flat due to the fixed nature of many facilities operating expenses, and
increases in variable expenses partially offset by cost cutting programs. Facilities expenditures are also affected by the mix of revenue. In 2002, laundry and MicroFridge® equipment sales
increased slightly as a percentage of total revenue. These sales create higher operating costs due to delivery and installation generally being more costly in the sales business than in the facilities
management business.

Depreciation and Amortization.Depreciation and amortization include amounts included as a component of cost of revenue,
which are primarily related to laundry and MicroFridge® equipment in the field, and amounts included as an operating expense, which are primarily non-revenue-generating
corporate assets. Aggregate depreciation and amortization decreased by $2,779, or 14%, from year ended December 31, 2001, to $17,698 for the year ended December 31, 2002. Depreciation
expense of property, plant and equipment remained flat when compared to 2001 due to the fact that the amount spent by the Company on capital expenditures has not changed significantly in the last
several years. Amortization expense has decreased by $2,754 in 2002 as compared to 2001, primarily due to the effect

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of
the adoption of FAS 142 on January 1, 2002. Had goodwill been amortized in 2002, $2,708 would have been charged to income. In 2001, $2,708 of goodwill amortization was charged to
income.

Cost of Product Sales.Cost of product sales increased by $171, or 1%, from the year ended December 31, 2001 to
$27,197 for the year ended December 31, 2002. Gross margins on product sales were 31% for both the years ended December 31, 2002 and 2001. The gross margin on product sales includes
laundry and MicroFridge® equipment sales. The gross margin in the laundry equipment sales business improved from 32% in 2001 to 33% in 2002. This increase was primarily attributable to
changes in product sales mix, price increases on selected products and a shift from selling some products through other commercial distributors to selling directly to the end users at higher margins.
The gross margin associated with MicroFridge® equipment sales remained the same at 30% for the years ended December 31, 2002 and 2001. This sales margin was the net of several
factors, including changes in sales mix between the academic, hotel and government divisions, competitive pressure in the MicroFridge® markets, particularly the hotel market where the
Company made price concessions to secure sales, and increased sales of larger refrigerator units, which have lower gross margins than smaller units. Also affecting the gross margin of equipment sales
was the
improvement in 2002, as compared to 2001, of the gross margin earned from laundry equipment sales to the government.

General, Administration, Sales and Marketing Expense.General, administration, sales and marketing expenses increased by $667
from the year ended December 31, 2001 to $20,484 for the year ended December 31, 2002. General, Administration, Sales and Marketing expenses were 13% and 14% of revenue for the years
ended December 31, 2001 and 2002, respectively. This increase was primarily attributable to increases in advertising, insurance, reserve for doubtful accounts and professional fees. The
increase in advertising was primarily in the MicroFridge® business, followed by the laundry equipment sales business. In both of these businesses, increased advertising expenditures were
in reaction to the effect of the general economic downturn. Insurance costs for 2002, as compared to 2001, have also increased by approximately 20%, due to conditions existing in the insurance
industry.

Interest Expense.Interest expense, net of interest income, decreased by $586, or 11%, from the year ended
December 31, 2001, to $4,578 for the year ended December 31, 2002. This decrease is primarily related to a decrease in total borrowings. The total borrowings of the Company decreased by
$13,394 during the year from $70,219 at December 31, 2001, to $56,825 at December 31, 2002. Interest expense was not significantly affected by fluctuations in interest rates due to
interest rate swap agreements, which were in place for the entire year. Interest expense for the year ended December 31, 2002 includes a non-cash expense of $828, before the effect
of income taxes, related to the terminated swap agreement and the ineffective portion of the February 2004 swap agreement.

Provision for Income Tax.The effective tax rate decreased from 48% to 41% from the year ended December 31, 2001 to
the year ended December 31, 2002. The provision for income tax is higher than the Company's statutory tax rate primarily due to goodwill amortization deducted in 2001 for financial reporting
purposes, which are not deductible for federal and state tax purposes, and other permanent differences in 2002.

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

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Seasonality

The Company experiences moderate seasonality as a result of its significant operations in the college and university market. Revenues derived from the college and
university market represented approximately 26% of the Company's total revenue for 2003. Academic facilities management revenues are derived substantially during the school year in the first, second
and fourth calendar quarters. Conversely, the Company's operating and capital expenditures increase during the third calendar quarter, when it installs a large number of machines while colleges and
universities are generally on summer break. Product sales, principally of MicroFridge® products, to this market are also high during the third calendar quarter. In 2003 total capital
expenditures were $15,372, of which $14,671 was invested in laundry route equipment. Of this amount, approximately 35% was invested in the third quarter. The Company's acquisition on
January 16, 2004 of Web's laundry facilities management contracts will not change the seasonality of the Company's business significantly.

Liquidity and Capital Resources (Dollars in Thousands)

Mac-Gray's primary source of cash has been from operating activities. The Company's primary uses of cash have been the purchase of new laundry
machines, MicroFridge® equipment, and the reduction of bank debt. The Company anticipates that it will continue to use cash generated from its operating activities to finance working
capital needs, including interest payments on any outstanding indebtedness, as well as capital expenditures and other purposes.

Cash
flows provided by operations were $18,473, $26,835 and $24,480 for the years ended December 31, 2001, 2002 and 2003, respectively. Cash flows from operations consists
primarily of activities affecting the Company's core operating activities, such as facilities management revenue, product sales, equipment service revenue and rental revenue, offset by facilities
rent, facilities expenditures, cost of product sales, cost of rental revenue, general and administration expenses and sales and marketing expenses. The decrease from 2002 to 2003 of $2,355 is
primarily attributable to the net of the positive impact of a decrease in inventory balances, increases in deferred income taxes and net income, offset by the negative impact of increases in accounts
receivable. Inventory balances have decreased due primarily to improvements in MicroFridge® | inventory management. Accounts receivable have increased in 2003 as compared to
2002 due primarily to several transactions with government agencies and leasing companies, which require more documentation and therefore, on occasion, more time to collect. Deferred income tax
liabilities in 2003 increased by $1,098 due to the use of accelerated depreciation on assets acquired creating a difference between "book" and "tax" depreciation. Prepaid expenses, facilities rent and
other assets decreased by $974 in 2003 primarily due to the collection and sale of receivables under long term MicroFridge® equipment leases and a decrease in prepaid expenses and rent
paid to new laundry facilities management customers.

Cash
used in investing activities was $11,917, $12,436 and $12,802 for the years ended December 31, 2001, 2002 and 2003, respectively. The most significant component of cash flows
used in investing activities is capital expenditures, which increased by $2,038 for the year ended December 31, 2003 as
compared to the year ended December 31, 2002. Capital expenditures were $12,779, $13,334 and $15,372 for the years ended December 31, 2001, 2002 and 2003, respectively. The 15% increase
in 2003 capital expenditures as compared to 2002 was due to an increase in the amount of new laundry equipment placed in service in 2003 partially offset by decreases in capital expenditures for
MicroFridge®, reprographics and administration. During 2003, the Company paid $1,030 to acquire laundry facilities management assets and contracts. Also during 2003, the Company sold
certain lease receivables, the proceeds of which amounted to $3,284.

Cash
flows used in financing activities were $8,046, $14,608 and $11,398 for the years ended December 31, 2001, 2002 and 2003, respectively. Financing activities for those periods
consist primarily of proceeds from and repayments of bank borrowings, and capital stock transactions. The principal use

17

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of
cash in financing activities in 2001, 2002 and 2003 was the repayment of bank debt. The Company reduced its total bank and other debt by $7,379, $13,394 and $5,952 for the years ended
December 31, 2001, 2002 and 2003 respectively. During 2003, the Company paid $3,037 to terminate two interest rate swap agreements.

During
2003, we repurchased 155,500 shares of our common stock at a total cost of $622.

On
June 24, 2003, the Company refinanced its outstanding Senior Secured Credit Facility with a group of banks. This transaction retired both the June 2000 revolving line of
credit and the June 2000 Senior Secured Term Loan Facility, which were due to expire in July 2004 and June 2005, respectively. On January 16, 2004, the Company amended its
Senior Secured Credit Facility in connection with the Web acquisition and borrowed approximately $39,000 under the facility to fund the acquisition. (See Note 18 of Notes to Consolidated
Financial Statements.)

The
amended Senior Secured Credit Facility provides for borrowings up to $105,000, consisting of a $70,000 three-year revolving credit line and a $35,000
five-year term loan. In addition to the increased borrowing capacity and providing for the acquisition of Web's assets and the sale of certain of our assets to Web, this amendment extends
the terms of the Revolving Credit Facility and the Term Loan Facility to June 30, 2006 and June 30, 2008, respectively. The amended Senior Secured Credit Facility continues to be
collaterized by a blanket lien on the assets of the Company and each of its subsidiaries, as well as a pledge by the Company of all the capital stock of its subsidiaries. The term loan amortization
schedule has been amended to include nineteen quarterly payments of $1,250 and a final payment of the remaining principal balance due at maturity. In addition to the scheduled quarterly payments on
the amended Senior Secured Term Loan Facility, the Company is required to pay an amount equal to 50% of the Excess Cash Flow, as defined, for each fiscal period provided that the funded debt ratio for
each of the preceding four fiscal quarters is greater than 1.50 to 1. This payment is first used to reduce the amended Senior Secured Term Loan Facility with any remaining amounts used
to reduce the revolving line of credit. No excess cash flow payments were required for the years ended December 31, 2002 and 2003.

Outstanding
indebtedness under the 2003 amended Senior Secured Credit Facility bears interest, at the Company's option, at a rate equal to the i) Prime rate, or ii) LIBOR
plus 2.00%. For periods after June 30, 2004 the Applicable LIBOR Margin may be adjusted quarterly based on certain financial ratios. The average interest rate at December 31, 2003 was
approxiamtely 4.1%.

The
amended Senior Secured Credit Facility includes certain financial and operational covenants, including restrictions on paying dividends and other distributions, making certain
acquisitions and incurring indebtedness, and requires that the Company maintain certain financial ratios. The most restrictive financial ratio is a minimum level of debt service coverage. The Company
was in compliance with all financial covenants at December 31, 2003.

On
June 24, 2003, the Company terminated its two $20,000 interest rate swap agreements, which had been in effect since February 2000 and January 2002, respectively.
The January 2002 interest rate swap agreement was due to expire in February 2004 while the February 2000 interest rate swap agreement was due to expire in February 2005.
The Company paid $3,037 to terminate both the February 2000 and January 2002 swap agreements. The accumulated other comprehensive losses related to the terminated interest rate swap
agreements are reclassified against current period earnings in the same period the forecasted interest payments affect earnings. Upon termination, there was $1,419; net of taxes of $946, included in
accumulated other comprehensive loss. The $88 associated with the January 2002 interest rate swap agreement will be reclassified as an earnings charge through February 2004 and the
$1,331 associated with the February 2000 interest rate swap agreement will be reclassified as an earnings charge through February 2005.

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On
June 24, 2003, as required by the 2003 Senior Secured Credit Facility, the Company entered into two standard International Swaps and Derivatives Association ("ISDA") interest
rate swap agreements (the "2003 Swap Agreements") to manage the interest rate risk associated with its 2003 Senior Secured Credit Facility. The Company has designated its interest rate swap agreements
as cash flow hedges. Each agreement has a notional amount of $20,000 and a maturity date in June 2008. The first interest rate swap agreement has a fixed notional amount throughout its term and
a fixed rate of 2.34%. The second interest rate swap agreement contains an amortization provision and a fixed rate of 2.69%. The notional amount of this agreement at December 31, 2003 was
$18,572. In accordance with the 2003 Swap Agreements and on a quarterly basis, interest expense is calculated based on the floating 90-day LIBOR and the fixed rate. If interest expense as
calculated is greater based on the 90-day LIBOR, the financial institution pays the difference to the Company; if interest expense as calculated is greater based on the fixed rate, the
Company pays the difference to the financial institution. Depending on fluctuations in the LIBOR, the Company's interest rate exposure and its related impact on interest expense and net cash flow may
increase or decrease. The Company is exposed to credit loss in the event of non-performance by the other party to the swap agreement; however, nonperformance is not anticipated.

