UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington
D.C. 20549




FORM
10-K




(Mark
One)


[X]           ANNUAL REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the
fiscal year endedDecember 31,
2008


OR


[]           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  0-1684





GYRODYNE
COMPANY OF AMERICA, INC.


(Exact
name of registrant as specified in its charter)




NEW YORK
                  11-1688021(State
      or other jurisdiction of incorporation or organization)
                  (I.R.S.
      Employer Identification No.)1 FLOWERFIELD, SUITE 24, ST. JAMES,
      NY
                  11780(Address
      of principal executive offices)
                  (Zip
      Code)




Registrant’s
telephone number, including area code    (631) 584-5400





Securities
registered pursuant to Section 12(b) of the Act: NONE





Securities
registered pursuant to Section 12(g) of the Act:





COMMON STOCK, $1.00 PAR
VALUE


(Title of
Class)





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





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





Indicate
by check mark whether the registrant (1) has filed all the reports required to
be filed by Section 13 or Section 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 x





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 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.  o





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


(Check
One):





Large
accelerated filer  o                                                                Accelerated
filer  o


Non-accelerated
filer  o                                                                  Smaller
reporting company x


(Do not
check if a smaller reporting company)





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




The
aggregate market value of voting common stock held by non-affiliates of the
registrant on June 30,
2008 was $20,900,457. The aggregate
market value was computed by reference to the closing price on such date of the
common stock as reported on the NASDAQ Stock Market. Shares of common stock held
by each executive officer and director and by each person who to the
registrant’s knowledge owns 5% or more of the outstanding voting stock have been
excluded in that such persons may be deemed to be affiliates. This determination
of affiliate status is not necessarily a conclusive determination for other
purposes.





On
February 18, 2009, 1,289,878 shares of the Registrant's common stock, par value
$1 per share, were outstanding.





DOCUMENTS
INCORPORATED BY REFERENCE


None







1


TABLEOF
CONTENTS TO FORM 10-K


FOR THE YEAR ENDED DECEMBER
31, 2008








ITEM
      #
                
                PAGEPART
      I1.
                Business.
                31B.
                Unresolved Staff Comments.
                72.
                Properties.
                73.
                Legal Proceedings.
                84.
                Submission of Matters to a Vote of Security
      Holders.
                9PART
      II5.
                Market for Registrant’s Common Equity, Related Stockholder
      Matters and Issuer Purchases of Equity Securities.
                97.
                Management's Discussion and Analysis of Financial
      Condition and Results of Operation.
                108.
                Financial Statements and Supplementary
      Data.
                179.
                Changes in and Disagreements With Accountants on
      Accounting and Financial Disclosure.
                179A(T).
                Controls and Procedures.
                189B.
                Other Information.
                18PART
      III10.
                Directors, Executive Officers and Corporate
      Governance.
                1811.
                Executive Compensation.
                2112.
                Security Ownership of Certain Beneficial Owners and
      Management and Related Stockholder Matters.
                2413.
                Certain Relationships and Related Transactions, and
      Director Independence.
                2614.
                Principal Accountant Fees and
    Services.
                26PART
      IV15.
                Exhibits, Financial Statement
    Schedules.
                27Signatures
                29Exhibit Index
                30








2




PART
I





Item1. Business.





The
statements made in this Form 10-Kthat are not historical
facts contain “forward-looking information” within the meaning of the Private
Securities Litigation Reform Act of 1995, and Section 27A of the Securities Act
of 1933 and Section 21E of the Securities Exchange Act of 1934, both as amended,
which can be identified by the use of forward-looking terminology such as “may,”
“will,” “anticipates,” “expects,” “projects,” “estimates,” “believes,” “seeks,”
“could,” “should,” or “continue,” the negative thereof, other variations or
comparable terminology.  Important factors, including certain risks
and uncertainties, with respect to such forward-looking statements that could
cause actual results to differ materially from those reflected in such
forward-looking statements include, but are not limited to, the effect of
economic and business conditions, including risks inherent in the real estate
markets of Suffolk and Westchester Counties in New York, Palm Beach County in
Florida and Fairfax County in Virginia, the ability to obtain additional capital
in order to develop the existing real estate, uncertainties associated with the
Company’s litigation against the State of New York for just compensation for the
Flowerfield property taken by eminent domain, and other risks detailed from time
to time in the Company’sSECreports. These and other
matters the Company discusses in this Report, or in the documents it
incorporates by reference into this Report, may cause actual results to differ
from those the Company describes. The Company assumes no obligation to update or
revise any forward-looking information, whether as a result of new information,
future events or otherwise.





Business
Development





Gyrodyne
Company of America, Inc. (the “Company”) was organized in 1946 as a corporation
under the laws of the State of New York.  The Company's headquarters
are located at 1 Flowerfield, Suite 24, St. James, New York
11780.  The Company’s main phone number is (631)
584-5400.  The Company maintains a website at www.gyrodyne.com.





The
Company was, from its inception and for the next 25 years, engaged in design,
testing, development, and production of coaxial helicopters primarily for the
U.S. Navy.  Following a sharp reduction in the Company’s helicopter
manufacturing business and its elimination by 1975, the Company began converting
its vacant manufacturing facilities and established its rental property
operation.  The Company has since concentrated its efforts on the
development of its real estate holdings in St. James, New York.  The
converted buildings consist of approximately 127,392 rentable square feet
housing 54 tenants in space suitable for office, engineering, manufacturing, and
warehouse use.  The property, which is known as Flowerfield, consists
of 68 acres. Approximately 10 acres are utilized for the rental property and the
balance of 58 remains undeveloped but is the subject of development plans (see
below).





In 1965,
the Company acquired a 20% limited partnership interest in Callery-Judge Grove,
L.P., a New York limited partnership, which owns a 3,700+ acre citrus grove
located in Palm Beach County, Florida, for a purchase price of $1.1 million.
Based on three subsequent capital infusions in which the Company did not
participate, the Company’s share is now approximately 11%. The investment has
yielded distributions to Gyrodyne of approximately $5.5 million in the
aggregate. The property is the subject of a plan for mixed use development and
recently received approval to develop 2,996 residential units and 235,000 square
feet of commercial and retail space.





On November 2, 2005, the State
University of New York at Stony Brook (the “University”) filed an acquisition
map with the Suffolk County Clerk’s office and vested title in approximately
245.5 acres of the Flowerfield Property pursuant to the New York Eminent Domain
Procedure Law (the “EDPL”).  On March 27, 2006, the Company received
payment from the State of New York in the amount of $26,315,000, which the
Company had previously elected under the EDPL to accept as an advance payment
for the property (the “Advance Payment”).  Under the EDPL, both the
Advance Payment and any additional award from the Court of Claims bear interest
at the current statutory rate of 9% simple interest from the date of the taking
through the date of payment. In December  2007, the Company recorded a
provision for loss of interest on condemnation proceeds amounting to $332,377
which represents a portion of the previously recorded interest receivable of
$921,385 pertaining to the Advance Payment. During the year ended December 31,
2006, the Company received $589,008 of interest on the Advance Payment. Although
the Company had been assured by counsel representing the State that a statutory
interest rate of 9% was due and payable on the Advance Payment of $26.3 million,
the State of New York has now taken the position that a lesser interest rate was
applicable. The Company is currently seeking just compensation under the EDPL in
a lawsuit against the State of New York (see below), and also plans on pursuing
the loss of interest in such lawsuit. See also Note 18 in the footnotes to the
consolidated financial statements.





In 2005,
the Company retained an investment banking firm to assist management and the
Board of Directors in reviewing the Company’s strategic options. On December 9,
2005, the Company presented at its 2005 annual shareholders meeting a strategic
plan for the future direction of the Company.  The objective of the
plan is to position the Company so that it is best able to achieve one or more
shareholder liquidity events in a reasonable period of time that would put the
maximum amount of cash or marketable securities in the hands of the Company’s
shareholders in a tax efficient manner.  The plan calls for achieving
this objective by pursuing a conversion to a real estate investment trust
(REIT), disposition and redeployment of the assets of the Company in a tax
efficient manner, maximization of the value for the remaining 68 acres at
Flowerfield, and vigorous pursuit of maximum value from the State of New York
for the 245.5 acres of Flowerfield taken by eminent domain.  Following
the Company’s conversion to a REIT, which the Company completed in 2007,
effective May 1, 2006, and so long as Gyrodyne qualifies for REIT tax status,
the Company generally will not be subject to New York State and federal
corporate income taxes on income and gain generated after May 1, 2006, the
effective date of the Company’s REIT election, from investments in real estate,
thereby reducing the Company’s corporate-level taxes and substantially
eliminating the double taxation on income and gain that usually results in the
case of distributions as a C corporation.





3


On May 1,
2006, the Company filed a Notice of Claim with the Court of Claims of the State
of New York seeking additional damages from the State of New York resulting from
the eminent domain taking by the University.  See “Legal
Proceedings”.





