This report contains, in addition to historical information, forward-looking statements that involve risks and uncertainties. Additional statements identified by words such as "will," "likely," "may," "believe," "expect," "anticipate," "intend," "seek," "designed," "develop," "would," "future," "can," "could," "outlook" and other expressions that are predictions of or indicate future events and trends and which do not relate to historical matters, also identify forward-looking statements. These forward-looking statements reflect our current views about future events and financial performance. Investors should not rely on forward-looking statements because they are subject to a variety of factors that could cause actual results to differ materially from our expectations. Factors that could cause or contribute to such differences include, but are not limited to, the following:

† debt service requirements under our existing and future indebtedness;

† availability of cash flow to finance capital expenditures;

† our ability to renew laundry leases with our customers;

† competition in the laundry facilities management industry;

†                   our ability to maintain relationships with our suppliers;



†                   our ability to maintain adequate internal controls over
financial reporting;

† our ability to consummate acquisitions and successfully integrate the businesses we acquire;

† increases in multi-unit housing sector apartment vacancy rates and condominium conversions;

† our susceptibility to product liability claims;

† our ability to protect our intellectual property and proprietary rights and create new technology;

† our ability to retain our key personnel and attract and retain other highly skilled employees;

† decreases in the value of our intangible assets;

† our ability to comply with current and future environmental regulations;

† actions of our controlling stockholders;

† provisions of our charter and bylaws that could discourage takeovers; and

† those factors discussed under Item 1A "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2008 and our other filings with the Securities and Exchange Commission ("SEC").

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

In this Quarterly Report on Form 10-Q, unless the context suggest otherwise, references to the "Company," "Mac-Gray," "we," "us," "our" and similar terms refer to Mac-Gray Corporation and its subsidiaries. We have

registered, applied to register or are using the following trademarks:
Mac-Gray®, Web®, Hof™, Automatic Laundry Company™, MicroFridge®, SnackMate®, LaundryView®, PrecisionWash™, Intelligent Laundry® Systems, LaundryLinx™, TechLinx™, VentSnake™, Intelli-Vault®, Safe Plug®, LaundryAudit™, e-issues™ and Life Just Got Easier®. The following are trademarks of parties other than us:
Maytag®, Whirlpool®, Amana®, Magic Chef®, KitchenAid®, and Estate®.

Overview

Mac-Gray Corporation was founded in 1927 and re-incorporated in Delaware in 1997. Since its founding, Mac-Gray has grown to become the second largest laundry facilities management business in the United States. Through our portfolio of card and coin-operated laundry equipment located in laundry facilities across the country, we provide laundry convenience to residents of multi-unit housing, such as apartment buildings, condominiums, colleges and universities, public housing complexes and hotels and motels. Based on our ongoing survey of colleges and universities, we believe we are the largest provider of such services to the college and university market in the United States. We report our business in two segments, facilities management and product sales. Facilities management consists of our laundry facilities management and reprographics business units. Product sales consist of our commercial laundry equipment sales and Intirion Corporation ("Intirion"), which operates our MicroFridge® branded product sales business.

Our business model is built on a stable demand for laundry services, combined with long-term leases, strong customer relationships, a broad customer base, and predictable capital needs. For the three and nine months ended September 30, 2009, our total revenue was $87,395 and $269,336, respectively. Approximately 86% of our total revenue for the three and nine month period was generated by our facilities management segment. We generate facilities management revenue primarily by entering into long-term leases with property owners or property management companies for the exclusive right to install and maintain laundry equipment in common area laundry rooms within their properties in exchange for a negotiated portion of the revenue we collect. As of September 30, 2009, approximately 90% of our installed equipment base was located in laundry facilities subject to long-term leases, which have a weighted average remaining term of approximately five years. Our capital costs are typically incurred in connection with new or renewed leases, and include investments in laundry equipment and card and coin-operated systems, incentive payments to property owners or property management companies, and expenses to refurbish laundry facilities. Our capital costs consist of a large number of relatively small amounts, which are associated with our entry into or renewal of leases. Accordingly, our capital needs are predictable and largely within our control. For the three and nine months ended September 30, 2009, we incurred $4,922 and $17,372 of capital expenditures, respectively. In addition, we made incentive payments of approximately $348 and $1,547 in the three and nine months ended September 30, 2009 to property owners and property management companies in connection with obtaining our lease arrangements.