The
fair value of the 2003 Swap Agreements is the estimated amount that the Company would receive or pay to terminate the agreement at the reporting date, taking into account current
interest rates and the credit worthiness of the counter party. At December 31, 2003, the fair value of the 2003 Swap Agreements, net of related taxes, was an unrealized gain of $566. This
amount has been included in other assets on the consolidated balance sheet.

On
February 17, 2004, as required by the amended Senior Secured Credit Facility, the Company entered into an additional ISDA interest rate swap agreement to manage the interest
rate risk associated with its amended Senior Secured Credit Facility. This agreement has a notional amount of $21,600 and a maturity date in February 2007. The interest rate swap agreement has
a fixed notional amount throughout its term and a fixed rate of 2.58%.

Prior
to its termination in June 2003, the ineffective portion of the January 2002 interest rate swap agreement resulted in income, after the effect of related income
taxes, for the years ended December 31, 2002 and 2003 of $218 and $152, respectively. See Item 7A"Quantitative and Qualitative Disclosures About Market RiskRisk
Factors".

A
summary of the Company's contractual obligations and commitments related to its outstanding long term debt and future minimum lease payments as of December 31, 2003 is as follows:

Fiscal
Year

Long Term
Debt

Route Rent
Commitments

Capital Lease
Commitments

Operating Lease
Commitments

Total2004

$
2,984

$
5,127

$
648

$
803

$
9,5622005


2,979


3,750


582


522


7,8332006


33,021


3,236


509


202


36,9682007


5,714


2,797


191


12


8,7142008


4,286


2,253








6,539Thereafter





3,892








3,892Total

$
48,984

$
21,055

$
1,930

$
1,539

$
73,508


We
anticipate that available funds from current operations, existing cash and other sources of liquidity will be sufficient to meet current operating requirements and anticipated capital
expenditures. However, we may require external sources of financing for any significant future acquisitions. Further, the revolving credit portion of the amended Senior Secured Credit Facility matures
in June 2006. We expect that repayment of the revolver will require external financing.

19

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Inflation

The Company does not believe that its financial performance has been materially affected by inflation.

Critical Accounting Policies and Estimates

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

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

Cash and cash equivalents.The Company considers all highly liquid investments with original maturities of three months or
less to be cash equivalents. On occasion the Company has excess cash available for a short period of time; when this occurs, the Company invests such excess cash in repurchase agreements and other
highly liquid short-term investments. Accordingly, the investments are subject to minimal credit and market risk. Included in cash and cash equivalents is an estimate of cash not yet
collected at period end, which remains at laundry and reprographics customer locations. At December 31, 2002 and 2003, this totaled $3,480 and $3,621 respectively. The Company records the
estimated cash not yet collected as cash and cash equivalents and facilities management revenue. The Company also records the estimated related facilities rent expense and accrued route rent. These
estimates are based upon historical collection trends, so that total cash at the end of each period will be reasonably stated.

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

The
Company has entered into long-term lease transactions that meet the qualifications of a sales-type lease for certain equipment. For these transactions, the
amount of revenue recognized upon product shipment is the present value of the minimum lease payments, net of executory costs, together with the profit thereon, discounted at the interest rate
implicit in the lease. Interest revenue is recognized over the life of the rental agreement. At December 31, 2002 and 2003 the Company had $11,022 and $6,888, respectively, in receivables
related to sales-type leases. These receivables have been recorded net of unearned interest income of $849 and $790 at December 31, 2002 and 2003. These receivables are primarily
due ratably over the next six years and have been classified as other current assets and other long-term assets, as appropriate, on the balance sheet. The related reserve for uncollectible
lease receivables at December 31, 2002 and 2003 was $453 and $542, respectively. The Company has not entered into significant sales-type leases since 2001.

20

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The
Company believes its accounting for facilities management revenue, rental revenue and long-term lease transactions is appropriate for the Company, best matching the
nature of the transaction with the proper reporting period.

Provision for Doubtful Accounts.On a regular basis, the Company reviews the adequacy of its provision for doubtful accounts
for trade accounts receivable and lease receivables based on historical collection results and current economic conditions using factors based on the aging of its trade accounts and lease receivables.
In addition, the Company estimates specific additional allowances based on indications that a specific customer may be experiencing financial difficulties.

Inventories.Inventories are stated at the lower of cost (as determined using the first-in, first-out
method) or market and primarily consist of finished goods. Based on the nature of the Company's inventory, being laundry and MicroFridge® equipment, and the inventory handling practices of
the Company, the Company believes the lower of cost or market is the most appropriate valuation method for the Company.

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

Intangible Assets.Intangible assets primarily consist of various non-compete agreements, customer lists,
goodwill and contract rights recorded in connection with acquisitions. The non-compete agreements are amortized using the straight-line method over the life of the agreements,
which range from two to five years. Customer lists are amortized using the straight-line method over five to fifteen years. Contract rights are amortized using the
straight-line method over fifteen years. Based on its experience, the Company believes that these costs, associated with various acquisitions, are properly recognized and amortized over a
reasonable length of time. In accordance with FAS 142, the Company stopped amortizing goodwill on January 1, 2002.

Impairment of Long-Lived Assets.The Company reviews long-lived assets, including fixed assets and
intangible assets with definitive lives, for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable or that the
useful lives of these assets are no longer appropriate. Each impairment test is based on a comparison of the undiscounted cash flows to the recorded value of the asset. If impairment is indicated, the
asset is written down to its estimated fair value on a discounted cash flow basis.

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

Financial Instruments.The Company accounts for derivative instruments in accordance with Statement of Financial Accounting
Standard No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"), and Statement of Financial Accounting Standard No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities-an amendment of

21

---

FASB No. 133"
("FAS 138"). These statements require the Company to recognize derivatives on its balance sheet at fair value. Derivatives that are not hedges must be adjusted to
fair value through earnings. If the derivative is a hedge, changes in the fair value of derivatives will either be offset against the change in fair value of the hedged assets, liabilities or firm
commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings, depending on the intended use of the derivative. The ineffective portion of a
derivative's change in fair value will be immediately recognized in earnings. The Company has designated its interest rate swap agreements as cash flow hedges. Accordingly, the change in fair value of
the agreements is recognized in other comprehensive income and the ineffective portion of the change is recognized in earnings immediately.

Fair Value of Financial Instruments.For purposes of financial reporting, the Company has determined that the fair value of
financial instruments approximates book value at December 31, 2002 and 2003, based upon terms currently available to the Company in financial markets. The fair value of the interest rate swaps
is the estimated amount that the Company would receive or pay to terminate the agreement at the reporting date, taking into account current interest rates and the credit worthiness of the counter
party.

New Accounting Pronouncements

In November 2002, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 elaborates on the disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of the guarantee, a liability for the fair
value of the obligation undertaken in issuing the guarantee. FIN 45 does not prescribe a specific approach for subsequently measuring the guarantor's recognized liability over the term of the related
guarantee. This Interpretation also incorporates, without change, the guidance in FASB Interpretation No. 34, "Disclosure of Indirect Guarantees of Indebtedness of Others", which is being
superseded. The Company has adopted the disclosure provisions of this pronouncement as of December 31, 2002. The adoption of the financial provisions of FIN 45 on January 1, 2003 had no
material effect on the Company's financial position or results of operations.

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

In
April 2003, the FASB issued Statement of Financial Accounting Standard No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities"
("FAS 149"), which amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging
activities under FAS 133. FAS 149 is effective for contracts entered into or modified after June 30, 2003 except for the provisions that were cleared

22

---

by
the FASB in prior pronouncements. The adoption of FAS 149 on July 1, 2003 had no material effect on the Company's financial position or results of operations.

In
May 2003, the FASB issued Statement of Financial Accounting Standards No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and
Equity" ("FAS 150"). FAS 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Many of those instruments were previously classified as equity.
FAS 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after
June 15, 2003, except for mandatorily redeemable financial instruments of nonpublic entities. It is to be implemented by reporting the cumulative effect of a change in an accounting principle
for financial instruments created before the issuance date of the FAS 150 and still existing at the beginning of the interim period of adoption. Restatement is not permitted. The adoption of
FAS 150 on July 1, 2003 had no material effect on the Company s financial position or results of operations.

Risk Factors

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

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

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

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

In the event the Company is unable to decrease the outstanding indebtedness under its credit facility, the increased indebtedness could:



23

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

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

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

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



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

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

The card/coin-operated laundry services industry is highly competitive, both locally and nationally. On the local level, private businesses tend to
have long-standing relationships with property owners and managers in their specific geographic market. On the national level, there are two competitors with larger installed machine bases
than Mac-Gray. These larger companies tend to have significant operational and managerial resources to devote to expansion and to capture additional market share. These competitive forces
may increase purchase prices for future acquisitions to levels that make the acquisitions less attractive or uneconomical. Accordingly, the Company cannot assure that it will be able to compete
effectively in any specific geographic location in the business of supplying laundry equipment services to property owners and managers or in the acquisition of other businesses.

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

Currently the Company purchases a majority of the equipment that it uses in the laundry facilities management business from Maytag. In addition, the Company
derives a significant amount of its non-laundry facilities management revenue, as well as competitive advantages, from its position as a

24

---

distributor
of Maytag commercial laundry products. Although either party, upon written notice, may terminate the agreements between the Company and Maytag, Maytag has never terminated any agreement
with the Company. The Company's relationship with Maytag dates from 1927.

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

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

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

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



Growth Strategy May not be Successful if the Company is Unable to Acquire and Integrate New Businesses.

The Company's long-term growth strategy depends, in part, on its ability to acquire and successfully integrate and operate additional businesses.
While the Company generally believes that the management team and business structure currently in place enables it to operate a significantly larger
and more diverse operation, it may be exposed to the following risks in connection with finding, completing, and successfully integrating acquisitions:



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

On January 16, 2004 the Company acquired the eastern laundry facility assets of Web. The majority of these assets are in the Company's existing
geographical markets. There can be no guarantee that a successful integration of these assets will occur. Failure to successfully complete the integration could adversely effect the overall results
and financial strength of the Company.

25

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Multi-housing Vacancy Rates Could Effect Revenue From the Operations of Laundry Route Contracts.

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

The
level of occupancy can be adversely affected by many market economic conditions, including:



The MicroFridge® Products May be Susceptible to Product Liability Claims for Which Insurance May Not be Adequate.

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

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

The Company relies upon certain trademark, service mark, copyright, patent and trade secret laws, employee and third-party non-disclosure and
non-solicitation agreements and other methods to protect proprietary rights. Periodically the Company makes filings with the Patent and Trademark Office to protect some of its proprietary
rights, although the Company has traditionally relied upon the protections afforded by contract rights and through common law ownership rights. The Company cannot assure investors that these contract
rights and legal claims to ownership will adequately protect the operations from adverse claims. In addition, any adverse claims or litigation,
with or without merit, could be costly and could divert management's attention from the operation of the business.