The
Company initially invested the Advance Payment from the condemnation of
$26,315,000 in short term U.S. Government securities and interest bearing
deposits which were valued at $26,184,383 and $238,593, respectively, as of
April 30, 2006. Subsequently, the Company invested in hybrid mortgage-backed
securities fully guaranteed by agencies of the U.S. Government which are
qualified REIT investments; at December 31, 2008, those investments totaled
$8,413,279.





In
accordance with Section 1033 of the Internal Revenue Code, if the Company
replaces the condemned property with like kind property within three years (or
such extended period if requested and approved by the Internal Revenue Service
at its discretion) after April 30, 2006, recognition of the gain for federal and
state tax purposes is deferred until the newly acquired property is disposed of.
In June of 2007 and 2008, the Company acquired the Port Jefferson Professional
Park and the Cortlandt Medical Center, respectively. These purchases totaled
approximately $15,914,000 and represent a reinvestment of only a portion of the
condemnation proceeds. The Company will continue to recognize a deferred tax
liability for the potential effect of the gain on condemnation. As of December
31, 2008, the remaining balance of condemnation proceeds to be reinvested is
approximately $10,401,000. On February 2, 2009, the Company entered into an
agreement to acquire a medical office complex in Fairfax, Virginia for
$13,160,000. The closing is expected to take place on or about March 31, 2009
but in no event later than April 30, 2009. (See below). If the Company closes on
schedule, the Company will have completed its reinvestment of the $26.3 million
Advance Payment of condemnation proceeds in a tax efficient manner under Section
1033 of the Internal Revenue Code.





On June
27, 2007, the Company acquired ten buildings in the Port Jefferson Professional
Park in Port Jefferson Station, New York. The buildings were acquired for a
purchase price of $8,850,000. The buildings, located at 1-6, 8, 9 and 11 Medical
Drive and 5380 Nesconset Highway in Port Jefferson Station, are situated on 5.16
acres with 41,651 square feet of rentable space. The purchase price per square
foot was $212 and the aggregate annual rent flow from the property is currently
$872,717. The Company funded $5,551,191 of the purchase price by the assumption
of the existing mortgage debt on the property and the remainder in cash after
adjustments.





On June
2, 2008, the Company acquired the Cortlandt Medical Center in Cortlandt Manor,
New York. The property consists of five office buildings which are situated on
5.01 acres with 29,811 square feet of rentable space. The purchase price was $7
million or $235 per square foot. The aggregate annual rent flow from the
property is currently $917,556. Of the $7 million purchase price, the Company
paid $1,750,000 in cash and received financing in the amount of
$5,250,000.





The
Company has filed an application to develop a gated, age restricted community on
the remaining Flowerfield property that would  include 39
single-family homes, 60 townhouses and 210 condominiums. Living space would
range from 1,600 square feet for the smallest condominiums to 2,800 square feet
for detached single-family homes. Amenities would include a clubhouse with
recreation facilities, pedestrian and bicycle paths, and extensive landscaping.
The Company has engaged the firm of Platt Byard Dovell White Architects, a
residential and commercial property designer, for this project. Leading the
project will be Sam White, FAIA, a partner at the firm known for blending
historic context into new architecture.





The
application requires the zoning of approximately 62.4 acres be changed from
"light industrial" (approx. 55.5 acres) and "residential" (approx. 6.9 acres) to
"planned residential." Another 4.3 acres of the property owned by the Company,
while already zoned as "residential," would remain undeveloped. Total amount of
open space remaining after development is expected to exceed 40
acres.





On
February 12, 2007, the Company entered into an agreement with Landmark National
to terminate two agreements, the Golf Operating Agreement and the Asset
Management Agreement, both dated April 9, 2002. In addition to Landmark agreeing
not to pursue any claim under those agreements for 10% of all proceeds related
to the condemnation and any future sale and/or development of the remaining
Flowerfield acreage, Landmark agreed to provide consulting services in
connection with the eminent domain litigation. In consideration for Landmark’s
agreement not to pursue the foregoing claims and for services previously
provided, the Company paid Landmark $2,000,000, $500,000 of which was accrued by
the Company during its year ended April 30, 2006. In addition, the Company will
also pay Landmark an additional $1,000,000 over a thirty-six month period,
commencing on March 1, 2007, in recognition of services rendered between 2004
and 2006, and for general consulting, review of pertinent documents,
consultations regarding land planning and economic feasibility studies and
coordination with project engineers associated with the Company’s claim for
additional compensation.





4


On
February 2, 2009, the Company entered into a non-binding agreement to acquire a
59,000 square foot medical office complex in Fairfax, Virginia for $13,160,000,
$100,000 of which was paid as a refundable deposit upon the signing of the
agreement, and the remainder to be paid at closing. The closing is expected to
take place on or about March 31, 2009 but in no event later than April 30, 2009,
and is subject to customary representations and conditions, including the
condition that the Company obtain financing in a principal amount equal to or
greater than 59% of the purchase price, or $8 million, in the form of a new loan
or, at the Company’s discretion, assumption and modification of existing debt
secured against the property. The Agreement is subject to a 45-day inspection
period during which the Company may, at its own expense, arrange for legal,
environmental and/or engineering analyses. The Company may terminate the
Agreement prior to the expiration of the inspection period in the event that the
Seller fails to cure any title or survey objections pursuant to the terms of the
Agreement.





The
proposed transaction qualifies for the deferral treatment under Section 1033 of
the Internal Revenue Code and will complete the reinvestment program of the
$26.3 million Advance Payment received in connection with the condemnation of
the 245 acres of the Flowerfield property.





Neither
the Company nor any of its subsidiaries have ever been in any bankruptcy,
receivership or similar proceeding.





References
to the Company contained herein include its wholly owned subsidiaries, except
where the context otherwise requires.





Description of the Company's
Business





The
Company manages its real estate operations and is a passive investor as a
limited partner in the Callery Judge Grove, L.P., which owns a large citrus
grove in Palm Beach County, Florida.  The Company currently has a
total of 10 employees, of which 7 are full time, involved in support of the real
estate operation and development plans.  Competition among industrial,
medical and office rental properties on Long Island and Cortlandt Manor, New
York is intense.  There are numerous commercial property owners that
compete with the Company in attracting tenants, many of which are substantially
larger than the Company.  See Item 2, "Properties" for a discussion
regarding dependence on major tenants.





Real
Estate





Gyrodyne
owns a 68 acre site called Flowerfield, primarily zoned for light industry,
which is located approximately 50 miles east of New York City on the north shore
of Long Island in the hamlet of St. James. Flowerfield's location also places it
in hydrological zone VIII, one of the most liberal with respect to effluent
discharge rates. The Company currently has 127,392 square feet of rentable space
located on approximately 10 acres of developed property at Flowerfield. As of
December 31, 2008, there were 54 tenants, comprising 71 leases, renting space
with an annual base rent of $1,694,442. The Flowerfield property is located in
Smithtown Township. Environmental studies have been updated and numerous other
studies including archeological, ecological, and traffic have been conducted in
connection with development plans -- all with no significant adverse findings.
The Company believes that it does not incur material costs in connection with
compliance with environmental laws. During the years ended December 31, 2008 and
December 31, 2007, the Company had no material expenses related to environmental
issues.





On June
27, 2007, the Company acquired ten buildings in the Port Jefferson Professional
Park in Port Jefferson Station, New York. The buildings were acquired for an
aggregate purchase price of $8,850,000 or $212 per squre foot. The buildings,
located at 1-6, 8, 9 and 11 Medical Drive and 5380 Nesconset Highway in Port
Jefferson Station, are situated on 5.16 acres with 41,651 square feet of
rentable space. As of December 31, 2008, there were 19 tenants, comprising 19
leases, renting space with an annual base rent of $872,717.  The Company
funded $5,551,191 of the purchase price by the assumption of the existing
mortgage debt on the property and the remainder in cash after
adjustments.




On June
2, 2008, the Company acquired the Cortlandt Medical Center in Cortlandt Manor,
New York. The property consists of five office buildings which are situated on
5.01 acres with 29,811 square feet of rentable space. The purchase price was $7
million or $235 per square foot. As of December 31, 2008, there were 13 tenants,
comprising 13 leases, renting space with an annual base rent of $917,556. 
Of the $7 million purchase price for the property, the Company paid $1,750,000
in cash and received financing in the amount of $5,250,000.





5


On
February 2, 2009, the Company entered into a non-binding agreement to acquire a
59,000 square foot medical office complex in Fairfax, Virginia for $13,160,000,
$100,000 of which was paid as a refundable deposit upon the signing of the
agreement, and the remainder is required to be paid at closing. The closing is
expected to take place on or about March 31, 2009 but in no event later than
April 30, 2009, and is subject to customary representations and conditions,
including the condition that the Company obtain financing in a principal amount
equal to or greater than 59% of the purchase price, or $8 million, in the form
of a new loan or, at the Company’s discretion, assumption and modification of
existing debt secured against the property. The Agreement is subject to a 45-day
inspection period during which the Company may, at its own expense, arrange for
legal, environmental and/or engineering analyses. The Company may terminate
the Agreement prior to the expiration of the inspection period in the event that
the Seller fails to cure any title or survey objections pursuant to the terms of
the Agreement.