In addition, through our product sales segment, we generate revenue by selling commercial laundry equipment and our line of combination refrigerator/freezer/microwave oven units under the MicroFridge® and SnackMateTM brands. Intirion is also a national distributor of Maytag®, Whirlpool®, Amana®, Magic Chef®, KitchenAid®, and Estate® brands of appliances. For the three and nine months ended September 30, 2009, our product sales segment generated approximately 14% of our total revenue and 20% and 18% of our gross margin, respectively.

Our current priorities include 1) continuing to reduce funded debt, thereby improving debt leverage ratios and reducing interest expense, 2) maintaining capital expenditures at the irreducible levels needed to sustain the business,
3) increasing facilities management operating efficiencies in all markets, particularly the ones that have been influenced by acquisition activity in the past three years, and 4) improving the profitability of individual laundry facilities management accounts that come up for contract renewal. One of the key challenges we face is maintaining and expanding our customer base in a competitive industry. Approximately 10% to 15% of our laundry room leases are up for renewal each year. Within any given geographic area, Mac-Gray may compete with local independent operators, regional operators and multi-region operators as well as property owners and property management companies who self-operate their laundry facilities. We devote substantial resources to our sales efforts and are focused on continued innovation in order to distinguish us from our competitors.

Results of Operations (Dollars in thousands)

Three and nine months ended September 30, 2009 compared to three and nine months ended September 30, 2008.

The information presented below for the three and nine months ended September 30, 2009 and 2008 is derived from our unaudited condensed consolidated financial statements and related notes included elsewhere in this report:

                         For the three months ended September 30,               For the nine months ended September 30,
                                                   Increase        %                                       Increase       %
                      2008           2009         (Decrease)     Change       2008            2009        (Decrease)    Change
Laundry
facilities
management         $    78,279    $    74,712    $      (3,567 )     -5 % $    223,520    $    231,294    $     7,774        3 %
Reprographics
revenue                    229            104             (125 )    -55 %          872             728           (144 )    -17 %
Total facilities
management
revenue                 78,508         74,816           (3,692 )     -5 %      224,392         232,022          7,630        3 %
Intirion sales
revenue                 12,639          9,031           (3,608 )    -29 %       28,318          24,856         (3,462 )    -12 %
Laundry
equipment sales
revenue                  6,894          3,548           (3,346 )    -49 %       15,873          12,458         (3,415 )    -22 %
Total product
sales revenue           19,533         12,579           (6,954 )    -36 %       44,191          37,314         (6,877 )    -16 %
Total revenue      $    98,041    $    87,395    $     (10,646 )    -11 % $    268,583    $    269,336    $       753        0 %

Revenue

Total revenue decreased by $10,646, or 11%, to $87,395 for the three months ended September 30, 2009 compared to $98,041 for the three months ended September 30, 2008. Total revenue increased by $753, or less than 1%, to $269,336 for the nine months ended September 30, 2009 compared to $268,583 for the nine months ended September 30, 2008.

Facilities management revenue. Facilities management revenue decreased by $3,692, or 5%, to $74,816 for the three months ended September 30, 2009 compared to $78,508 for the three months ended September 30, 2008. The decrease in revenue is primarily the result of reduced usage of the Company's equipment in apartment building laundry rooms as a result of increased apartment vacancy rates in most markets, particularly in the Southwest. To a lesser extent, the decrease in revenue is attributable to the termination of contracts we have chosen not to renew, partially offset by the Company's vend increase program. Facilities management revenue increased by $7,630, or 3%, to $232,022 for the nine months ended September 30, 2009 compared to $224,392 for the nine months ended September 30, 2008. The increase in revenue is the net of an increase of $12,078 attributable to the laundry facilities management businesses acquired in 2008, offset by a decline of $4,448 resulting from increased apartment vacancy rates and the termination of contracts we have chosen not to renew. We expect continued and increasing vacancy rates to continue to have a negative impact on our facilities management business in the near term. We track the change in revenue month over month and quarter over quarter for certain large accounts to better understand the revenue trend for our multi-family housing customers. This analysis does not include all revenue and is not adjusted for variances such as number of collection days in one quarter vs. another. This analysis is used to enable us to respond to changing trends in different geographic markets and to enable us to better allocate capital spending.