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

As of March 26, 2004, Mac-Gray's directors, executive officers, and certain of its stockholders and their affiliates beneficially owned in the
aggregate approximately 51% of the outstanding shares of the Company's common stock. This percentage ownership does not include options to purchase 268,000 shares of the common stock held by some of
these persons, all of which are currently exercisable. If these affiliates exercised any of their options, then the ownership of common stock would be further concentrated. As a result of this
concentration in ownership, these stockholders, acting together, have the ability to significantly influence the outcome of the election of directors and all other matters requiring approval by a
majority of stockholders. Matters requiring stockholder approval include significant corporate transactions, such as mergers and sales of all or substantially all of the Company's assets. The
concentration of ownership in affiliates, together, in some cases, with specific provisions of

26

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the
Company's charter and bylaws, as described below, and applicable sections of the corporate law of Delaware, may have the effect of delaying or preventing a change in control of
Mac-Gray.

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

Specific provisions of the Company's charter and bylaws, as described below; sections of the corporate law of Delaware; the shareholder rights agreement, and
powers of the Board of Directors may discourage takeover attempts not first approved by the Board of Directors, including takeovers which some stockholders may deem to be in their best interests.
These provisions and powers of the Board of Directors could delay or prevent the removal of incumbent directors or the assumption of control by stockholders, even if the particular removal or
assumption of control would be beneficial to stockholders. These provisions and powers of the Board of Directors could also discourage or make more difficult a merger, tender offer or proxy contest,
even if these events would be beneficial, in the short term, to the interests of stockholders. The anti-takeover provisions and powers of the Board of Directors include, among other
things:



Item 7A. Quantitative and Qualitative Disclosures About Market Risk

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



The table below provides information about the Company's debt obligations that are sensitive to changes in interest rates. For debt obligations, the table
presents principal cash flows and related

27

---

weighted
average interest rates by expected maturity dates. The fair market value of long-term debt approximates book value at December 31, 2003.

|                      |  | Expected Maturity Date (In Thousands)
|--------------------- |  | -------------------------------------
|
|
|Long-term Debt:       |  |                                      
|Fixed Rate            |  | $                                    
|Average interest rate |  |                                      
|Variable rate         |  | $                                    
|Average interest rate |  |                                      

On
June 24, 2003, the Company terminated its two $20,000 interest rate swap agreements, which had been in effect since February 2000 and January 2002, respectively.
The January 2002 interest rate swap agreement was due to expire in February 2004 while the February 2000 interest rate swap agreement was due to expire in February 2005.
The Company paid $3,037 to terminate both the February 2000 and January 2002 swap agreements. The accumulated other comprehensive losses related to the terminated interest rate swap
agreements are reclassified against current period earnings in the same period the forecasted interest payments affect earnings. Upon termination, there was $1,419, net of taxes of $946, included in
accumulated other comprehensive loss. The $88 associated with the January 2002 interest rate swap agreement will be reclassified as an earnings charge through February 2004 and the
$1,331 associated with the February 2000 interest rate swap agreement will be reclassified as an earnings charge through February 2005.

On
June 24, 2003, as required by the 2003 Senior Secured Credit Facility, the Company entered into two standard International Swaps and Derivatives Association ("ISDA") interest
rate swap agreements (the "2003 Swap Agreements") to manage the interest rate risk associated with its 2003 Senior Secured Credit Facility. The Company has designated its interest rate swap agreements
as cash flow hedges. Each agreement has a notional amount of $20,000 and a maturity date in June 2008. The first interest rate swap agreement has a fixed notional amount throughout its term and
a fixed rate of 2.34%. The second interest rate swap agreement contains an amortization provision and a fixed rate of 2.69%. The
notional amount of this agreement at December 31, 2003 was $18,572. In accordance with the 2003 Swap Agreements and on a quarterly basis, interest expense is calculated based on the floating
90-day LIBOR and the fixed rate. If interest expense as calculated is greater based on the 90-day LIBOR, the financial institution pays the difference to the Company; if
interest expense as calculated is greater based on the fixed rate, the Company pays the difference to the financial institution. Depending on fluctuations in the LIBOR, the Company's interest rate
exposure and its related impact on interest expense and net cash flow may increase or decrease. The Company is exposed to credit loss in the event of non-performance by the other party to
the swap agreement; however, nonperformance is not anticipated.

The
fair value of the 2003 Swap Agreements is the estimated amount that the Company would receive or pay to terminate the agreement at the reporting date, taking into account current
interest rates and the credit worthiness of the counter party. At December 31, 2003, the fair value of the 2003 Swap Agreements, net of related taxes, was an unrealized gain of $566. This
amount has been included in other assets on the consolidated balance sheet.

On
February 17, 2004, as required by the amended Senior Secured Credit Facility, the Company entered into an additional ISDA interest rate swap agreement to manage the interest
rate risk associated with its amended Senior Secured Credit Facility. This agreement has a notional amount of $21,600 and a maturity date in February 2007. The interest rate swap agreement has
a fixed notional amount throughout its term and a fixed rate of 2.58%.

28

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Prior
to its termination in June 2003, the ineffective portion of the January 2002 interest rate swap agreement resulted in income, after the effect of related income
taxes, for the years ended December 31, 2002 and 2003 of $218 and $152, respectively.

As
of December 31, 2003, there was $16,929 outstanding under the term loan and $31,765 outstanding under the revolving line of credit, and the unused balance under the revolving
line of credit was $27,858. The average interest rate was approximately 4.1% at December 31, 2003.

Item 8. Financial Statements and Supplementary Data

Financial statements and supplementary data are contained in pages F-1 through F-32 hereto.

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

None.

Item 9A. Controls and Procedures

As of the end of the period covered by this Report, and pursuant to Rule 13a-15(e) under the Securities Exchange Act of 1934, the Company's
Chief Executive Officer and Chief Financial Officer, together with other members of the Company management, conducted an evaluation of the effectiveness of the design and operation of our disclosure
controls and procedures. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in that they provide
reasonable assurance that information required to be disclosed by us in the reports we submit or file under the Exchange Act is recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms. There was no change in the Company's internal control over financial reporting that occurred during the fiscal quarter ended December 31, 2003 that has
materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

29

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PART III

Item 10. Directors and Executive Officers of the Registrant

The information appearing under the caption "Information Regarding Directors/Nominees" and "Information Regarding Executive Officers" in the Company's definitive
proxy statement for its 2004 annual meeting of stockholders is incorporated herein by reference.

Item 11. Executive Compensation

The information appearing under the caption "Executive Compensation" in the Company's definitive proxy statement for its 2004 annual meeting of stockholders is
incorporated herein by reference.

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

The information appearing under the caption "Principal and Management Stockholders" in the Company's definitive proxy statement for its 2004 annual meeting of
stockholders is incorporated herein by reference.

Stock Option Plan Information and Employee Stock Purchase Plan Information

The following tables provide information as of December 31, 2003 regarding shares of common stock of the Company that may be issued under the existing
equity compensation plans, including the Company's 1997 Stock Option and Incentive Plan (the "Stock Option Plan") and the Company's 2001 Employee Stock Purchase Plan (the "ESPP"). There are no equity
compensation plans that have not been approved by the shareholders.

|Plan category                                              |  | Number of securities
to be issued upon exercise
of outstanding options,
warrants and rights |  | Weighted average
exercise price of
outstanding options,
warrants and rights |      | Number of securities
remaining available for
future issuance under
equity compensation
plan (excluding
securities referenced in
column (a)) |        
|---------------------------------------------------------- |  | ------------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------- | ---- | ------------------------------------------------------------------------------------------------------------------------------------------- | -------
|
|Equity compensation plans approved by security holders(1)  |  | 1,055,400                                                                                   |  | $                                                                           | 4.01 |                                                                                                                                             | 136,142
|                                                           |  |                                                                                             |  |                                                                             |      |                                                                                                                                             |        
|Equity compensation plans not approved by security holders |  | -0-                                                                                         |  |                                                                             | -0-  |                                                                                                                                             | -0-    
|                                                           |  |                                                                                             |  |                                                                             |      |                                                                                                                                             |        
|Total                                                      |  | 1,055,400                                                                                   |  | $                                                                           | 4.01 |                                                                                                                                             | 273,830
|                                                           |  |                                                                                             |  |                                                                             |      |                                                                                                                                             |        

---

30

---

Item 13. Certain Relationships and Related Transactions

The information appearing under the caption "Certain Relationships and Related Transactions" in the Company's definitive proxy statement for its 2004 annual
meeting of stockholders is incorporated herein by reference.

Item 14. Principal Accountant Fees and Services

The information concerning our principal accountant fees and services required by Item 14 will be included in our definitive proxy statement for our 2004 annual
meeting of stockholders and is incorporated herein by reference.

31

---



PART IV

Item 15. Exhibits, Financial Statements, Schedules and Reports on Form 8-K

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

(a)(3)
Exhibits

See
attached exhibit listing on pages 32 through 34.

(b)
Reports on Form 8-K

On
October 22, 2003, the Company filed a current report on Form 8-K reporting under Item 12 that on October 22, 2003 the Company issued a press release
announcing the Company's financial results for the quarter ended September 30, 2003 and attaching as exhibits the press release and a transcript of the Company's quarterly earnings call.

(a)(3)
Exhibits:

The
Exhibits listed below are identified by numbers corresponding to the Exhibit Table of Item 601 of Regulation S-K. Exhibits 10.3, 10.11 and 10.13 constitute all of
the management contracts and compensation plans and arrangements required to be filed as exhibits to this report on Form 10-K. 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.



32

---



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

|2.1   |  | Stock Purchase Agreement, dated as of March 31, 1998, by and among Mac-Gray Services, Inc., Copico, Inc. and the stockholders of Copico, Inc. (10.20) z                                                                                                                                 
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|1.2   |  | Stock and Asset Purchase Agreement, dated as of March 4, 1998, by and among Mac-Gray Services, Inc., Amerivend Corporation, Amerivend Southeast Corporation, Gerald E. Pulver and Gerald E. Pulver Grantor Retained
Annuity Trust. (2.2) y                                              
|1.3   |  | Asset Purchase Agreement, dated as of January 16, 2004, between Mac-Gray Services, Inc. and Web Service Company. (2.1) T                                                                                                                                                                
|3.1   |  | Amended and Restated Certificate of Incorporation. (3.1) +                                                                                                                                                                                                                              
|3.2   |  | By-laws, as amended. (3.2) v                                                                                                                                                                                                                                                            
|4.1   |  | Specimen certificate for shares of Common Stock, $.01 par value, of the Registrant (4.1) #                                                                                                                                                                                              
|4.2   |  | Shareholder Rights Agreement, dated as of June 15, 1999, by and between the Registrant and State Street Bank and Trust Company. (4.1) x                                                                                                                                                 
|10.1  |  | Stockholders' Agreement dated as of June 26, 1997 by and among the Registrant and certain stockholders of the Registrant. (10.2) +                                                                                                                                                      
|10.2  |  | Form of Maytag Distributorship Agreements. (10.13) +                                                                                                                                                                                                                                    
|10.3  |  | The Registrant's 1997 Stock Option and Incentive Plan (with form of option agreements attached as exhibits). (10.16) +                                                                                                                                                                  
|10.4  |  | Revolving Credit and Term Loan Agreement, dated June 24, 2003, by and among the Registrant, the other Borrowers (as defined therein), the lenders named therein and KeyBank National Association, as agent. (10.15)
u                                                                   
|10.5  |  | Form of Pledge Agreement between the Registrant and the Banks (as defined herein) dated as of June 24, 2003 (filed herewith)                                                                                                                                                            
|10.6  |  | Form of Security Agreement between the Registrant and the Banks (as defined herein) dated as of June 24, 2003 (filed herewith)                                                                                                                                                          
|10.7  |  | Second Amendment, dated January 16, 2004, to Revolving Credit and Term Loan Agreement, among the Registrant, the other Borrowers (as defined therein), the Banks (as defined therein), the Agent (as defined therein),
and KeyBank National Association as Documentation Agent. (10.1) t
|10.8  |  | Form of Revolving Credit Note issued by the Registrant in favor of the Banks (as defined herein) dated as of January 16, 2004 (filed herewith)                                                                                                                                          
|10.9  |  | Form of Term Note issued by the Registrant in favor of the Banks (as defined herein) dated as of January 16, 2004 (filed herewith)                                                                                                                                                      
|10.10 |  | Form of Amended and Restated Collateral Assignment of Material Contracts and Licenses dated as of January 16, 2004 (filed herewith).                                                                                                                                                    
|10.11 |  | Form of Noncompetition Agreement between the Registrant and its executive officers. (10.11) + (10.15) v                                                                                                                                                                                 
|      |  |                                                                                                                                                                                                                                                                                         