The
proposed transaction qualifies for the deferral treatment under Section 1033 of
the Internal Revenue Code and will complete the reinvestment program of the
$26.3 million Advance Payment received in connection with the condemnation of
the 245 acres of the Flowerfield property.





Limited Partnership
Investment in Callery-Judge  Grove, L.P. (the
“Grove”)





The
Company’s initial participation in the Grove through its wholly owned
subsidiary, Flowerfield Properties, Inc., represented a 20% limited partner’s
interest in the Grove. Based on three subsequent capital infusions in which the
Company did not participate, the Company’s share is now approximately
11%.





The
original limited partnership investment of $1.1 million, which was made in 1965,
has since yielded distributions of approximately $5.5 million to Gyrodyne in the
aggregate. Due to recurring losses of the Grove, the investment is carried on
the books of the Company at $0 as a result of recording the Company’s pro-rata
share of losses under the equity method of accounting. In fiscal 2000, when the
Company’s share of losses equaled the carrying value of the investment, the
equity method of accounting was suspended, and no additional losses have been
charged to operations.





Tax
Status





The
Company has qualified, and expects to continue to qualify in the current fiscal
year, as a real estate investment trust (REIT) for federal and state income tax
purposes under section 856(c)(1) of the Internal Revenue Code (the “Code”). As
long as the Company qualifies for taxation as a REIT, it generally will not be
subject to federal and state income tax. If the Company fails to qualify as a
REIT in any taxable year, it will be subject to federal and state income tax on
its taxable income at regular corporate rates. Unless entitled to relief under
specific statutory provisions, the Company will also be disqualified for
taxation as a REIT for the four taxable years following the year in which it
loses its qualification. Even if the Company qualifies as a REIT, it may be
subject to certain state and local taxes on its income and property and to
federal income and excise taxes on its undistributed income.





Competition





All of
the rental properties owned by the Company are located in St. James, Port
Jefferson Station, and Cortlandt Manor, New York.  On February 2,
2009, the Company entered into an agreement to acquire a medical office complex
in Fairfax, Virginia. The closing is expected to take place on or about March
31, 2009 but in no event later than April 30, 2009. (See – “Business
Development,”above). The Company competes in the leasing of medical,
professional and general office space and engineering, manufacturing and
warehouse space with a considerable number of other real estate companies, some
of which may have greater marketing and financial resources than the
Company.  Principal factors of competition in the Company’s rental
property business are:  the quality of properties, leasing terms
(including rent and other charges and allowances for tenant improvements),
attractiveness and convenience of location, the quality and breadth of tenant
services provided and reputation as an owner and operator of quality office
properties in its relevant market.  Additionally, the Company’s
ability to compete depends upon, among other factors, trends in the national and
local economies, investment alternatives, financial condition and operating
results of current and prospective tenants, availability and cost of capital,
construction and renovation costs, taxes, governmental regulations, legislation
and population trends.




In
seeking new investment opportunities, the Company competes with other real
estate investors, including pension funds, insurance companies, foreign
investors, real estate partnerships, other public and private real estate
investment trusts, private individuals and other domestic real estate companies,
many of which have greater financial and other resources than the Company. With
respect to properties presently owned or to be owned by the Company, it competes
with other owners of like properties for tenants.




6


Environmental
Matters




The
Company believes that each of its properties is in compliance, in all material
respects, with federal, state and local regulations regarding hazardous waste
and other environmental matters and is not aware of any environmental
contamination at any of its properties that would require any material capital
expenditure by the Company for the remediation thereof.  No assurance
can be given, however, that environmental regulations will not in the future
have a materially adverse effect on the Company’s operations.





Insurance





The
Company carries comprehensive liability, property and umbrella insurance
coverage which includes fire and business interruption insurance and covers all
of its rental properties. The Company believes the policy specifications,
insurance limits and deductibles are appropriate given the relative risk of
loss, the cost of the coverage and industry practice and, in the opinion of the
Company’s management, its rental properties are adequately insured.





Major
Customers





For the
year ended December 31, 2008, rental income from the three largest tenants
represented 6%, 5% and 4% of total rental income.


For the
year ended December 31, 2007, rental income from the three largest tenants
represented 9%, 7% and 5% of total rental income.





Item1B. Unresolved Staff Comments.





None





Item2. Properties.





The
executive office of the Company is located at 1 Flowerfield, Suite 24, St.
James, New York and consists of approximately 3,256 square feet.





Real Estate
Investments





The
Company owns a 68 acre tract of land located in St. James on the north shore of
Suffolk County, Long Island, New York. The property currently has approximately
127,392 square feet of rental space and has 54 tenants. The Company also owns a
professional office park which consists of ten buildings located in Port
Jefferson Station on the north shore of Suffolk County, Long Island, New York.
The property currently has approximately 41,651 square feet of rental space and
19 tenants. In addition, the Company owns a medical office park which consists
of five buildings located in Cortlandt Manor, New York. The property currently
has approximately 29,811 square feet of rental space and 13
tenants.





The land
at all locations is carried on the Company's balance sheet at cost in the amount
of $3,487,483 while the buildings and improvements are carried at a depreciated
cost of $15,007,142. The Company has a secured revolving line of credit in the
amount of $1,750,000. The outstanding balance was zero as of December 31, 2008
and 2007. Collateral for the credit line consists of Building #7 and the
surrounding 6 1⁄2 acres located at Flowerfield in St. James.





The
average age of the Flowerfield buildings is approximately 49 years while the
Port Jefferson Station buildings have an average age of 35 years and the
Cortlandt Manor buildings have an average age of 19 years. All facilities
continually undergo maintenance repair cycles for roofs, paved areas, and
building exteriors. The general condition of internal infrastructure, HVAC,
electrical, and plumbing is considered above average for facilities of this age.
The grounds feature extensive landscaping, are neatly groomed and well
maintained.





There are
four main buildings in the Flowerfield Industrial Park with rental unit sizes
ranging from 105 to 12,980 square feet. Given the location and size of rental
units, the Flowerfield Industrial Park attracts many smaller companies that are
not dependent on extensive material or product handling.  In the ten
buildings located in Port Jefferson Station, the rental unit sizes range from
384 to 4,000 square feet. The size, location and configuration of the units are
conducive to professional offices consisting primarily of medical and dental
professionals. In the five buildings located in the Cortlandt Medical Center in
Cortlandt Manor, the rental size units range from 1,123 to 4,358 square feet and
are conducive to medical offices consisting primarily of medical
professionals.





7


The
Company currently maintains a $100 million dollar liability umbrella policy and
has insured certain buildings and rent receipts predicated on an analysis of
risk, exposure, and loss history. It is management's opinion that the premises
are adequately insured.





The
      following table sets forth certain information as of December 31, 2008 for
      all of the Company’s properties:Annual
                
                Number
      OfBase
                
                Tenants
      WhoRentable
                
                Annual
                Rent
                Number
                Occupy
      10%Square
                Percent
                Base
                Per
      Leased
                Of
                Or
      More OfProperty
                Feet
                Leased
                Rent
                SQ. FT.
                Tenants
                Rentable Sq. Ft.All
      Locations
                198,854
                90%
                $3,484,714
                $19.45
                86
                0




The
following table sets forth the Company’s scheduled lease expirations as of
December 31, 2008:





%
      of Gross AnnualNumber
      of
                Square
                Total
                Rental
      RevenuesLeases
                Feet
                Annual
                RepresentedFiscal Year End
                Expiring
                Expiring
                Rent
                By Such Leases2009
                53
                67,369
                $1,126,744
                32.33%2010
                27
                47,517
                928,014
                26.63%2011
                16
                36,652
                880,890
                25.28%2012
                2
                3,853
                57,524
                1.65%2013
                1
                1,616
                46,660
                1.34%Thereafter
                4
                22,129
                444,882
                12.77%




The
Company’s properties are located in the hamlet of St. James, Port Jefferson
Station and Cortlandt Manor, New York. The Company has filed an application for
the zoning of approximately 62.4 acres in St. James to be changed from light
industrial (approximately 55.5 acres) and residential (approximately 6.9 acres)
to planned residential. On February 2, 2009, the Company entered into an
agreement to acquire a medical office complex in Fairfax, Virginia. The closing
is expected to take place on or about March 31, 2009 but in no event later than
April 30, 2009. (See – “Business Development,”above).





Item3. Legal Proceedings.





Gyrodyne Company of America,
Inc. v. The State University of New York at Stony Brook





On May 1,
2006 the Company commenced litigation in the Court of the State of New York
seeking just compensation for the 245.5 acres in St. James and Stony Brook, New
York (the “Property”) that were appropriated by the State on November 2, 2005
under the power of eminent domain.  On November 10, 2008, Gyrodyne and
the State of New York filed with the Court of Claims their respective appraisals
regarding the value of the Property. As of the November 2005 appropriation date,
Gyrodyne’s appraiser has valued the Property at $125,000,000, based in part upon
a separate zoning analysis report that Gyrodyne also filed with the Court which
concluded that there was a high probability the Property would have been rezoned
from light industrial use to a Planned Development District.  The
State’s appraiser appraised the Property using the current light industrial
zoning at a fair market value of $22,450,000.