Product sales revenue. Revenue from our product sales segment decreased by $6,954, or 36%, to $12,579 for the three months ended September 30, 2009 compared to $19,533 for the three months ended September 30, 2008. Revenue from our product sales segment decreased by $6,877, or 16%, to $37,314 for the nine months ended September 30, 2009 compared to $44,191 for the nine months ended September 30, 2008.

Revenue in the Intirion business unit decreased by $3,608, or 29%, to $9,031 for the three months ended September 30, 2009 compared to $12,639 for the three months ended September 30, 2008. Revenue in the Intirion business unit decreased by $3,462, or 12%, to $24,856 for the nine months ended September 30, 2009 compared to $28,318 for the nine months ended September 30, 2008. The decrease in revenue for the three months ended September 30, 2009 compared to the same period in 2008 is attributable to a decrease in sales to all markets, particularly the academic and government markets. The decrease in revenue for the nine months ended September 30, 2009 compared to the nine months ended September 30, 2008 is attributable primarily to a decrease in sales to the academic and hospitality markets. Sales to the other markets were essentially flat year over year. We expect sales to the hospitality and academic markets will continue to be impacted by the widespread scaling back of capital projects by the hospitality industry and academic institutions. Our sales to

the government will fluctuate based on the government's shifting budget priorities as well as the timing of the release of funds for military housing initiatives.

Revenue in the laundry equipment sales business unit decreased by $3,346, or 49%, to $3,548 for the three months ended September 30, 2009 compared to $6,894 for the three months ended September 30, 2008. Revenue in the laundry equipment sales business unit decreased by $3,415, or 22%, to $12,458 for the nine months ended September 30, 2009 compared to $15,873 for the nine months ended September 30, 2008. Sales in the laundry equipment sales business unit are sensitive to the strength of the economy, local economic factors, local permitting and the availability of financing to small businesses, and therefore have the potential to fluctuate significantly from quarter to quarter. We expect that the current economic environment will continue to negatively impact sales in the laundry equipment business unit.

Cost of revenue

Cost of facilities management revenue. Cost of facilities management revenue includes rent paid to customers as well as those costs associated with installing and servicing equipment and costs of collecting, counting, and depositing facilities management revenue. Cost of facilities management revenue decreased by $1,661, or 3%, to $51,757 for the three months ended September 30, 2009 as compared to $53,418 for the three months ended September 30, 2008. The decrease in cost is the net of a decrease of $2,466 in facilities management rent offset by an increase of $805 in other operating expenses. The decrease in facilities management rent is directly attributable to the decline in facility management revenue. The increase in other operating expenses is the net of an increase of $1,055 in employee health insurance costs and a decrease of $250 in other expenses. Cost of facilities management revenue increased by $5,828, or 4%, to $157,680 for the nine months ended September 30, 2009 as compared to $151,852 for the nine months ended September 30, 2008. The increase is due primarily to the $3,550 increased rent associated with the increase in facility management revenue resulting from the facilities management business we acquired on April 1, 2008. Increased employee health insurance costs of $2,128 and additional operating expenses related to the acquisition offset by cost control measures implemented by the Company accounted for the remaining increase of $2,278. As a percentage of facilities management revenue, cost of facilities management revenue was 69% and 68%, respectively, for the three months ended September 30, 2009 and 2008 and 68% for both the nine months ended September 30, 2009 and 2008. Facilities management rent as a percentage of facilities management revenue was 48% and 49% for the three months ended September 30, 2009 and 2008, respectively. Facilities management rent was 49% for both the nine months ended September 30, 2009 and September 30, 2008. Facilities management rent can be affected by new and renewed laundry leases, lease portfolios acquired and by other factors such as the amount of incentive payments and laundry room betterments invested in new or renewed laundry leases. As we vary the amount invested in a facility, the facilities management rent as a function of facilities management revenue can vary. Incentive payments and betterments are amortized over the life of the related lease.