33

---

|10.12 |  | Form of Director Indemnification Agreement between the Registrant and each of its            Directors. (10.17) + (10.16) v                            
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------
|10.13 |  | April 2001 Amendment to the Mac-Gray Corporation 1997 Stock Option and Incentive Plan. (10.17) v                                                       
|21.1  |  | Subsidiaries of the Registrant. (21.1) z                                                                                                               
|23.1  |  | 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)

34

---



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 26th DAY OF MARCH, 2004.

|                     |  | MAC-GRAY CORPORATION
|-------------------- |  | --------------------
|                     |  | By:                 
|Date: March 26, 2004 |  |                     

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/THOMAS E. BULLOCKThomas E. Bullock             |  | Director                                                                                                                |  | March 26, 2004
|/s/WILLIAM M. CROZIER, JR.William M. Crozier, Jr. |  | Director                                                                                                                |  | March 26, 2004
|/s/JOHN P. LEYDONJohn P. Leydon                   |  | Director                                                                                                                |  | March 26, 2004
|/s/LARRY L. MIHALCHIKLarry L. Mihalchik           |  | Director                                                                                                                |  | March 26, 2004
|/s/JERRY A. SCHILLERJerry A. Schiller             |  | Director                                                                                                                |  | March 26, 2004
|/s/MICHAEL J. SHEAMichael J. Shea                 |  | Executive Vice President, Chief Financial Officer, Treasurer and Secretary (Principal Financial and Accounting Officer) |  | March 26, 2004

35

---



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

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE

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

|MAC-GRAY CORPORATION |                                                                                                     |                                                                                                                                                                                               
|-------------------- | --------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                     | Report of Independent Auditors                                                                      |                                                                                                                                                                                               
|                     | Consolidated Balance Sheets at December 31, 2002 and 2003                                           |                                                                                                                                                                                               
|                     | Consolidated Income Statements for the Years Ended December 31, 2001, 2002 and 2003                 |                                                                                                                                                                                               
|                     | Consolidated Statement of Stockholders' Equity for the Years Ended December 31, 2001, 2002 and 2003 |                                                                                                                                                                                               
|                     | Consolidated Statements of Cash Flows for the Years Ended December 31, 2001, 2002,
and 2003         |                                                                                                                                                                                               
|                     | Notes to Consolidated Financial Statements                                                          |                                                                                                                                                                                               
|                     |                                                                                                     | The following consolidated financial statement schedule of Mac-Gray Corporation is included in Item 15 (a)(2) and should be read in conjunction with the financial statements included herein.
|                     |                                                                                                     | Schedule II Valuation and Qualifying Accounts                                                                                                                                                 

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

F-1

---



REPORT OF INDEPENDENT AUDITORS

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

In
our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Mac-Gray
Corporation and its subsidiaries (the "Company") at December 31, 2002 and 2003, and the results of their operations and their cash flows for each of the three years in the period ended
December 31, 2003, 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
accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements
and financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on
our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.

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

LOGO

Boston,
Massachusetts
February 19, 2004

F-2

---



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

|                                              |                                                                                                                                                                                                                               | December 31, 2002 |                            | December 31, 2003 |  
|--------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------- | -------------------------- | ----------------- | -
|ASSETS                                        |                                                                                                                                                                                                                               |                   |                            |                   |  
|Current assets:                               |                                                                                                                                                                                                                               |                   |                            |                   |  
|                                              | Cash and cash equivalents                                                                                                                                                                                                     |                   | $                          | 5,016             |  
|                                              | Trade receivables, net of allowance for doubtful accounts                                                                                                                                                                     |                   |                            | 7,670             |  
|                                              | Inventory of finished goods                                                                                                                                                                                                   |                   |                            | 6,186             |  
|                                              | Deferred income taxes                                                                                                                                                                                                         |                   |                            | 1,067             |  
|                                              | Prepaid expenses, route rent and other current assets                                                                                                                                                                         |                   |                            | 7,595             |  
|                                              |                                                                                                                                                                                                                               |                   |                            |                   |  
|                                              |                                                                                                                                                                                                                               |                   | Total current assets       |                   |  
|Property, plant and equipment, net            |                                                                                                                                                                                                                               |                   | 74,928                     |                   |  
|Intangible assets, net                        |                                                                                                                                                                                                                               |                   | 45,739                     |                   |  
|Prepaid expenses, route rent and other assets |                                                                                                                                                                                                                               |                   | 14,178                     |                   |  
|                                              |                                                                                                                                                                                                                               |                   |                            |                   |  
|                                              |                                                                                                                                                                                                                               |                   | Total assets               |                   | $
|                                              |                                                                                                                                                                                                                               |                   |                            |                   |  
|LIABILITIES AND STOCKHOLDERS' EQUITY          |                                                                                                                                                                                                                               |                   |                            |                   |  
|Current liabilities:                          |                                                                                                                                                                                                                               |                   |                            |                   |  
|                                              | Current portion of long-term debt                                                                                                                                                                                             |                   | $                          | 8,371             |  
|                                              | Current portion of capital lease obligations                                                                                                                                                                                  |                   |                            | 479               |  
|                                              | Trade accounts payable                                                                                                                                                                                                        |                   |                            | 6,272             |  
|                                              | Accrued route rent                                                                                                                                                                                                            |                   |                            | 8,550             |  
|                                              | Accrued expenses                                                                                                                                                                                                              |                   |                            | 5,185             |  
|                                              | Deferred revenues and deposits                                                                                                                                                                                                |                   |                            | 1,278             |  
|                                              |                                                                                                                                                                                                                               |                   |                            |                   |  
|                                              |                                                                                                                                                                                                                               |                   | Total current liabilities  |                   |  
|Long-term debt                                |                                                                                                                                                                                                                               |                   | 47,290                     |                   |  
|Long-term capital lease obligations           |                                                                                                                                                                                                                               |                   | 685                        |                   |  
|Deferred income taxes                         |                                                                                                                                                                                                                               |                   | 17,821                     |                   |  
|Deferred retirement obligation                |                                                                                                                                                                                                                               |                   | 541                        |                   |  
|Other liabilities                             |                                                                                                                                                                                                                               |                   | 2,219                      |                   |  
|Commitments and contingencies (Note 14)       |                                                                                                                                                                                                                               |                   |                            |                   |  
|Stockholders' equity:                         |                                                                                                                                                                                                                               |                   |                            |                   |  
|                                              | Preferred stock of Mac-Gray Corporation ($.01 par value, 5 million shares authorized, no shares outstanding)                                                                                                                  |                   |                            |                  |  
|                                              | Common stock of Mac-Gray Corporation ($.01 par value, 30 million shares authorized, 13,443,754 issued and 12,670,220 outstanding at December 31, 2002, and 13,449,354 issued and 12,579,494 outstanding at
December 31, 2003) |                   |                            | 134               |  
|                                              | Additional paid in capital                                                                                                                                                                                                    |                   |                            | 68,540            |  
|                                              | Accumulated other comprehensive loss                                                                                                                                                                                          |                   |                            | (1,723            | )
|                                              | Retained earnings                                                                                                                                                                                                             |                   |                            | 5,805             |  
|                                              |                                                                                                                                                                                                                               |                   |                            |                   |  
|                                              |                                                                                                                                                                                                                               |                   | 72,756                     |                   |  
|                                              | Less common stock in treasury, at cost                                                                                                                                                                                        |                   |                            | (9,068            | )
|                                              |                                                                                                                                                                                                                               |                   |                            |                   |  
|                                              |                                                                                                                                                                                                                               |                   | Total stockholders' equity |                   |  
|                                              |                                                                                                                                                                                                                               |                   |                            |                   |  
|Total liabilities and stockholders' equity    |                                                                                                                                                                                                                               | $                 | 162,379                    |                   | $
|                                              |                                                                                                                                                                                                                               |                   |                            |                   |  

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

F-3

---



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

|                                                                                      |                                                                | Years Ended December 31, |       
|------------------------------------------------------------------------------------- | -------------------------------------------------------------- | ------------------------ | ------
|
|Revenue:                                                                              |                                                                |                          |       
|                                                                                      | Route revenue                                                  |                          | $     
|                                                                                      | Sales                                                          |                          |       
|                                                                                      | Other                                                          |                          |       
|                                                                                      |                                                                |                          |       
|                                                                                      |                                                                | Total revenue            |       
|                                                                                      |                                                                |                          |       
|Cost of revenue:                                                                      |                                                                |                          |       
|                                                                                      | Route rent                                                     |                          |       
|                                                                                      | Route expenditures and other direct costs                      |                          |       
|                                                                                      | Depreciation and amortization                                  |                          |       
|                                                                                      | Cost of product sales                                          |                          |       
|                                                                                      |                                                                |                          |       
|                                                                                      |                                                                | Total cost of revenue    |       
|                                                                                      |                                                                |                          |       
|Gross margin                                                                          |                                                                |                          | 30,942
|                                                                                      |                                                                |                          |       
|Operating expenses:                                                                   |                                                                |                          |       
|                                                                                      | General and administration                                     |                          |       
|                                                                                      | Sales and marketing                                            |                          |       
|                                                                                      | Depreciation and amortization                                  |                          |       
|                                                                                      | Loss on early extinguishment of debt                           |                          |       
|                                                                                      |                                                                |                          |       
|                                                                                      |                                                                | Total operating expenses |       
|                                                                                      |                                                                |                          |       
|Income from operations                                                                |                                                                |                          | 9,924 
|                                                                                      | Interest expense, net                                          |                          |       
|                                                                                      | Other income, net                                              |                          |       
|                                                                                      | Gain on sale of lease receivables                              |                          |       
|                                                                                      |                                                                |                          |       
|Income before provision for income taxes and effect of change in accounting principle |                                                                |                          | 4,784 
|                                                                                      | Provision for income taxes                                     |                          |       
|                                                                                      |                                                                |                          |       
|Net income before effect of change in accounting principle                            |                                                                |                          | 2,485 
|                                                                                      | Effect of change in accounting principlenet of taxes (Note 6) |                          |       
|                                                                                      |                                                                |                          |       
|Net income                                                                            |                                                                | $                        | 2,485 
|                                                                                      |                                                                |                          |       
|Net income per common share before effect of change in accounting principlebasic     |                                                                | $                        | 0.20  
|                                                                                      |                                                                |                          |       
|Net income per common share before effect of change in accounting principlediluted   |                                                                | $                        | 0.20  
|                                                                                      |                                                                |                          |       
|Net income per common sharebasic                                                     |                                                                | $                        | 0.20  
|                                                                                      |                                                                |                          |       
|Net income per common sharediluted                                                   |                                                                | $                        | 0.20  
|                                                                                      |                                                                |                          |       
|Weighted average common shares outstandingbasic                                      |                                                                |                          | 12,645
|                                                                                      |                                                                |                          |       
|Weighted average common shares outstandingdiluted                                    |                                                                |                          | 12,647
|                                                                                      |                                                                |                          |       