As the
State's appraisal is $3,865,000 less than the $26,315,000 Advance Payment
already made to Gyrodyne if the Court of Claims were to adopt the State of New
York’s November 10, 2008 appraisal, the State could recoup the $3,865,000
difference between the Advance Payment and the State of New York’s November 10,
2008 appraisal, including interest already paid on the Advance
Payment.





The
Company believes the State’s appraisal is fundamentally flawed in that it
misapplied the eminent domain law’s requirement that just compensation be
determined based upon the highest and best use and the probability that such use
could have been achieved.





The Court
of Claims has by Order dated February 25, 2009 scheduled the trial in this case
to commence on August 3, 2009.





Faith Enterprises v.
Gyrodyne, Supreme Court, Suffolk County, Index # 3511/2007.





Faith
Enterprises ("Faith") a prior tenant at 7 Flowerfield, failed to fulfill its
rental payment obligation. In February 2007, the Company served Faith with a
notice of default. Faith sued the Company in Suffolk Supreme Court, seeking to
stop the eviction and seeking damages. In November 2007, the Company
commenced a third-party action against the guarantors of Faith's lease. In late
2008 and early 2009, asset searches were conducted and it was determined that
Faith and the guarantors do not have assets that could be used to satisfy any
judgment that Gyrodyne may ultimately get in this case.  As a result,
the Company and Faith agreed to enter into a stipulation of
discontinuance, which would discontinue Faith's litigation against the
Company and the Company's litigation against Faith and its guarantors. The
stipulation has been drafted and is being circulated for review, comments
and finalization.





8


In
addition, in the normal course of business, the Company is a party to various
legal proceedings. After reviewing all actions and proceedings pending against
or involving the Company, management considers the aggregate loss, if any, will
not be material.





Item4. Submission of Matters to a Vote of Security
Holders.





The
Company’s annual shareholders meeting for the Year Ended December 31, 2007 was
held on December 10, 2008 (the “2008 Annual Meeting”). The votes on each matter
submitted to shareholders were as follows:





To elect
two directors to serve for a term of three years or until their successors shall
be elected and shall qualify:





For
                  
                  
                  WithheldElliot
      H. Levine
                  
                  
                  1,187,121
                  
                  
                  
                  11,850Naveen
      Bhatia
                  
                  
                  1,182,154
                  
                  
                  
                  16,817




The
directors whose terms of office as a director continued after the 2008 Annual
Meeting are as follows:  Paul L. Lamb, Stephen V. Maroney, Philip F.
Palmedo, Richard B. Smith, Ronald J. Macklin and Nader G.M. Salour.





On the
proposal to ratify the engagement of HoltzRubensteinReminick, LLP as independent
certifiedpublic accountants and auditors for the 2008 fiscal year: votes
for 1,189,292; against 7,053; abstain 2,626.





PART
II





Item5. Market for Registrant’s Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity Securities.





(a)
            Market
      information





The
Company's Common Stock, $1 par value (symbol: "GYRO") is traded in the NASDAQ
Small-Cap Market. Since June 10, 1948, the NASDAQ Small-Cap Market has been the
principal market in which the Company’s stock is publicly traded. Set forth
below are the high and low sales prices for the Company’s stock for each full
quarter within the two most recent fiscal years:





Quarter
      Ended

                      Fiscal
      2007
                  
                  Low
                  
                  
                  HighMarch
      31, 2007
                  
                  
                  $58.63
                  
                  
                  
                  $73.59June
      30, 2007
                  
                  
                  $55.04
                  
                  
                  
                  $63.58September
      30, 2007
                  
                  
                  $46.01
                  
                  
                  
                  $57.44December
      31, 2007
                  
                  
                  $39.75
                  
                  
                  
                  $51.50








Quarter
      Ended
                        Fiscal
      2008
                      
                      Low
                      
                      
                      HighMarch
      31, 2008
                      
                      
                      $38.00
                      
                      
                      
                      $49.99June
      30, 2008
                      
                      
                      $33.50
                      
                      
                      
                      $42.00September
      30, 2008
                      
                      
                      $28.59
                      
                      
                      
                      $40.00December
      31, 2008
                      
                      
                      $22.76
                      
                      
                      
                      $39.00








(b)
            Approximate
      number of equity security holders, including shares held in street name by
      brokers.




Number
      of Holders of RecordTitle of Class
                                
                                as of February 18, 2009Common
      Stock, $1.00 Par Value
                                
                                
                                624




9


(c)
            On
      April 9, 2007, the Company paid a special cash distribution of $4.00 per
      share to all shareholders of record as of the close of business on March
      26, 2007. There were no cash dividends declared on the Company’s Common
      Stock during the year ended December 31, 2008 and
  2007.





(d)
            Equity
      Compensation Plan Information.





As of
December 31, 2008, there were no equity compensation plans under which
securities of the Company were authorized for issuance.




Item7. Management's Discussion and Analysis of Financial
Condition and Results of Operation.





MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION





The
statements made in this Form 10-Kthat are not historical
facts contain “forward-looking information” within the meaning of the Private
Securities Litigation Reform Act of 1995, and Section 27A of the Securities Act
of 1933 and Section 21E of the Securities Exchange Act of 1934, both as amended,
which can be identified by the use of forward-looking terminology such as “may,”
“will,” “anticipates,” “expects,” “projects,” “estimates,” “believes,” “seeks,”
“could,” “should,” or “continue,” the negative thereof, other variations or
comparable terminology.  Important factors, including certain risks
and uncertainties, with respect to such forward-looking statements that could
cause actual results to differ materially from those reflected in such
forward-looking statements include, but are not limited to, the effect of
economic and business conditions, including risks inherent in the real estate
markets of Suffolk and Westchester Counties in New York, Palm Beach County in
Florida and Fairfax County in Virginia, the ability to obtain additional capital
in order to develop the existing real estate, uncertainties associated with the
Company’s litigation against the State of New York for just compensation for the
Flowerfield property taken by eminent domain, and other risks detailed from time
to time in the Company’sSECreports.  The
Company assumes no obligation to update the information in this Form
10-K.





Overview




As used
herein, the terms “we,” “us,” “our” or the “Company” refer to Gyrodyne Company
of America, Inc., a New York corporation. We operate as a fully integrated,
self-administered and self-managed real estate investment trust (“REIT”) focused
on acquiring, developing, owning, leasing and managing medical, commercial and
industrial real estate. Our tenants include unrelated diversified entities with
a recent emphasis on medical office parks and properties. Our properties are
generally located in markets with well established reputations, including
Suffolk and Westchester counties in New York.




As of
December 31, 2008, our portfolio consisted of three properties,
representing 19 buildings with an aggregate of approximately 199,000 rentable
square feet. We also own undeveloped land parcels adjacent to existing
properties for which plans are currently being formulated.





In the
first quarter of 2009, but in no event later than April 30, 2009, we expect to
close on a property in Fairfax, Virginia which will add approximately 59,000
rentable square feet to our portfolio and approximately $1,345,000 in annual
rental income. Successfully closing title on this property will complete our
reinvestment of the $26.3 million Advance Payment from condemnation proceeds in
a tax efficient manner pursuant to Section 1033 of the Internal Revenue
Code.




Factors Which May Influence Future
Operations




Our
operating focus is on acquiring, developing, owning, leasing and managing
medical, commercial and industrial space. As of December 31, 2008, our
operating portfolio was 90% leased to 86 tenants with two occupancies scheduled
for February and April 2009 upon completion of certain tenant improvements. As
of December 31, 2007, our operating portfolio was 92% leased to 73 tenants.
The decrease in the overall leasing percentage is a reflection of an increase in
the rentable square footage in our portfolio, which increased by approximately
29,811 rentable square feet in the year ended December 31, 2008 as a
result of the acquisition of the Cortlandt Medical Center; total leased square
footage during the same period increased by approximately 24,338 square
feet.




Leases
representing approximately 38% of our leased square footage expire during 2009
and leases representing approximately 27% of our leased square footage expire
during 2010. Our leasing strategy for 2009 focuses on leasing currently vacant
space, negotiating renewals for leases scheduled to expire during the year, and
identifying new tenants or existing tenants seeking additional space to occupy
the spaces for which we are unable to negotiate such
renewals.


10


Lease
Expirations





The
following is a summary of lease expirations and related revenues of leases in
place at December 31, 2008. This table assumes that none of the tenants
exercise renewal options or early termination rights, if any, at or prior to the
scheduled expirations:





%
      of Gross AnnualNumber
      of
                  Square
                  Total
                  Rental
      RevenuesLeases
                  Feet
                  Annual
                  RepresentedFiscal Year End
                  Expiring
                  Expiring
                  Rent
                  By Such Leases2009
                  53
                  67,369
                  $1,126,744
                  32.33%2010
                  27
                  47,517
                  928,014
                  26.63%2011
                  16
                  36,652
                  880,890
                  25.28%2012
                  2
                  3,853
                  57,524
                  1.65%2013
                  1
                  1,616
                  46,660
                  1.34%Thereafter
                  4
                  22,129
                  444,882
                  12.77%


The
success of our leasing and acquisition strategy will be dependent upon the
general economic conditions and more specifically real estate market conditions
and trends in the United States and in our target markets of New York and the
eastern portion of the United States. We cannot give any assurance that leases
will be renewed or that available space will be re-leased at rental rates equal
to or above the current contractual rental rates or at all.