Depreciation and amortization related to operations. Depreciation and amortization related to operations decreased by $477, or 4%, to $12,291 for the three months ended September 30, 2009 as compared to $12,768 for the three months ended September 30, 2008. Depreciation and amortization related to operations increased by $2,004, or 6%, to $36,858 for the nine months ended September 30, 2009 as compared to $34,854 for the nine months ended September 30, 2008. The increase in depreciation and amortization for the nine months ended September 30, 2009 as compared to the same period in 2008 is primarily attributable to having nine full months of depreciation and amortization associated with the contract rights and equipment we acquired as part of our acquisition of a facilities management business on April 1, 2008 compared to only six months of such depreciation and amortization in the comparable period in 2008.

Cost of product sales. Cost of product sales consists primarily of the cost of laundry equipment, MicroFridge® branded equipment and parts sold, as well as salaries, warehousing and distribution expenses and other costs included in the product sales segment. Cost of product sales decreased by $5,600, or 36%, to $9,779 for the three months ended September 30, 2009 as compared to $15,379 for the three months ended September 30, 2008. Cost of product sales decreased by $5,822, or 17%, to $28,769 for the nine months ended September 30, 2009 as compared to $34,591 for the nine months ended September 30, 2008. As a percentage of sales, cost of product sales was 78% for the three months ended September 30, 2009, as compared to 79% for the three months ended September 30, 2008 and 77% for the nine months ended September 30, 2009, as compared to 78% for the nine months ended September 30, 2008. The gross margin in the Intirion® business unit increased to 22% for the three months ended September 30, 2009 as compared to 21% for the same period in 2008 and increased to 23% for the nine months ended September 30, 2009 as compared to 22% for the corresponding period in 2008. The gross margin in the Intirion® business unit is impacted by the mix of products and markets into which we sell. Typically direct sales, such as sales to the government, achieve a higher margin than sales

into distribution channels. The gross margin in the laundry equipment sales business unit decreased to 20% for the three-month period ended September 30, 2009 as compared to 21% for the same period in 2008 and stayed at 20% for both the nine month period ended September 30, 2009 and September 30, 2008. The gross margin is primarily a function of the mix of products sold.

Operating expenses

General, administration, sales and marketing, and related depreciation and amortization expense. General, administration, sales and marketing, and related depreciation and amortization expense decreased by $29, or less than 1%, to $9,793 for the three months ended September 30, 2009 as compared to $9,822 for the three months ended September 30, 2008. Medical claims and related expenses increased by $207 in the three months ended September 30, 2009 compared to the three months ended September 30, 2008. General, administration, sales and marketing, and related depreciation and amortization expense increased by $783, or 3%, to $30,416 for the nine months ended September 30, 2009 as compared to $29,633 for the nine months ended September 30, 2008. As a percentage of total revenue, general, administration, sales and marketing and related depreciation expenses were 11% and 10% for the three months ended September 30, 2009 and 2008, respectively, and 11% for both the nine months ended September 30, 2009 and September 30, 2008. The increase in expenses in the nine months ended September 30, 2009 compared to the same periods in 2008 is primarily attributable to proxy contest related expenses of $971 incurred in 2009 and an increase in medical claim related expenses of $318.

Gain on sale of assets

The gain on sale of assets is primarily attributable to the gain on the sale of our facility in Tampa, Florida during the first quarter of 2009. It has been our objective to sell all operating facilities and property, thus increasing our flexibility relating to facility costs and locations. The sale of the Tampa facility completes the disposal of Company owned properties.

Income from operations

Income from operations decreased by $2,812, or 42%, to $3,834 for the three months ended September 30, 2009 compared to $6,646 for the three months ended September 30, 2008 and decreased by $1,322, or 8%, to $16,165 for the nine months ended September 30, 2009 compared to $17,487 for the nine months ended September 30, 2008 due primarily to the cumulative effect of the reasons discussed above.