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

F-4

---

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

|                           |                                                                                                         | Common stock |       |   |     |   |   |        |    |   |       | Treasury Stock |   |        |       
|-------------------------- | ------------------------------------------------------------------------------------------------------- | ------------ | ----- | - | --- | - | - | ------ | -- | - | ----- | -------------- | - | ------ | ------
|
|
|Balance, December 31, 2000 |                                                                                                         | 13,443,754   |       | $ | 134 |   | $ | 68,540 |    | $ | 771   |                |   |       |       
|                           | Net income                                                                                              |              |      |   |     |  |   |        |   |   |       | 2,485          |   |        |      
|                           | Other comprehensive loss:                                                                               |              |       |   |     |   |   |        |    |   |       |                |   |        |       
|                           | Cumulative effect of adopting FAS 133, net of tax of $750                                               |              |      |   |     |  |   |        |   |   |       |               |   | $      | (1,124
|                           | Unrealized loss on derivative instruments, net of tax of $524 (Note 10)                                 |              |      |   |     |  |   |        |   |   |       |               |   |        | (787  
|                           |                                                                                                         |              |       |   |     |   |   |        |    |   |       |                |   |        |       
|Comprehensive income       |                                                                                                         |             |       |   |    |   |   |       |    |   |      |                |   |       |       
|                           |                                                                                                         |              |       |   |     |   |   |        |    |   |       |                |   |        |       
|                           | Stock granted                                                                                           |              |      |   |     |  |   |        |   |   |       | (89            | ) |        |      
|                           | Options exercised                                                                                       |              |      |   |     |  |   |        |   |   |       | (9             | ) |        |      
|                           |                                                                                                         |              |       |   |     |   |   |        |    |   |       |                |   |        |       
|Balance, December 31, 2001 |                                                                                                         | 13,443,754   |       |   | 134 |   |   | 68,540 |    |   | 3,158 |                |   | (1,911 | )     
|                           | Net income                                                                                              |              |      |   |     |  |   |        |   |   |       | 2,868          |   |        |      
|                           | Other comprehensive income:                                                                             |              |       |   |     |   |   |        |    |   |       |                |   |        |       
|                           | Unrealized gain on derivative instruments and reclassification adjustment, net of tax of $125 (Note 10) |              |      |   |     |  |   |        |   |   |       |               |   |        | 188   
|                           |                                                                                                         |              |       |   |     |   |   |        |    |   |       |                |   |        |       
|                           | Comprehensive income                                                                                    |              |      |   |     |  |   |        |   |   |       |               |   |        |      
|                           |                                                                                                         |              |       |   |     |   |   |        |    |   |       |                |   |        |       
|                           | Stock issuanceEmployee Stock Purchase Plan                                                             |              |      |   |     |  |   |        |   |   |       | (130           | ) |        |      
|                           | Repurchase of common stock                                                                              |              |      |   |     |  |   |        |   |   |       |               |   |        |      
|                           | Stock granted                                                                                           |              |      |   |     |  |   |        |   |   |       | (91            | ) |        |      
|                           |                                                                                                         |              |       |   |     |   |   |        |    |   |       |                |   |        |       
|Balance, December 31, 2002 |                                                                                                         | 13,443,754   |       |   | 134 |   |   | 68,540 |    |   | 5,805 |                |   | (1,723 | )     
|                           | Net income                                                                                              |              |      |   |     |  |   |        |   |   |       | 4,104          |   |        |      
|                           | Other comprehensive income:                                                                             |              |       |   |     |   |   |        |    |   |       |                |   |        |       
|                           | Unrealized gain on derivative instruments and reclassification adjustment, net of tax of $901 (Note 10) |              |      |   |     |  |   |        |   |   |       |               |   |        | 1,351 
|                           |                                                                                                         |              |       |   |     |   |   |        |    |   |       |                |   |        |       
|                           | Comprehensive income                                                                                    |              |      |   |     |  |   |        |   |   |       |               |   |        |      
|                           |                                                                                                         |              |       |   |     |   |   |        |    |   |       |                |   |        |       
|                           | Repurchase of common stock                                                                              |              |      |   |     |  |   |        |   |   |       |               |   |        |      
|                           | Options exercised                                                                                       |              | 5,600 |   |     |  |   |        | 21 |   |       | (154           | ) |        |      
|                           | Stock issuanceEmployee Stock Purchase Plan                                                             |              |      |   |     |  |   |        |   |   |       | (212           | ) |        |      
|                           | Stock granted                                                                                           |              |      |   |     |  |   |        |   |   |       | (104           | ) |        |      
|                           |                                                                                                         |              |       |   |     |   |   |        |    |   |       |                |   |        |       
|Balance, December 31, 2003 |                                                                                                         | 13,449,354   |       | $ | 134 |   | $ | 68,561 |    | $ | 9,439 |                | $ | (372   | )     
|                           |                                                                                                         |              |       |   |     |   |   |        |    |   |       |                |   |        |       

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

F-5

---



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

|                                                 |                                                                                         | Years ended December 31,                                                         |                                                
|------------------------------------------------ | --------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------- | -----------------------------------------------
|
|Cash flows from operating activities:            |                                                                                         |                                                                                  |                                                
|                                                 | Net income                                                                              |                                                                                  | $                                              
|                                                 | Adjustments to reconcile net income to net cash flows provided by operating activities: |                                                                                  |                                                
|                                                 |                                                                                         | Depreciation and amortization                                                    |                                                
|                                                 |                                                                                         | Effect of change in accounting principle                                         |                                                
|                                                 |                                                                                         | Loss on early extinguishment of debt                                             |                                                
|                                                 |                                                                                         | Allowance for doubtful accounts and lease reserves                               |                                                
|                                                 |                                                                                         | Gain on sale of assets                                                           |                                                
|                                                 |                                                                                         | Deferred income taxes                                                            |                                                
|                                                 |                                                                                         | Director stock grant                                                             |                                                
|                                                 |                                                                                         | Non-cash interest expense                                                        |                                                
|                                                 |                                                                                         | Decrease in accounts receivable                                                  |                                                
|                                                 |                                                                                         | (Increase) decrease in inventory                                                 |                                                
|                                                 |                                                                                         | (Increase) decrease in prepaid expenses, route rent and other assets             |                                                
|                                                 |                                                                                         | (Decrease) increase in accounts payable, accrued route rent and accrued expenses |                                                
|                                                 |                                                                                         | Decrease in deferred revenues and customer deposits                              |                                                
|                                                 |                                                                                         |                                                                                  |                                                
|                                                 |                                                                                         |                                                                                  | Net cash flows provided by operating activities
|                                                 |                                                                                         |                                                                                  |                                                
|Cash flows from investing activities:            |                                                                                         |                                                                                  |                                                
|                                                 | Capital expenditures                                                                    |                                                                                  |                                                
|                                                 | Payments for acquisitions                                                               |                                                                                  |                                                
|                                                 | Proceeds from sale of lease receivables                                                 |                                                                                  |                                                
|                                                 | Proceeds from sale of property and equipment                                            |                                                                                  |                                                
|                                                 |                                                                                         |                                                                                  |                                                
|                                                 |                                                                                         |                                                                                  | Net cash flows used in investing activities    
|                                                 |                                                                                         |                                                                                  |                                                
|Cash flows from financing activities:            |                                                                                         |                                                                                  |                                                
|                                                 | Payments on long-term debt and capital lease obligations                                |                                                                                  |                                                
|                                                 | Payments on 2000 Senior Secured Credit Facility, net                                    |                                                                                  |                                                
|                                                 | Borrowings on 2003 Senior Secured Credit Facility, net                                  |                                                                                  |                                                
|                                                 | Payments for repurchase of common stock                                                 |                                                                                  |                                                
|                                                 | Financing costs                                                                         |                                                                                  |                                                
|                                                 | Payments for termination of derivitive instruments                                      |                                                                                  |                                                
|                                                 | Proceeds from issuance of common stock                                                  |                                                                                  |                                                
|                                                 | Proceeds from exercise of stock options                                                 |                                                                                  |                                                
|                                                 |                                                                                         |                                                                                  |                                                
|                                                 |                                                                                         |                                                                                  | Net cash flows used in financing activities    
|                                                 |                                                                                         |                                                                                  |                                                
|(Decrease) increase in cash and cash equivalents |                                                                                         |                                                                                  | (1,490                                         
|Cash and cash equivalents, beginning of period   |                                                                                         |                                                                                  | 6,715                                          
|                                                 |                                                                                         |                                                                                  |                                                
|Cash and cash equivalents, end of period         |                                                                                         | $                                                                                | 5,225                                          
|                                                 |                                                                                         |                                                                                  |                                                
|Supplemental cash flow information:              |                                                                                         |                                                                                  |                                                
|                                                 | Interest paid                                                                           |                                                                                  | $                                              
|                                                 | Income taxes paid                                                                       |                                                                                  | $                                              

Supplemental disclosure of non-cash investing activities: During the years ended December 31, 2001, 2002 and 2003, the Company
acquired various vehicles under capital lease agreements totaling $566, $915 and $1,380, respectively.

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

F-6

---



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

1. Description of the Business and Basis of Presentation

Description of the Business.Mac-Gray Corporation ("Mac-Gray" or the "Company") generates the
majority of its revenue from card/coin-operated laundry rooms located in the Northeastern, Southeastern and Midwestern United States. A large portion of its revenue is also derived from
the sale and lease of the Company's MicroFridge® product lines. The Company's principal customer base is the multi-housing market, which includes apartments, condominium units, colleges
and universities, and military bases. The Company also sells, services and leases commercial laundry equipment to commercial laundromats, multi-housing properties and institutions. The Company also
generates revenue from card/coin-operated reprographics equipment located in university and municipal libraries, and other buildings. The majority of the Company's purchases of laundry
equipment is from one supplier.

Basis of Presentation.The consolidated financial statements include the accounts of the Company and its wholly owned
subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation.

2. Significant Accounting Policies

Cash and Cash Equivalents.The Company considers all highly liquid investments with original maturities of three months or
less to be cash equivalents. On occasion the Company has excess cash available for a short period of time; when this occurs, the Company invests such excess cash in repurchase agreements and other
highly liquid short-term investments. Accordingly, the investments are subject to minimal credit and market risk. The Company has cash investments with financial institutions in excess of
the $100 insured limit of the Federal Deposit Insurance Corporation. Included in cash and cash equivalents is an estimate of cash not yet collected which remains at laundry and reprographics customer
locations. At December 31, 2002 and 2003, this estimate was $3,480 and $3,621, respectively.

Revenue Recognition.The Company recognizes route revenue (facilities management revenue) on the accrual basis. Rental
revenue is recognized ratably over the related contractual period, which is generally less than one year. The Company recognizes revenue from product sales upon shipment of the products, unless
otherwise specified. Shipping and handling fees charged to customers are recognized upon shipment of the products and are included in revenue with the related cost included in cost of sales.

The
Company has entered into long-term lease transactions that meet the qualifications of a sales-type lease for certain equipment. For these transactions, the
amount of revenue recognized upon product shipment is the present value of the minimum lease payments, net of executory costs, together with the profit thereon, discounted at the interest rate
implicit in the lease. Interest revenue is recognized over the life of the rental agreement. At December 31, 2002 and 2003 the Company had $11,022 and $6,888, respectively, in receivables
related to sales-type leases. These receivables have been recorded net of unearned interest income of $849 and $790 at December 31, 2002 and 2003. These receivables are primarily
due ratably over the next six years and have been classified as other current assets and other long-term assets, as appropriate, in the consolidated balance sheet. The related reserve for
lease receivables at December 31, 2002 and 2003 was $453 and $542, respectively. The Company has not entered into any significant sales-type leases since 2001. In September of 2003,
the Company received $3,284 for the sale of certain lease receivables resulting in a gain of $836.