Critical Accounting
Policies




The
preparation of financial statements in conformity with GAAP requires management
to use judgment in the application of accounting policies, including making
estimates and assumptions. We base our estimates on historical experience and on
various other assumptions believed to be reasonable under the circumstances.
These judgments affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenue and expenses during the reporting
periods. If our judgment or interpretation of the facts and circumstances
relating to various transactions had been different, it is possible that
different accounting policies would have been applied resulting in a different
presentation of our financial statements. On an ongoing basis, we evaluate our
estimates and assumptions. In the event estimates or assumptions prove to be
different from actual results, adjustments are made in subsequent periods to
reflect more current information. Below is a discussion of accounting policies
that we consider critical in that they address the most material parts of our
financial statements, require complex judgment in their application or require
estimates about matters that are inherently uncertain.





Investments in
Real Estate




Investments
in real estate are carried at depreciated cost. Depreciation and amortization
are recorded on a straight-line basis over the estimated useful lives of the
assets as follows:




Buildings
      and improvements
              
              10-39 yearsMachinery
      & equipment
              
              3
      to 20 years




Our
estimates of useful lives have a direct impact on our net income. If expected
useful lives of our investments in real estate were shortened, we would likewise
depreciate the assets over a shorter time period, resulting in an increase to
depreciation expense and a corresponding decrease to net income on an annual
basis.




Management
must make significant assumptions in determining the value of assets and
liabilities acquired. The use of different assumptions in the allocation of the
purchase cost of the acquired properties would affect the timing of recognition
of the related revenue and expenses.




Repair
and maintenance costs are charged to expense as incurred and significant
replacements and betterments are capitalized. Repairs and maintenance costs
include all costs that do not extend the useful life of an asset or increase its
operating efficiency. Significant replacements and betterments represent costs
that extend an asset’s useful life or increase its operating
efficiency.




11


Revenue
recognition - Minimum revenues from rental property are recognized on a
straight-line basis over the terms of the related leases. The excess of rents
recognized over amounts contractually due, if any, are included in deferred
rents receivable on the Company's balance sheets. Certain leases also provide
for tenant reimbursements of common area maintenance and other operating
expenses and real estate taxes. Ancillary and other property related income is
recognized in the period earned.





Allowance for
doubtful accounts-Management must make
estimates of the uncollectability of accounts receivable. Management
specifically analyzes accounts receivable and analyzes historical bad debts,
customer concentrations, customer credit-worthiness, current economic trends and
changes in customer payment terms when evaluating the adequacy of the allowance
for doubtful accounts.




Assets and
Liabilities Measured at Fair-Value- On
January 1, 2008, we adopted SFAS No. 157, Fair Value Measurements
(“SFAS 157”), which defines fair-value, establishes a framework for
measuring fair-value, and expands disclosures about fair-value measurements.
SFAS 157 applies to reported balances that are required or permitted to be
measured at fair-value under existing accounting pronouncements; accordingly,
the standard does not require any new fair-value measurements of reported
balances.




On
January 1, 2008, we adopted SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities, which permits companies to choose to
measure certain financial instruments and other items at fair-value in order to
mitigate volatility in reported earnings caused by measuring related assets and
liabilities differently. However, we have not elected to measure any additional
financial instruments and other items at fair-value (other than those previously
required under other GAAP rules or standards) under the provisions of this
standard.




SFAS 157
emphasizes that fair-value is a market-based measurement, not an entity-specific
measurement. Therefore, a fair-value measurement should be determined based on
the assumptions that market participants would use in pricing the asset or
liability. As a basis for considering market participant assumptions in
fair-value measurements, SFAS 157 establishes a fair-value hierarchy that
distinguishes between market participant assumptions based on market data
obtained from sources independent of the reporting entity (observable inputs
that are classified within Levels 1 and 2 of the hierarchy) and the
reporting entity’s own assumptions about market participant assumptions
(unobservable inputs classified within Level 3 of the
hierarchy).




Level 1
inputs utilize quoted prices (unadjusted) in active markets for identical assets
or liabilities that we have the ability to access. Level 2 inputs are
inputs other than quoted prices included in Level 1 that are observable for
the asset or liability, either directly or indirectly. Level 2 inputs may
include quoted prices for similar assets and liabilities in active markets, as
well as inputs that are observable for the asset or liability (other than quoted
prices), such as interest rates, foreign exchange rates, and yield curves that
are observable at commonly quoted intervals. Level 3 inputs are
unobservable inputs for the asset or liability, which is typically based on an
entity’s own assumptions, as there is little, if any, related market activity.
In instances where the determination of the fair-value measurement is based on
inputs from different levels of the fair-value hierarchy, the level in the
fair-value hierarchy within which the entire fair-value measurement falls is
based on the lowest level input that is significant to the fair-value
measurement in its entirety. Our assessment of the significance of a particular
input to the fair-value measurement in its entirety requires judgment, and
considers factors specific to the asset or liability.




Currently,
we have investments in hybrid mortgage-backed securities, with a AAA rating
fully guaranteed by U.S. government agencies (the Federal National
Mortgage Association and the Federal Home Loan Mortgage Corporation). The fair
values of mortgage-backed securities originated by
U.S. government agencies are based on a pricing model that incorporates
prepayment speeds and spreads to determine appropriate average life of
mortgage-backed securities. The spreads are sourced from broker/dealer's trade
prices and the new issue market. As the significant inputs used to price the
mortgage-backed securities are observable market inputs, the fair values of
these securities are included in the Level 2 fair value
hierarchy.




Newly Issued Accounting
Pronouncements


See Notes
to Consolidated Financial Statements included elsewhere herein for disclosure
and discussion of new accounting standards.




RESULTS OF
OPERATIONS




The
following is a comparison, for the years ended December 31, 2008 and 2007
of the operating results of Gyrodyne Company of America, Inc.




12


Comparison of the
Year EndedDecember 31,
2008to the Year EndedDecember 31,
2007




The
Company is reporting net income of $1,542,249 for the fiscal year ended December
31, 2008 compared to a net loss of $1,551,654 for the twelve months ended
December 31, 2007. Diluted per share income amounted to $1.20 for 2008 compared
to a per share loss of ($1.21) for the prior year. Both periods included the
recognition of tax benefits totaling $2,496,000 and $403,989 for 2008 and 2007,
respectively, and are more fully described in a latter section of this
report.





Rental
Revenues. Revenues are comprised solely of rental income and
amounted to $3,091,542, representing a $1,254,522 or a 68% improvement over the
2007 total of $1,837,020. These improved earnings reflect a full year of
operating the Port Jefferson Professional Park which was acquired in June of
2007, seven months of operating the Cortlandt Medical Center which was acquired
earlier this year, and improved results at the Flowerfield facility. The
increases over 2007 results per property amounted to $510,633, $567,315, and
$176,574 for Port Jefferson, Cortlandt, and Flowerfield,
respectively.





In 2009,
rental income is expected to increase to approximately $4,680,000 compared to
$3,092,000 in 2008, a variance of $1,588,000. Approximately $1,010,000 of this
increase will be a result of the anticipated acquisition of property in Fairfax,
Virginia in March 2009. This increase represents nine months of the Fairfax
property’s $1,345,000 projected annual rental income. Complimenting this
increase will be another $454,000 of rental income representing the ownership of
the Cortlandt Medical Center for a full year in 2009 compared to seven months in
2008. The remainder of the increase is primarily related to one tenant under
lease as of December 31, 2008, but expected to occupy space and incur rent as of
April 1, 2009.





On a pro
forma basis, the comparison of rental revenues for the years ended December 31,
2008 and 2007 as if all the properties operated for twelve months is estimated
as follows:





Facility Rental Revenue
                      
                      December 31, 2008
                      
                      
                      December 31, 2007Port
      Jefferson Professional Park
                      
                      $
                      986,604
                      
                      
                      $
                      1,011,680Cortlandt
      Medical Center
                      
                      
                      967,033
                      
                      
                      
                      956,764Flowerfield
      Industrial Park
                      
                      
                      1,537,623
                      
                      
                      
                      1,361,049Total
                      
                      $
                      3,491,260
                      
                      
                      $
                      3,329,493





Total Expenses.Expenses
amounted to $4,135,388 for the current year and reflect a decrease of $532,975
when compared to the prior year results which totaled $4,668,363. Although the
Company experienced increased rental property and depreciation expenses as a
result of adding the two new properties to its portfolio, it also reduced
general and administrative expenses by $781,619. Additionally, expenses were
reduced when compared to the prior year due to a non-recurring event in 2007
amounting to $332,377, as described later in this report.