Interest expense, net

Interest expense, net of interest income, decreased by $826, or 15%, to $4,828 for the three months ended September 30, 2009, as compared to $5,654 for the three months ended September 30, 2008. The decrease is due to lower outstanding debt balances resulting from our concerted effort to reduce interest-bearing debt. For the nine months ended September 30, 2009 interest expense decreased by $239, or 2%, to $14,825 compared to $15,064 for the nine months ended September 30, 2008. Included in interest expense for the nine months ended September 30, 2008 is six months interest on our debt resulting from our April, 2008 acquisition. Included in the nine months ended September 30, 2009 is nine months interest on our debt resulting from our April, 2008 acquisition. Our average effective interest rates are not significantly affected by fluctuations in the market as a significant amount of our debt has been assigned fixed rates through our derivative instruments.

Gain/Loss related to derivative instruments

Certain of the Company's Swap Agreements qualify as cash flow hedges while others do not. The change in the fair value of the Swap Agreements that do not qualify for hedge accounting treatment is recognized in the income statement in the period in which the change occurs. The change in the fair value of these contracts resulted in a gain of $57 for the three months ended September 30, 2009, compared to a loss of $122 for the same period in 2008. For the nine months ended September 30, 2009, we recorded a gain of $558 compared to a loss of $159 for the nine months ended September 30, 2008.

Provision for income taxes

The provision for income taxes decreased by $768 to a benefit of $551 for the three months ended September 30, 2009 compared to an expense of $217 for the three months ended September 30, 2008. The decrease is the result of the pre-tax loss of $937 for the three months ended September 30, 2009 compared to the pre-tax

income of $870 for the three months ended September 30, 2008. The provision for income taxes increased by $272 to $911 for the nine months ended September 30, 2009 compared to $639 for the nine months ended September 30, 2008. The effective tax rate increased to 48% from 28% for the nine months ended September 30, 2009, compared to the same period in 2008. The effective tax rate for the nine months ended September 30, 2008 was reduced by the benefit of a reduction of the reserve for uncertain tax positions of $204 and an amendment to Massachusetts tax law which will reduce payment on timing items that become taxable after January 1, 2009. The effective tax rate for the nine months ended September 30, 2008 without considering the effect of the reduction to the reserve was 44%. The increase in the effective rate from 44% to 48% is primarily a function of permanent tax differences as a percent of income before taxes.

Net income (loss)

As a result of the foregoing, net income decreased by $1,039 to a loss of $386 for the three months ended September 30, 2009 compared to net income of $653 for the same period ending September 30, 2008. Net income decreased by $638, or 39%, to $987 for the nine months ended September 30, 2009 as compared to net income of $1,625 for the nine months ended September 30, 2008.

Seasonality

We experience moderate seasonality as a result of our operations in the college and university market. Revenues derived from the college and university market represented approximately 13% of our total facilities management revenue. Academic facilities management and rental revenues are derived substantially during the school year in the first, second and fourth calendar quarters. Conversely, our operating and capital expenditures have historically been higher during the third calendar quarter when we install a large amount of equipment while colleges and universities are generally on summer break. Product sales, principally of Intirion® products, to this market are typically higher during the third calendar quarter as compared to the rest of the calendar year, somewhat offsetting the seasonality effect of the laundry facilities management business unit.

Liquidity and Capital Resources (Dollars in thousands)

We believe that we can satisfy our working capital requirements and funding of capital needs with internally generated cash flow and, as necessary, borrowings from our revolving credit facility described below. Capital requirements for the year ending December 31, 2009, including contract incentive payments, are currently expected to be between $27,000 and $30,000. In the nine months ended September 30, 2009, spending on capital expenditures and contract incentives totaled $17,372 and $1,547, respectively. The capital expenditures for 2009 are primarily composed of laundry equipment installed in connection with new customer leases and the renewal of existing leases.

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

For the nine months ended September 30, 2009, our source of cash was from operating activities. Our primary uses of cash for the nine months ended September 30, 2009 were the reduction of debt, the purchase of new laundry . . .