F-7

---

Allowance for Doubtful Accounts.On a regular basis, the Company reviews the adequacy of its provision for doubtful accounts
for trade accounts receivable and lease receivables based on historical collection expense results and current economic conditions using factors based on the aging of its trade accounts
and lease receivables. In addition, the Company estimates specific additional allowances based on indications that a specific customer may be experiencing financial difficulties. The Company maintains
an allowance for doubtful trade accounts receivable of $397 and $393 at December 31, 2002 and 2003, respectively.

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

Fair Value of Financial Instruments.For purposes of financial reporting, the Company has determined that the fair value of
financial instruments approximates book value at December 31, 2002 and 2003, based upon terms currently available to the Company in financial markets. The fair value of the interest rate swaps
is the estimated amount that the Company would receive or pay to terminate the agreement at the reporting date, taking into account current interest rates and the credit worthiness of the counter
party.

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

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

Prepaid Route Rent.Prepaid route rent (prepaid facilities rent) consists of cash advances paid to property owners and
managers under laundry service contracts. The prepaid amount is amortized ratably over the life of the contract.

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

Route EquipmentNot Yet Placed in Service.These assets represent laundry machines that management estimates will
be installed in route laundry rooms and have not been purchased for commercial sale.

Advertising Costs.Advertising costs are expensed as incurred. These costs were $782, $878 and $1,101 for the years ended
December 31, 2001, 2002 and 2003, respectively.

F-8

---

Intangible Assets.Intangible assets primarily consist of various non-compete agreements, customer lists,
goodwill and contract rights recorded in connection with acquisitions. The non-compete agreements are amortized using the straight-line method over the life of the agreements,
which range from two to five years. Customer lists are amortized using the straight-line method over five to fifteen years. Contract rights are amortized using the
straight-line method over fifteen years. In accordance with the adoption of the provisions of Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible
Assets" ("FAS 142") (see note 6), the Company stopped amortizing goodwill on January 1, 2002.

Impairment of Long-Lived Assets.The Company reviews long-lived assets, including fixed assets and
intangible assets with definitive lives, for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable or that the
useful lives of these assets are no longer appropriate. Each impairment test is based on a comparison of the undiscounted cash flows to the recorded value of the asset. If an impairment is indicated,
the asset is written down to its estimated fair value on a discounted cash flow basis.

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

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

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

F-9

---

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

Year Ended December 31,2001

2002

2003Net income, as reported

$
2,485

$
2,868

$
4,104Deduct: Total stock-based employee compensation expense determined under fair value method for all awards, net of related tax effects


(39
)

(244
)

(377
)Pro forma net income

$
2,446

$
2,624

$
3,727Earnings per share:Basic, as reported

$
0.20

$
0.23

$
0.32Basic, pro forma

$
0.19

$
0.21

$
0.29Diluted, as reported

$
0.20

$
0.23

$
0.32Diluted, pro forma

$
0.19

$
0.21

$
0.29


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

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

Earnings Per Share.The Company accounts for earnings per share in accordance with Statement of Financial Accounting
Standards No. 128, "Earnings Per Share" ("FAS 128"). FAS 128 requires the presentation of basic earnings per share ("EPS") and diluted earnings per share. Basic EPS includes no
dilution and is computed by dividing net income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution
of securities that could share in the earnings of an entity. Diluted earnings per share has been calculated using the treasury stock method.

Other Comprehensive Income.The Company accounts for comprehensive income in accordance with Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("FAS 130"). This statement requires disclosure of comprehensive income and its components in interim and annual reports.
Comprehensive income includes all changes in stockholders' equity during a period except those resulting from investments by stockholders and distributions to stockholders.

F-10

---

Financial Instruments.The Company accounts for derivative instruments in accordance with the provisions of Statement of
Financial Accounting Standard No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("FAS 133"), and Statement of Financial Accounting Standard
No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activitiesan amendment of FASB No. 133" ("FAS 138"). These statements require the Company
to recognize derivatives on its balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through earnings. If the derivative is a hedge, changes in the fair value of
derivatives will either be offset against the change in fair value of the hedged assets, liabilities or firm commitments through earnings or recognized in other comprehensive income until the hedged
item is recognized in earnings, depending on the intended use of the derivative. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. The Company
has designated its interest rate swap agreements as cash flow hedges. Accordingly, the change in fair value of the agreements are recognized in other comprehensive income and the ineffective portion
of the change is recognized in earnings immediately.

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

The
activity for the years ended December 31, 2002 and 2003 is as follows:

Accrued
WarrantyBalance, December 31, 2001

$
160Accruals for warranties issued


196Accruals for pre-exisiting warranties (including changes in estimates)


Settlements made (in cash or in kind)


(191
)Balance, December 31, 2002


165Accruals for warranties issued


238Accruals for pre-exisiting warranties (including changes in estimates)


Settlements made (in cash or in kind)


(153
)Balance, December 31, 2003

$
250


New Accounting Pronouncements.In November 2002, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 elaborates on the
disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required
to recognize, at the inception of the guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. FIN 45 does not prescribe a specific approach for subsequently
measuring the guarantor's recognized liability over the term of the related guarantee. This Interpretation also incorporates, without change, the guidance in FASB Interpretation No. 34,
"Disclosure of Indirect Guarantees of Indebtedness of Others", which is being superseded. The Company has adopted the disclosure provisions of this pronouncement as of December 31, 2002. The

F-11

---

adoption
of the financial provisions of FIN 45 on January 1, 2003 had no material effect on the Company's financial position or results of operations.

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

In
April 2003, the FASB issued Statement of Financial Accounting Standard No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities"
("FAS 149"), which amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging
activities under FAS 133. FAS 149 is effective for contracts entered into or modified after June 30, 2003 except for the provisions that were cleared by the FASB in prior
pronouncements. The adoption of FAS 149 on July 1, 2003 had no material effect on the Company's financial position or results of operations.

In
May 2003, the FASB issued Statement of Financial Accounting Standards No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and
Equity" ("FAS 150"). FAS 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Many of those instruments were previously classified as equity.
FAS 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after
June 15, 2003, except for mandatorily redeemable financial instruments of nonpublic entities. It is to be implemented by reporting the cumulative effect of a change in an accounting principle
for financial instruments created before the issuance date of the FAS 150 and still existing at the beginning of the interim period of adoption. Restatement is not permitted. The adoption of
FAS 150 on July 1, 2003 had no material effect on the Company's financial position or results of operations.

F-12

---

3. Prepaid Expenses, Route Rent and Other Current Assets

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

December 31,2002

2003Prepaid route rent

$
1,733

$
1,718Prepaid supplies


1,918


1,959Leases receivable


3,099


2,521Prepaid insurance


427


836Other


418


824$
7,595

$
7,858


4. Prepaid Expenses, Route Rent and Other Assets

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

December 31,2002

2003Prepaid route rent

$
5,606

$
5,192Leases receivable


7,202


3,272Notes receivable


1,178


1,045Derivative instruments





566Other


192


333$
14,178

$
10,408


5. Property, Plant and Equipment

Property, plant and equipment consist of the following:

December 31Estimated
Useful Life2002

2003Route equipment

10 years

$
125,710

$
138,955Rental equipment

7 years


6,683


4,221Buildings and improvements

15-39 years


10,946


11,438Furniture, fixtures and computer equipment

2-7 years


7,842


8,860Trucks and autos

3-5 years


5,144


5,432Tooling costs

3 years


306


340Land and improvements




221


221156,852


169,467Less: accumulated depreciation




83,117


94,32473,735


75,143Route equipment, not yet placed in service




1,193


1,478Property, plant and equipment, net



$
74,928

$
76,621


F-13

---

Depreciation
of property, plant and equipment totaled $16,237, $16,212 and $16,466 for the years ended December 31, 2001, 2002 and 2003, respectively.

At
December 31, 2002 and 2003, trucks and autos included $4,693 and $5,085, respectively, of equipment under capital lease with an accumulated amortization balance of $3,528 and
$3,197, respectively.

6. Adoption of FAS 142

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

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

|                                                               |  | For the year ended
December 31,
|-------------------------------------------------------------- |  | -------------------------------
|
|Reported earnings                                              |  | $                              
|Add: Impairment charge in accordance with FAS 142net of taxes |  |                                
|                                                               |  |                                
|                                                               |  |                                
|Add: Goodwill amortizationnet of taxes                        |  |                                
|                                                               |  |                                
|                                                               |  | $                              
|                                                               |  |                                

F-14

---

After
the write-off of goodwill associated with the reprographics segment, the remaining goodwill, which will not be further amortized, and the intangible assets to be
amortized, are:

As of December 31, 2002Cost

Accumulated
Amortization

Net Book ValueGoodwill:Laundry and reprographics

$
37,718




$
37,718MicroFridge®


223





22337,941





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


4,482

$
3,450


1,032Contract rights


9,060


4,019


5,041MicroFridge®:Customer lists


1,451


443


1,008Deferred financing costs


1,852


1,135


71716,845


9,047


7,798Total intangible assets

$
54,786

$
9,047

$
45,739


As of December 31, 2003Cost

Accumulated
Amortization

Net Book ValueGoodwill:Laundry

$
37,718




$
37,718MicroFridge®


223





22337,941





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


4,532

$
3,812


720Contract rights


9,832


4,652


5,180MicroFridge®:Customer lists


1,451


538


913Deferred financing costs


921


386


53516,736


9,388


7,348Total intangible assets

$
54,677

$
9,388

$
45,289


F-15

---

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

2004

$
1,1412005


1,0072006


9392007


8572008


837Thereafter


2,567$
7,348


Amortization
expense associated with the above intangible assets amounted to $4,240, $1,486 and $1,357 for the years ended December 31, 2001, 2002 and 2003, respectively.

7. Accrued Expenses

Accrued expenses consist of the following:

December 31,2002

2003Accrued interest

$
301

$
Accrued salaries


565


640Accrued commission/bonuses


1,438


1,318Accrued warranty


165


250Deferred service revenue


398


333Deferred smart card revenue


651


747Current portion of deferred retirement obligation


104


104Accrued professional fees


144


241Accrued income taxes


394


1,160Accrued sales tax


281


308Accrued insurance


289


342Other accrued expenses


455


425$
5,185

$
5,868


8. Deferred Retirement Obligation

The deferred retirement obligation at December 31, 2002 and 2003 relates to payments due to a former shareholder of the Company in connection with a
retirement agreement, which provides for annual payments of $104 until the death of the former shareholder. The liability has been estimated based upon the life expectancy of the former shareholder
utilizing actuarial tables.

F-16

---



9. Long-Term Debt

Long-term debt consists of the following:

December 31,2002

20032000 Senior Secured Credit Facility

$
54,500

$
2003 Senior Secured Credit Facility





48,694Various fixed interest rate notes (8.4%-11.51%), due through February 1, 2005


774


15Acquisition note payable, 8% imputed interest rate (estimated fair market rate), monthly payments, due May 31, 2006


387


275Total long-term debt


55,661


48,984Less: current portion


8,371


2,984$
47,290

$
46,000


Credit Agreement and Revolving Credit Facility

On June 24, 2003, the Company refinanced its outstanding Senior Secured Credit Facility with a group of banks. This transaction retired both the
June 2000 revolving line of credit and the June 2000 Senior Secured Term Loan Facility, which were due to expire in July 2004 and June 2005, respectively. Effective
December 31, 2003, the Company entered into an amendment that modified certain covenants. On January 16, 2004 the Company amended its Senior Secured Credit Facility in connection with a
business acquisition (see Note 18).