Rental Operations
Expense. Reflecting the additional facilities, rental expenses
increased by $371,571, totaling $1,225,049 in 2008 compared to $853,478 during
the prior year. The increases over the 2007 results per property amounted to
$154,273, $173,665, and $43,633 for Port Jefferson, Cortlandt, and Flowerfield,
respectively. Similarly, reflecting the addition of the newly acquired
facilities, depreciation expense increased by $209,450, amounting to $359,626 in
2008 compared to $150,176 during the prior year.





In 2009,
rental operating expenses are expected to increase to approximately $1,625,000
compared to $1,225,000 in 2008, a variance of $400,000. Approximately $290,000
of this increase will be a result of the anticipated acquisition of property in
Fairfax, Virginia and $115,000 is a result of having the Cortlandt Medical
Center for a full year in 2009. Reflecting the aforementioned addition of new
properties, depreciation expense is forecasted to increase by $294,000,
amounting to $654,000 in 2009 compared to $360,000 in 2008.





On a pro
forma basis, the comparison of rental expenses for the years ended December 31,
2008 and 2007 as if all the properties operated for twelve months is as
follows:





Facility Rental Expense
                  
                  December 31, 2008
                  
                  
                  December 31, 2007Port
      Jefferson Professional Park
                  
                  $
                  290,783
                  
                  
                  $
                  261,342Cortlandt
      Medical Center
                  
                  
                  319,128
                  
                  
                  
                  312,832Flowerfield
      Industrial Park
                  
                  
                  760,602
                  
                  
                  
                  716,969Total
                  
                  $
                  1,370,513
                  
                  
                  $
                  1,291,143





13


General and Administrative
Expenses. Although there were several contributing factors to the
reduction in general and administrative expenses in 2008, the most significant
was the fact that 2007 included corporate governance expenses totaling $756,656
associated with the Company’s involvement in a proxy contest; 2008 corporate
governance expenses decreased by $690,022 when compared to the prior year. The
Company has no indication that it will experience a proxy contest in 2009. Other
significant contributing factors between the two reporting periods included
decreases of $248,174 in legal and consulting fees and decreases of $31,336 and
$26,010 in accounting fees and directors’ fees, respectively. Legal and
consulting fees reflect decreased expenses associated with establishing real
estate investment trust (“REIT”) status and landlord-tenant matters amounting to
$79,535 and $42,506, respectively, and $120,242 in reduced expenses pertaining
to the engagement of an investment banking firm in the prior year. Offsetting a
portion of these reductions, the Company experienced an increase of $69,456 in
condemnation litigation expenses which totaled $520,469 and increased pension
plan expense totaling $56,972. Additionally, 2008 results included increased
travel expense attributable to researching potential real estate acquisitions
and staff attendance at REIT related conferences and educational seminars which
amounted to $51,878 and a net reduction in post REIT conversion tax refunds
amounting to $39,694. The non-recurring event during 2007 was a $332,377
reversal of an interest receivable associated with the Advance Payment received
in connection with the 2005 condemnation of 245 acres of the Company’s
Flowerfield property.





In 2009,
the Company anticipates incurring condemnation expenses of $652,000 compared to
$520,000 in 2008, an increase of $132,000. The increase includes legal expenses
of $76,500, anticipated increased engineering costs of $31,000 and costs related
to traffic analysis and appraisals of $26,000.





Interest Income.Interest
income for the most part represents earnings from the Company’s investment in
mortgage backed securities issued by U.S. Government Agencies. Interest income
declined by $482,092, totaling $556,058 in 2008 compared to $1,038,150 in the
prior year. The decrease is directly attributable to the sale of securities and
the redirection of those funds into real estate investments and the normal
reductions associated with the payment stream of funds in a mortgage
portfolio.




Interest
Expense.  Interest expense associated with the funding of the
two new facilities is also reflected in the 2008 results, increasing by $303,513
for the year and totaling $465,963 compared to $162,450 for the prior year.
Since the Company finances its real estate acquisitions, interest expense is
projected to increase in 2009 with the anticipated purchase of the Fairfax
Medical Center and the full year ownership of the Cortlandt Medical Center. The
projected total for 2009 is approximately $942,703 compared to $465,963 for
2008.





On a pro
forma basis, the comparison of interest expense for the years ended December 31,
2008 and 2007 as if all the properties operated for twelve months is as
follows:





Facility Interest Expense
                    
                    December 31, 2008
                    
                    
                    December 31, 2007Port
      Jefferson Professional Park
                    
                    $
                    314,128
                    
                    
                    $
                    319,212Cortlandt
      Medical Center
                    
                    
                    253,593
                    
                    
                    
                    242,778Total
                    
                    $
                    567,721
                    
                    
                    $
                    561,990





As a
result of the changes in rental revenue, total expenses and other income
(expense), the Company is reporting a loss before benefit for income taxes of
$953,751 for 2008 as compared to a loss of $1,955,643 for the previous
year.





Income Taxes.For 2008, the
Company has recorded a benefit for income taxes totaling $2,496,000. Of that
total, a benefit of $2,800,000 is directly attributable to the acquisition of
the Cortlandt Medical Center under Section 1033 of the Internal Revenue Code.
Additionally, the Company has booked a deferred tax adjustment of $304,000
attributable to its limited partnership investment in the Callery-Judge Grove.
In 2007, the Company recorded a benefit for taxes totaling $403,989 which was
comprised of a $725,000 benefit associated with the acquisition of the Port
Jefferson Professional Park under Section 1033 of the Internal Revenue Code, a
benefit from prior years tax refunds of $100,989, and a deferred tax adjustment
of $422,000 attributable to its limited partnership investment in the
Callery-Judge Grove.




14


LIQUIDITYANDCAPITAL
RESOURCES





The
following summary discussion of our cash flows is based on the consolidated
statements of cash flows in “Item 8. Financial Statements and Supplementary
Data” and is not meant to be an all inclusive discussion of the changes in our
cash flows for the periods presented below:





2008
                
                
                2007Net
      cash used in operating activities
                
                $
                (1,257,615
                )
                
                $
                (3,649,919
                )Net
      cash (used in) provided by investing activities
                
                $
                (5,895,488
                )
                
                $
                9,399,693Net
      cash provided by (used in) financing activities
                
                $
                4,903,855
                
                
                $
                (5,245,920
                )Ending
      cash and cash equivalents balance
                
                $
                1,205,893
                
                
                $
                3,455,141




Comparison of the
Year EndedDecember 31,
2008to the Year EndedDecember 31,
2007





Net cash
used in operating activities was $1,257,615 and $3,649,919 during the years
ended December 31, 2008 and 2007, respectively. The cash used in operating
activities in the current year was primarily related to increased land
development costs of $431,666 and increased payments to vendors of $237,610. The
cash used in operating activities in the prior year was primarily related to the
payment of $2,000,000 to Landmark National in consideration for services
previously provided by Landmark and for Landmark’s agreement not to pursue any
claim under the Golf Operating Agreement or the Asset Management Agreement, each
dated April 9, 2002, for 10% of all proceeds from the condemnation of 245.5
acres of Flowerfield and any future sale and / or development of the remaining
Flowerfield acreage. There were also increased land development costs of
$459,912.




Net cash
used in investing activities amounted to $5,895,488 for the year ended
December 31, 2008 compared to net cash provided by investing activities of
$9,399,693 for the year ended December 31, 2007. This fluctuation was caused by
the liquidation of marketable securities in preparation for the acquisition of
the Port Jefferson Professional Park in 2007 as well as the
acquisition of the Cortlandt Medical Center in
2008.





Net cash
provided by financing activities amounted to $4,903,855 compared to cash used in
financing activities of $5,245,920 for the years ended December 31, 2008 and
2007, respectively. The primary reason for the cash provided by financing
activities in 2008 was the financing of the acquisition of the Cortlandt
property. The net cash used during fiscal 2007 was principally the result of a
cash distribution payment of $5,160,157.





At
December 31, 2008, the Company had cash, cash equivalents and marketable
securities of $9,619,172 to meet its current obligations and has sufficient
resources to continue to investigate possible acquisitions.  In the
first quarter of 2009 we expect to close on a property in Fairfax,
Virginia.  It is anticipated that the purchase price of this property
will be approximately $13.1 million with $8 million of the purchase price to be
paid for in the form of mortgage financing.





For the
year ending December 31, 2009, the Company has a capital expenditure budget of
approximately $1,152,100 excluding acquisitions of properties. These capital
expenditures are for tenant improvements, general upgrades, necessary repairs
that qualify as capital expenditures and costs related to the land held for
development. Of the above budget, $571,500 of the improvement expenditures have
been folded  into the rental payments and will be recovered over the
terms of the leases. At the Flowerfield property, $124,700 is required for the
removal of underground oil tanks and conversion of the related building to
natural gas. Costs capitalized with regard to the land held for development is
budgeted to be $134,500 for the year ending December 31, 2009 and includes such
items as real estate taxes, consulting and legal expenses. The remaining
$246,400 includes $50,000 for expenditures related to the Fairfax, Virginia
property, if acquired. The capital expenditure budget and equity contribution
for the Fairfax, Virginia acquisition will be funded by cash and the sale of
marketable securities.