The
June 24, 2003 Revolving Line of Credit and Term Loan Facility (the "2003 Senior Secured Credit Facility") provides for borrowings up to $80,000 with borrowings under a
three-year revolving line of credit of up to $60,000 and a five-year $20,000 Senior Secured Term Loan Facility. In addition to the scheduled quarterly payments on the Senior
Secured Term Loan Facility, the Company is required to pay an amount equal to 50% of the Excess Cash Flow, as defined, for each fiscal period provided that the funded debt ratio for each of the
preceding four fiscal quarters is greater than 1.50 to 1. This payment is first used to reduce the Senior Secured Term Loan Facility with any remaining amounts used to reduce the revolving line of
credit. No excess cash flow payments were required for the years ended December 31, 2002 and 2003.

Outstanding
indebtedness under the 2003 Senior Secured Credit Facility bears interest, at the Company's option, at a rate equal to the i) prime rate, or ii) LIBOR plus
1.75%.

The
2003 Senior Secured Credit Facility is collateralized by a blanket lien on the assets of the Company and each of its subsidiaries, as well as a pledge by the Company of all of the
capital stock of its subsidiaries. The 2003 Senior Secured Credit Facility includes certain financial and operational covenants, including restrictions on paying dividends and other distributions,
making certain acquisitions and incurring indebtedness, and requires that the Company maintain certain financial ratios. The most restrictive financial ratio is a minimum level of debt service
coverage. The Company was in compliance with all financial covenants at December 31, 2003.

F-17

---

The
2003 Senior Secured Credit Facility contains a commitment fee equal to 0.25% per annum of the average daily unused portion of the 2003 Senior Secured Credit Facility provided that
the Funded Debt ratio is less than 1.75 to 1.00. If the Funded Debt ratio is greater than or equal to 1.75 to 1.00, the
commitment fee is equal to 0.375% per annum of the average daily-unused portion of the 2003 Senior Secured Credit Facility. As of December 31, 2003, the Company's commitment fee was equal to
0.375%.

Concurrent
with the effective date of the 2003 Senior Secured Credit Facility, the Company wrote off approximately $381 in deferred financing costs associated with the 2000 Senior
Secured Term Loan Facility.



As of December 31, 2003, the scheduled future principal payments of long-term debt are as follows:

2004

$
2,9842005


2,9792006


33,0212007


5,7142008


4,286$
48,984


10. Derivative Instruments

In February 2000, the Company entered into two standard International Swaps and Derivatives Association ("ISDA") interest rate swap agreements with its
primary financial institution to manage the interest rate risk associated with its 2000 Senior Secured Credit Facility (the "2000 Swap Agreements"). The Company has designated its interest rate swaps
as cash flow hedges. Each agreement has a
notional amount of $20,000 and maturity dates in February 2003 and 2005. The effect of the swap agreements is to limit the interest rate exposure to a fixed rate of 7.38% and 7.42% (versus the
90-day LIBOR rate) for the three year and five year swaps, respectively. On January 9, 2002, the Company terminated the $20,000 swap that expires in 2003 and entered into a $20,000
swap expiring in February 2004, with a fixed interest rate of 7.38% until February 2002, and 6.38% thereafter. The fair value of the interest rate swaps is the estimated amount that the
Company would receive or pay to terminate the agreement at the reporting date, taking into account current interest rates and the credit worthiness of the counter party. At December 31, 2002,
the fair value of the interest rate swaps was a loss of $2,219, net of related income taxes. The fair value of the interest rate swaps at December 31, 2002 is included in other liabilities.

On
June 24, 2003, the Company terminated its two $20,000 interest rate swap agreements, which had been in effect since February 2000 and January 2002, respectively.
The January 2002 interest rate swap agreement was due to expire in February 2004 while the February 2000 interest rate swap agreement was due to expire in February 2005.
The Company paid $3,037 to terminate both the February 2000 and January 2002 swap agreements. The accumulated other comprehensive losses related

F-18

---

to
the terminated interest rate swap agreements are reclassified against current period earnings in the same period the forecasted interest payments affect earnings. Upon termination, there was
$1,419, net of taxes of $946, included in accumulated other comprehensive loss. The $88 associated with the January 2002 interest rate swap agreement will be reclassified as an earnings charge
through February 2004 and the $1,331 associated with the February 2000 interest rate swap agreement will be reclassified as an earnings charge through February 2005. The Company
estimates that approximately $820, net of taxes, will be reclassified as an earnings charge during the year ended December 31, 2004.

On
June 24, 2003, as required by the 2003 Senior Secured Credit Facility, the Company entered into two standard International Swaps and Derivatives Association ("ISDA") interest
rate swap agreements (the "2003 Swap Agreements") to manage the interest rate risk associated with its 2003 Senior Secured Credit Facility. The Company has designated its interest rate swap agreements
as cash flow hedges. Each agreement has a notional amount of $20,000 and a maturity date in June 2008. The first interest rate swap agreement has a fixed notional amount throughout its term and
a fixed rate of 2.34%. The second interest rate swap agreement contains an amortization provision and a fixed rate of 2.69%. The notional amount of this agreement at December 31, 2003 was
$18,572. In accordance with the 2003 Swap Agreements and on a quarterly basis, interest expense is calculated based on the floating 90-day LIBOR and the fixed rate. If interest expense as
calculated is greater based on the 90-day LIBOR, the financial institution pays the difference to the Company; if interest expense as calculated is greater based on the fixed rate, the
Company pays the difference to the financial institution. Depending on fluctuations in the LIBOR, the Company's interest rate exposure and its related impact on interest expense and net cash flow may
increase or decrease. The Company is exposed to credit loss in the event of non-performance by the other party to the swap agreement; however, nonperformance is not anticipated.

The
fair value of the 2003 Swap Agreements is the estimated amount that the Company would receive or pay to terminate the agreement at the reporting date, taking into account current
interest rates and
the credit worthiness of the counter party. At December 31, 2003, the fair value of the 2003 Swap Agreements, net of related taxes, was an unrealized gain of $566. This amount has been included
in other assets on the consolidated balance sheet.

Prior
to its termination in June 2003, the ineffective portion of the January 2002 interest rate swap agreement resulted in income, after the effect of related income
taxes, for the years ended December 31, 2002 and 2003 of $218 and $152, respectively.

F-19

---

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

For the year endedDecember 31,
2001

December 31,
2002

December 31,
2003Unrealized gain (loss) on derivative instruments

$
(1,311
)
$
(877
)
$
1,247Reclassification adjustment





1,190


1,005Total other comprehensive income (loss) before income taxes


(1,311
)

313


2,252Income tax benefit (expense)


524


(125
)

(901
)Total other comprehensive income (loss)

$
(787
)
$
188

$
1,351


11. Income Taxes

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

Years Ended December 31,2001

2002

2003Current state

$
276

$
121

$
384Deferred state


232


400


454Current federal


388


(47
)

79Deferred federal


1,403


2,093


2,119Total income taxes

$
2,299

$
2,567

$
3,036


F-20

---

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

2002

2003Deferred tax assets:Net operating loss carryforwards

$
1,628

$
1,044Alternative minimum tax credit carryforwards


1,418


1,418Derivative instruments





599Accounts receivable


633


182Deferred compensation


261


215Warranty Reserve


221


396Deferred revenue


62


294Long term lease receivable reserve


299


443Other





1104,522


4,701Deferred tax liabilities:Depreciation


17,108


19,132Amortization


780


1,697Derivative instruments


182


Sales-type leases


3,022


1,984Other


184


21,276


22,813Net deferred tax liabilities

$
16,754

$
18,112


For
the years ended December 31, 2001, 2002 and 2003 the statutory income tax rate differed from the effective rate primarily as a result of the following differences:

2001

2002

2003Taxes computed at federal statutory rate

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

6.5

5.5

6.5Non-deductible goodwill

4.7



Other

2.9

1.0

2.0Income tax provision

48.1
%
40.5
%
42.5
%


F-21

---

At
December 31, 2003, the Company has the following net operating loss carryforwards available to reduce certain future federal taxable income:

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

$
710Net operating loss carryforwards relating to certain losses incurred in the year ending December 31, 2001


87Net operating loss carryforwards relating to certain losses incurred in the year ending December 31, 2002


1,262$
2,059


At
December 31, 2003, the Company has the following net operating loss carryforwards available to reduce certain future state taxable income:

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

$
5,487Net operating loss carryforwards relating to certain losses incurred in the year ending December 31, 2001


843Net operating loss carryforwards relating to certain losses incurred in the year ending December 31, 2002


186$
6,516


The
state net operating loss carryforwards expire 10-20 years from the year in which they were incurred, except for the Massachusetts portion. The Massachusetts
portion of the net operating loss carryfoward is $2,783, of which $2,169 expires in the year ending December 31, 2004, and $614 expires in the year ending December 31, 2005. The Company
believes it will be able to fully utilize the state net operating loss carryforwards prior to their expiration date and accordingly, no valuation allowance has been recorded associated with these
balances.

The
federal net operating loss carryfowards expire 15-20 years from the year in which they were incurred.

12. Repurchase of Common Stock

On December 2, 2002, the Board of Directors authorized a $2,000 stock repurchase program. The authorization expired on December 2, 2003. As of
December 31, 2002 and 2003, 3,800 shares and 155,500 shares had been purchased at a total cost of $12 and $622, respectively.

13. Segment Information

The Company operates three business segments which are based on the Company's different product and service categories: Laundry, MicroFridge® and
reprographics. These three business segments have been aggregated into two reportable segments ("Laundry and Reprographics" and "MicroFridge®"). The laundry and reprographics business
segments have been aggregated into one

F-22

---

reportable
segment (laundry and reprographics) since many operating functions of the laundry and reprographics operations are commingled. The Laundry segment provides card/coin-operated
laundry equipment to multi-housing facilities such as apartment buildings, colleges and universities and public housing complexes. The laundry segment also operates as a distributor of and provides
service to commercial laundry equipment in public laundromats, as well as institutional purchasers, including hospitals, restaurants and hotels, for use in their own on-premise laundry
facilities. The reprographics segment provides card/coin-operated reprographics equipment to academic and public libraries. The MicroFridge® segment sells, rents, and services
its own proprietary line of refrigerator/freezer/microwave oven combinations to a customer base which includes colleges and universities, government, hotel, motel and assisted living facilities.

There
are no intersegment revenues.

The
tables below present information about the operations of the reportable segments of Mac-Gray for the years ended December 31, 2001, 2002 and 2003. The information
presented represents the key financial metrics that are utilized by the Company's Chief Operating Decision Maker in assessing the performance of each of the Company's reportable segments.

Year Ended December 31, 2001Laundry and
Reprographics

MicroFridge®

TotalRevenues

$
126,215

$
25,854

$
152,069Gross margin


23,318


7,624


30,942Depreciation and amortization


17,772


1,784


19,556Capital expenditures


11,949


316


12,265Total assets


136,994


23,569


160,563


Year Ended December 31, 2002Laundry and
Reprographics

MicroFridge®

TotalRevenues

$
126,688

$
23,680

$
150,368Gross margin


25,794


6,618


32,412Depreciation and amortization


15,497


1,195


16,692Capital expenditures


12,843


100


12,943Total assets


131,876


24,228


156,104


Year Ended December 31, 2003Laundry and
Reprographics

MicroFridge®

TotalRevenues

$
127,335

$
22,321

$
149,656Gross margin


25,513


5,794


31,307Depreciation and amortization


15,842


1,013


16,855Capital expenditures


14,428


379


14,807Total assets


128,890


24,504


153,394


F-23

---

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

2001

2002

2003IncomeTotal gross margin for the reportable segments

$
30,942

$
32,412

$
31,307Operating expenses


(21,018
)

(21,681
)

(22,341
)Interest expense, net


(5,164
)

(4,578
)

(2,807
)Other income, net


24


188


145Gain on sale of lease receivables








836Income before provision for income taxes and effect of change in accounting principle

$
4,784

$
6,341

$
7,140


2001

2002

2003Depreciation and amortizationTotal for reportable segments

$
19,556

$
16,692

$
16,855Corporate


921


1,006


968Total depreciation and amortization

$
20,477

$
17,698

$
17,823


2001

2002

2003Capital expendituresTotal for reportable segments

$
12,265

$
12,943

$
14,807Corporate


514


391


565Total capital expenditures

$
12,779

$
13,334

$
15,372


2001

2002

2003AssetsTotal for reportable segments

$
160,563

$
156,104

$
153,394Corporate


6,488


5,208


6,003Deferred income taxes


844


1,067


2,608Total assets

$
167,895

$
162,379

$
162,005


F-24

---



14. Commitments and Contingencies

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

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

Capital
Leases

Operating
LeasesYear ended December 31,2004

$
648

$
8032005


582


5222006


509


2022007


191


122008 and thereafter





1,930

$
1,539Less: amount representing interest (LIBOR of 1.12% at December 31, 2003)


411,889Present value future minimum lease payments less amounts due within one year


635Amounts due after one year

$
1,254


Rent
expense incurred by the Company under non-cancelable operating leases totaled $1,169, $1,278 and $1,187 for the years ended December 31, 2001, 2002 and 2003,
respectively.