The
Company anticipates being able to fund its operations for the year ending
December 31, 2009 from the generation of cash from operations and earnings from
investments.





Beginning
in the second half of 2007, the residential mortgage and capital markets began
showing signs of stress, primarily in the form of escalating default rates on
sub-prime mortgages, declining residential home values and increasing inventory
nationwide. This “creditcrisis” spread
to the broader commercial credit markets and has reduced the availability of
financing and widened spreads. These factors, coupled with a slowing economy,
have reduced the volume of real estate transactions and increased capitalization
rates. Despite the fact that the Company has invested in medical office
buildings, an asset class that has been less vulnerable, if these conditions
continue, our portfolio may experience lower occupancy and effective rents,
which would result in a corresponding decrease in net income, funds from
operations, and cash flows.





The
Company operates as a real estate investment trust (a “REIT”) for federal and
state income tax purposes. As a REIT, the Company is generally not subject to
income taxes. The Company is subject to the “built-in gain” rules.
Under these rules, taxes may be payable at the time and to the extent that the
net unrealized gains on the Company’s assets at the date of conversion to REIT
status are recognized in taxable dispositions of such assets in the ten-year
period following conversion. To maintain its REIT status, the Company is
required to distribute at least 90% of its annual REIT taxable income, as
defined by the Internal Revenue Code (the “Code”), to its shareholders, among
other requirements. As of December 31, 2008, the Company had cash and cash
equivalents of $1,205,893 and investments in marketable securities of $8,413,279
and anticipates having the capacity to fund normal operating, general and
administrative expenses, and its regular debt service requirements.





15


Distributions
are determined by the Company’s Board of Directors and are dependent on a number
of factors, including the amount of funds available for distribution, the
Company’s financial condition, any decision by the Board of Directors to
reinvest funds rather than to distribute the funds, the Company’s capital
expenditures, the annual distribution required to maintain REIT status under the
Internal Revenue Code, and other factors the Board of Directors may deem
relevant.





During
fiscal 2004, the Company restructured an outstanding mortgage loan on the
Flowerfield property. That loan was satisfied and incorporated into a newly
established revolving credit line in the amount of $1,750,000 at prime plus one
percent. At December 31, 2008 and December 31, 2007, the Company had no
outstanding indebtedness against this credit facility.





INCOME
TAXES





The
Company has qualified, and expects to continue to qualify in the current fiscal
year, as a real estate investment trust (a “REIT”) for federal and state income
tax purposes under section 856(c)(1) of the Internal Revenue Code (the “Code”).
As a result of the election, the Company converted to a December 31 fiscal year
end. As long as the Company qualifies for taxation as a REIT, it generally will
not be subject to federal and state income tax. If the Company fails to qualify
as a REIT in any taxable year, it will be subject to federal and state income
tax on its taxable income at regular corporate rates. Unless entitled to relief
under specific statutory provisions, the Company will also be disqualified for
taxation as a REIT for the four taxable years following the year in which it
loses its qualification. Even if the Company qualifies as a REIT, it may be
subject to certain state and local taxes on its income and property and to
federal income and excise taxes on its undistributed income. The Company
believes that it has met all of the REIT distribution and technical requirements
for the year ended December 31, 2008 and was not subject to any federal and
state income taxes. Management intends to continue to adhere to these
requirements and maintain the Company’s REIT status.





The
Company’s investment in the Grove is held as a taxable REIT subsidiary of the
Company and is subject to federal and state income taxes. Taxable REIT
subsidiaries perform non-customary services for tenants, hold assets that the
Company cannot hold directly and generally may engage in any real estate or
non-real estate related business. Accordingly, through the investment in the
Grove, the Company is subject to corporate federal and state income taxes on the
Company’s share of the Grove’s taxable income for the years ended
December 31, 2008 and December 31, 2007.





LIMITED
PARTNERSHIP INVESTMENT





The
Company has a limited partnership investment in the Callery-Judge Grove located
in Palm Beach County, Florida. The investment represents a 10.93% interest in a
limited partnership that owns a 3,700+ acre citrus grove. The Company is
accounting for the investment under the equity method. As of December 31, 2008,
the carrying value of the Company’s investment was $0. The Grove has reported to
its limited partners that in November 2008 it received an independent appraisal
report of the citrus grove property which reflects the recent approval to
develop 2,996 residential units and 235,000 square feet of commercial and retail
space. Based upon the appraised value of the citrus grove property, at December
31, 2008 and 2007, strictly on a pro-rata basis, the estimated fair value of the
Company's interest in the Grove property would be approximately $21,700,000 and
$22,400,000 respectively, without adjustment for minority interest and lack of
marketability discount. The Company cannot predict what, if any, value it will
ultimately realize from this investment.





DEVELOPMENT
OF FLOWERFIELD PROPERTY





The
Company was a party to two contractual agreements dated April 9, 2002 with
Landmark National ("Landmark") pursuant to which Landmark was to design and
develop an 18 hole championship golf course community with 336 home sites on the
Company’s Flowerfield property located in Stony Brook / Saint James, New York, a
substantial portion of which has since been condemned by the State University of
New York (the "University"). Those contractual agreements were exhibited in the
Company’s April 30, 2002 10-KSB filing. The golf course agreement called for
monthly payments of $5,000 with a maximum total of $150,000. As of April 30,
2005, the Company had paid this obligation in full. Additionally, there was a
one-time fee of $100,000 for a grading report on the course layout, which was
completed and paid during fiscal 2003. The residential land planning and design
contract included monthly payments of $10,000 with a maximum payment totaling
$300,000. As of April 30, 2005, the Company had also paid this obligation in
full. Landmark was also entitled to a construction management fee of 4.5% of
construction costs. The balance of Landmark’s compensation was an incentive fee
of 10% of pre-tax net income from the residential golf course development.
Additionally, in a separate agreement for the future, Landmark was under
contract to manage the completed golf and clubhouse facilities under a long-term
management agreement. The annual fee for such service was $100,000 commencing
upon completion of the golf and clubhouse facilities. The residential land
planning and design contract also provided for a termination fee amounting to
$500,000, which is more clearly defined in Note 12 to the consolidated financial
statements. The Company had accrued a $500,000 termination fee through April 30,
2006 pursuant to the contract. Following the University's condemnation of the
Flowerfield property, the Company was advised by Landmark that it believed it
was entitled to 10% of all condemnation proceeds pursuant to the 10% incentive
fee provision referred to above.





16


On
February 12, 2007, the Company entered into an agreement with Landmark National
to terminate two agreements, the Golf Operating Agreement and the Asset
Management Agreement, both dated April 9, 2002. In addition to Landmark agreeing
not to pursue any claim under those agreements for 10% of all proceeds related
to the condemnation and any future sale and/or development of the remaining
Flowerfield acreage, Landmark agreed to provide consulting services in
connection with the eminent domain litigation. In consideration for Landmark’s
agreement not to pursue the foregoing claims, for services previously provided,
the Company paid Landmark $2,000,000, $500,000 of which was accrued by the
Company during its year ended April 30, 2006. Landmark will receive an
additional $1,000,000 over a thirty-six month period, commencing on March 1,
2007, in recognition of services rendered between 2004 and 2006, and for general
consulting, review of pertinent documents, consultations regarding land planning
and economic feasibility studies and coordination with project engineers
associated with the Company’s claim for additional compensation. The Company
accrued $1,500,000 as additional condemnation expense as of December 31,
2006.





In June
2007, the Company filed an application to develop a gated, age restricted
community on the remaining Flowerfield property that includes 39 single-family
homes, 60 townhouses and 210 condominiums. Living space would range from 1,600
square feet for the smallest condominiums to 2,800 square feet for detached
single-family homes. Amenities would include a clubhouse with recreation
facilities, pedestrian and bicycle paths, and extensive
landscaping.





The
application requires a change of zone of approximately 62.4 acres be changed
from "light industrial" (approx. 55.5 acres) and "residential" (approx. 6.9
acres) to "planned residential." Another 4.3 acres of the property owned by the
Company, while already zoned as "residential," would remain undeveloped. Total
amount of open space remaining after development is expected to exceed 40
acres.





The costs
associated with the development of the property as of December 31, 2008 consists
of architectural and engineering costs, legal expenses, economic analysis, soil
management and real estate taxes and was approximately $1,200,000. The Company
cannot predict the outcome of the application.





OFF-BALANCE
SHEET ARRANGEMENTS





The
Company has no off-balance sheet arrangements that have or are reasonably likely
to have a current or future effect on its financial condition, changes in
financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources that is material to
investors.





Item8. Financial Statements and Supplementary
Data.





See
Consolidated Financial Statements and accompanying Notes to Consolidated
Financial Statements commencing on the Contents page followed by Page
F-1.