Guaranteed Route Rent Payments.The Company operates card and coin laundry routes 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, 2003:

2004

$
5,1272005


3,7502006


3,2362007


2,7972008


2,253Thereafter


3,892$
21,055


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

F-25

---

15. Employee Benefit and Stock Plans

Retirement Plans.The Company maintains a qualified profit-sharing/401(k) plan (the "Plan") covering substantially all
employees. The Company's contributions to the Plan are at the discretion of the Board of Directors. Costs under the Plan amounted to $643, $620 and $606, for the years ended December 31, 2001,
2002 and 2003, respectively.

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

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

The
1997 Stock Plan provides for the issuance of up to the greater of 750,000 shares of common stock or ten percent of the outstanding shares of common stock. At December 31,
2003, approximately 1,257,949 shares of common stock were reserved for issuance under the 1997 Stock Plan, of which 1,055,400 shares were subject to outstanding options and 202,549 remained available
for issuance.

F-26

---

The
following is a summary of stock option plan activity:

|                               |  | 2001    |   | 2002 |      | 2003
|------------------------------ |  | ------- | - | ---- | ---- | ----
|
|Outstanding, beginning of year |  | 136,000 |   | $    | 9.39 |     
|Granted                        |  | 740,100 |   | $    | 3.47 |     
|Exercised                      |  | (1,000  | ) | $    | 3.13 |     
|Canceled                       |  |        |   |      |     |     
|Forfeited                      |  | (95,500 | ) | $    | 6.85 |     
|                               |  |         |   |      |      |     
|Outstanding, end of year       |  | 779,600 |   | $    | 4.09 |     
|                               |  |         |   |      |      |     
|Exercisable, end of year       |  | 153,100 |   | $    | 5.74 |     
|                               |  |         |   |      |      |     

|              |  | Options Outstanding |  | Options Exercisable
|------------- |  | ------------------- |  | -------------------
|
|$3.00$3.85   |  | 872,400             |  | 7.74               
|$3.86$6.50   |  | 126,000             |  | 9.95               
|7.94$8.50    |  | 54,000              |  | 5.18               
|$11.00$15.13 |  | 3,000               |  | 4.23               
|              |  |                     |  |                    
|              |  | 1,055,400           |  | 7.87               
|              |  |                     |  |                    

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

December 31,2001

2002

2003Fair value of options granted at grant date

$1.87

$1.85

$2.42Risk free interest rate

4.4%-4.8%

2.5%-4.9%

3.74%Expected option termemployees

7 years

7 years

7 yearsExpected option termindependent directors

3 years

3 years

3 yearsExpected volatility

45%

52%

41%


Mac-Gray Corporation 2001 Employee Stock Purchase Plan.The Company established the Mac- Gray
Corporation 2001 Employee Stock Purchase Plan (the "ESPP") in May of 2001. Under the terms of the ESPP, eligible employees may have between 1% and 15% of eligible compensation deducted from their pay
to purchase common stock. The per share purchase price is 85% of the fair market value of the stock on, the lower of, the first day or the last day of each six month interval. Up to 200,000 shares may
be offered pursuant to the ESPP. The plan includes certain restrictions, such as the holding period of the stock by employees. The number of shares of common stock purchased through

F-27

---

the
ESPP was 14,141 and 24,079 for the years ended December 31, 2002 and 2003, respectively. There have been 49,858 shares purchased since the inception of the plan. At December 31, 2002
and 2003 the Company had accumulated employee withholdings associated with this plan of $24 and $42 for acquisition of stock in 2003 and 2004, respectively.

16. Earnings Per Share

For the Year Ended December 31, 2001Income
(Numerator)

Shares
(Denominator)

Per-Share
AmountNet incomebasic

$
2,485

12,645

$
0.20Effect of dilutive securities:Stock options




2Net incomediluted

$
2,485

12,647

$
0.20


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

Shares
(Denominator)

Per-Share
AmountNet incomebasic

$
2,868

12,661

$
0.23Effect of dilutive securities:Stock options




3Net incomediluted

$
2,868

12,664

$
0.23


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

Shares
(Denominator)

Per-Share
AmountNet incomebasic

$
4,104

12,635

$
0.32Effect of dilutive securities:Stock options




106Net incomediluted

$
4,104

12,741

$
0.32


There
were 754, 974, and 57 shares under option plans that were excluded from the computation of diluted earnings per share at December 31, 2001, 2002 and 2003, respectively, due
to their anti-dilutive effects.

F-28

---

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

17. Summary of Quarterly Financial Information (unaudited)

|                                                                                        |  | Year Ended December 31, 2002 |        | Year Ended December 31, 2003 |  
|--------------------------------------------------------------------------------------- |  | ---------------------------- | ------ | ---------------------------- | -
|
|Revenue                                                                                 |  | $                            | 36,758 |                              | $
|Cost of revenue                                                                         |  |                              | 28,639 |                              |  
|                                                                                        |  |                              |        |                              |  
|Gross margin                                                                            |  |                              | 8,119  |                              |  
|Operating expenses                                                                      |  |                              | 5,273  |                              |  
|                                                                                        |  |                              |        |                              |  
|Income from operations                                                                  |  |                              | 2,846  |                              |  
|Gain on sale of lease receivables                                                       |  |                              |       |                              |  
|Interest and other expense, net                                                         |  |                              | (970   | )                            |  
|                                                                                        |  |                              |        |                              |  
|Income before provision for income taxes and effect of change in accounting principle   |  |                              | 1,876  |                              |  
|Provision for income taxes                                                              |  |                              | 773    |                              |  
|                                                                                        |  |                              |        |                              |  
|Net income before effect of change in accounting principle                              |  |                              | 1,103  |                              |  
|Effect of change in accounting principlenet of taxes                                   |  |                              | 906    |                              |  
|                                                                                        |  |                              |        |                              |  
|Net income                                                                              |  | $                            | 197    |                              | $
|                                                                                        |  |                              |        |                              |  
|Net income per common share before the effect of change in accounting principlebasic   |  | $                            | 0.09   |                              | $
|                                                                                        |  |                              |        |                              |  
|Net income per common share before the effect of change in accounting principlediluted |  | $                            | 0.09   |                              | $
|                                                                                        |  |                              |        |                              |  
|Net income per common sharebasic                                                       |  | $                            | 0.02   |                              | $
|                                                                                        |  |                              |        |                              |  
|Net income per common sharediluted                                                     |  | $                            | 0.02   |                              | $
|                                                                                        |  |                              |        |                              |  
|Weighted average common shares outstandingbasic                                        |  |                              | 12,652 |                              |  
|                                                                                        |  |                              |        |                              |  
|Weighted average common shares outstandingdiluted                                      |  |                              | 12,652 |                              |  
|                                                                                        |  |                              |        |                              |  

F-29

---



18. Subsequent Events

On January 16, 2004, the Company purchased the eastern operations of Web Service Company, Inc. ("Web"), a privately owned laundry facilities contractor
headquartered in Redondo Beach, California. Under the terms of the agreement, the Company purchased certain assets, including equipment and laundry facilities management contracts, located in 13
eastern and southeastern states and the District of Columbia. As part of the transaction, the Company also sold Web its equipment and contracts in western states. The transaction is expected to
generate approximately $29,000 in net incremental annual revenue for Mac-Gray. The net purchase price of $39,000 was paid in cash, and is subject to certain post-closing
adjustments. The Company is in the process of determining the purchase price allocation under the provisions of FAS 141, "Business Combinations".

In
connection with the acquisition, the Company obtained an amendment to its June 24, 2003 Senior Secured Credit Facility. This amendment, dated January 16, 2004, included
several changes to the original agreement, including permitting the acquisition of Web's assets, permitting the sale of certain assets to Web, and increased the Company's total borrowing capacity from
$80,000 to $105,000. This amendment provides for borrowings under a three year line of credit of up to $70,000 and a five year $35,000 Senior Secured term Loan Facility. Other significant changes
included extending the maturity dates of the Revolver portion of the debt from December 31, 2005 to June 30, 2006, and the Term portion of the debt from December 31, 2007 to
June 30, 2008. The Term Loan Amortization schedule has been amended to include nineteen quarterly payments of $1,250 and a final payment of the remaining principal balance due at maturity. In
addition to the scheduled quarterly payments on the amended Senior Secured Term Loan Facility, the Company is required to pay an amount equal to 50% of the Excess Cash Flow, as defined for each fiscal
period provided that the funded debt ratio for each of the preceding four fiscal quarters is greater than 1.50 to 1. This payment is first used to reduce the amended Senior Secured Term Loan Facility
with any remaining amounts used to reduce the revolving line of credit.

Outstanding
indebtedness under the amended 2003 Senior Secured Credit Facility bears interest, at the Company's option, at a rate equal to i.) Prime rate, or ii.) LIBOR plus 2.00%. For
periods after June 30, 2004, the Applicable LIBOR Margin may be adjusted quarterly based on certain financial ratios.

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

On
February 17, 2004, as required by the amended Senior Secured Credit Facility, the Company entered into an additional ISDA interest rate swap agreement to manage the interest
rate risk associated with its amended Senior Secured Credit Facility. This agreement has a notional amount of $21,600 and a maturity date in February 2007. The interest rate swap agreement has
a fixed notional amount throughout its term and a fixed rate of 2.58%.

F-30

---



As of January 16, 2004, the scheduled future principal payments on the amended Senior Secured Credit Facility are as follows:

2004

$
5,0002005


5,0002006


57,9032007


5,0002008


15,000$
87,903


F-31

---



MAC-GRAY CORPORATION

SCHEDULE II

VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 2001, 2002, AND 2003

|                              |                                                    | Balance
Beginning
of Year |   | Charged to
Cost and
Expenses |  | Deductions |     | Balance
at End
of Year
|----------------------------- | -------------------------------------------------- | ------------------------- | - | ---------------------------- |  | ---------- | --- | ----------------------
|Year Ended December 31, 2001: |                                                    |                           |   |                              |  |            |     |                       
|                              | Allowance for doubtful accounts and lease reserves |                           | $ | 492                          |  | $          | 706 |                       
|Year Ended December 31, 2002: |                                                    |                           |   |                              |  |            |     |                       
|                              | Allowance for doubtful accounts and lease reserves |                           | $ | 1,017                        |  | $          | 703 |                       
|Year Ended December 31, 2003: |                                                    |                           |   |                              |  |            |     |                       
|                              | Allowance for doubtful accounts and lease reserves |                           | $ | 850                          |  | $          | 322 |                       

F-32

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