Consolidated
Financial Statements include:


(1)  Report
      of Independent Registered Public Accounting
Firm


(2)  Consolidated
      Balance Sheets as of December 31, 2008 and
2007


(3)  Consolidated
      Statements of Operations for the years ended December 31, 2008 and
      2007


(4)  Consolidated
      Statement of Stockholders’ Equity for the years ended December 31, 2008
      and 2007


(5)  Consolidated
      Statements of Cash Flows for the years ended December 31, 2008 and
      2007


(6)  Notes
      to Consolidated Financial
Statements


(7)  Schedules


All
      other information required by the following schedules has been included in
      the consolidated financial statements, is not applicable, or not
      required:Schedule
      I, III, IV, V, VI, VII, VIII, IX, X, XI, XII and
  XIII.




Item9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.





None




17


Item9A(T). Controls and Procedures.





The
Company’s management, including the Chief Executive Officer and Chief Financial
Officer, has evaluated the effectiveness of the design and operation of the
Company’s disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) as of the end of the period covered by this report.
Based upon that evaluation, the Company’s Chief Executive Officer and Chief
Financial Officer have concluded that the disclosure controls and procedures as
of December 31, 2008 are effective to ensure that information required to be
disclosed in the reports the Company files or submits under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the SEC’s rules and forms and that such information is accumulated and
communicated to the Company's management, including the Chief Executive Officer
and Chief Financial Officer, to allow timely decisions regarding
disclosure.





Management’s
Annual Report on Internal Control over Financial Reporting





The
Company’s management is responsible for establishing and maintaining an adequate
system of internal control over financial reporting. The Company’s internal
control over financial reporting includes those policies and procedures
that:





·
            pertain
      to the maintenance of records that, in reasonable detail, accurately and
      fairly reflect the transactions and dispositions of the Company’s
      assets;·
            provide
      reasonable assurance that transactions are recorded as necessary to permit
      preparation of the Company’s financial statements in accordance with
      generally accepted accounting principles in the United States, and that
      the Company’s receipts and expenditures are being made only in accordance
      with authorizations of its management and directors;
and·
            provide
      reasonable assurance regarding prevention or timely detection of
      unauthorized acquisition, use or disposition of the Company’s assets that
      could have a material effect on the financial
  statements.





The
Company’s management assessed the effectiveness of its system of internal
control over financial reporting as of December 31, 2008. In making this
assessment, management used the framework in Internal Control — Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (“COSO”). Based on the Company’s assessment and the criteria
set forth by COSO, management believes that the Company did maintain effective
internal control over financial reporting as of December 31,
2008.





This
annual report does not include an attestation report of the Company’s registered
public accounting firm regarding internal control over financial
reporting.  Management’s report was not subject to attestation by the
Company’s registered public accounting firm pursuant to temporary rules of the
Securities and Exchange Commission that permit the Company to provide only
management’s report in this annual report.





There
have been no significant changes in the Company’s internal control over
financial reporting identified in connection with the evaluation that occurred
during the Company’s last fiscal quarter that have materially affected, or that
are reasonably likely to materially affect, the Company’s internal controls over
financial reporting.





Item9B. Other Information.





None.




PART
III





Item10. Directors, Executive Officers and Corporate
Governance.





(a)
            The
      following table lists the names, ages and positions of all executive
      officers and directors and all persons nominated or chosen to become such.
      Each director has been elected to the term indicated. Directors whose term
      of office ends in 2009 shall serve until the next Annual Meeting of
      Stockholders or until their successors are elected and qualified. All
      officers of the Corporation are elected by the Board of Directors to
      one-year terms.





18








Name
      & Principal Occupation or Employment
                        
                        Age
                        
                        
                        First
      Became a
                        
                        
                        Current
      BoardDirector
                        
                        
                        Term
      ExpiresStephen
      V. Maroney
                        
                        
                        66
                        
                        
                        1996
                        
                        
                        2010President,
      CEO, CFO, Treasurer, and Director of the CompanyPeter
      Pitsiokos
                        
                        
                        49
                        
                        
                        ---
                        
                        
                        ---COO,
      Secretary and Chief Compliance Officer of the CompanyFrank
      D’Alessandro
                        
                        
                        62
                        
                        
                        ---
                        
                        
                        ---Controller
      of the CompanyPaul
      L. Lamb
                        
                        
                        63
                        
                        
                        1997
                        
                        
                        2009Partner
      of Lamb & Barnosky, LLPChairman
      of the Board of Directors of the CompanyPhilip
      F. Palmedo
                        
                        
                        74
                        
                        
                        1996
                        
                        
                        2010Managing
      Director and Chairman of Kepler Asset Management andManager
      of IRG Carbon LLCDirector
      of the CompanyElliot
      H. Levine
                        
                        
                        56
                        
                        
                        2004
                        
                        
                        2011CPA
      and Senior Member of Levine & Seltzer, LLPDirector
      of the CompanyRichard
      B. Smith
                        
                        
                        54
                        
                        
                        2002
                        
                        
                        2009Vice
      President, Commercial Banking Division, First National Bank of L.
      I.Director
      of the CompanyRonald
      J. Macklin
                        
                        
                        46
                        
                        
                        2003
                        
                        
                        2010Deputy
      General Counsel, National GridDirector
      of the CompanyNader
      G.M. Salour
                        
                        
                        50
                        
                        
                        2006
                        
                        
                        2009Principal,
      Cypress Realty of Florida, LLCDirector
      of the CompanyNaveen
      Bhatia
                        
                        
                        29
                        
                        
                        2008
                        
                        
                        2011Co-Founder
      and Partner, Eagle Lake Capital, LLCDirector
      of the Company





(b)
            Business
      Experience





Stephen
V. Maroney, age 66, was initially engaged by the Company as an outside
consultant in June 1996 and elected to the Board of Directors in July of that
same year. Mr. Maroney is the former President of Extebank, a Long Island based
commercial bank with a presence in Nassau and Suffolk Counties and New York
City. Prior to that appointment, he served as Extebank’s Chief Financial
Officer. Mr. Maroney was appointed to the position of President, CEO and
Treasurer by the Gyrodyne Board of Directors on March 14, 1999. His career on
Long Island spans a period of over 40 years and includes involvement in numerous
civic, charitable and professional organizations.





19


Peter
Pitsiokos, age 49, joined the Company in July 1992 as its Assistant Secretary
and General Counsel and has been the Company’s Chief Operating Officer and Chief
Compliance Officer since 2004. He has also been Secretary of the Company for
over five years. Mr. Pitsiokos was formerly the Executive Assistant District
Attorney in Suffolk County, New York. He also served as the Assistant Director
of Economic Development and the Director of Water Resources in the Town of
Brookhaven. Mr. Pitsiokos also maintained a private law practice in which he
represented several national and local owners, managers and developers of real
estate. He holds a Law degree from Villanova University and a BA degree from
Stony Brook University.





Frank
D’Alessandro, age 62, joined the Company in March 1997 as its Controller. Prior
to joining the Company, he was Controller of Cornucopia Pet Foods Inc., a
distributor of all natural pet foods. Previous to that he spent many years in
various financial positions. Mr. D’Alessandro holds an MBA degree in Finance as
well as a BBA in Accounting, both from Hofstra University.





Paul L.
Lamb, age 63, has been a Director since 1997 and became Chairman of the Board on
March 14, 1999. He is a founding partner in the law firm of Lamb & Barnosky,
LLP; a past President of the Suffolk County Bar Association; and a Dean of the
Suffolk Academy of Law. He holds a B.A. from Tulane University, a J.D. from the
University of Kentucky and an LL.M. from the University of London,
England.





Philip F.
Palmedo, age 74, was appointed to the Board of Directors in July 1996. Mr.
Palmedo is currently Managing Director and Chairman of Kepler Asset Management
as well as Chairman of International Resources Group and former President of the
Long Island Research Institute. He was a founder of all three companies. Mr.
Palmedo has shepherded numerous fledgling businesses into the financial and
technological markets and completed several financing agreements. He has M.S.
and Ph.D. degrees from M.I.T.





Elliot H.
Levine, age 56, was appointed to the Board of Directors in October 2004. Mr.
Levine is a founding member of the accounting firm Levine & Seltzer, LLP
Certified Public Accountants, a graduate (1975) of Queens College, City
University of New York. He became a member of the American Institute of
Certified Public Accountants in February, 1978. Mr. Levine’s work experience
includes five years at Arthur Young, ten and a half years as partner and
director of taxes of Leslie Sufrin & Co. P.C., a one year tenure as senior
tax manager at Margolin, Winer & Evans CPAs and over 13 years as senior
member of Levine & Seltzer.





Richard
B. Smith, age 54, was appointed to the Board of Directors in November 2002. Mr.
Smith is currently a Vice President in the Commercial Banking Division of the
First National Bank of Long Island. He previously served as Senior Vice
President for Private Banking at Suffolk County National Bank until February,
2005. Previously, he worked for 10 years at Key Bank (Dime Savings Bank) and for
3 years at L.I. Trust/Apple Bank. He received an MBA in Finance from SUNY Albany
in 1983. Mr. Smith serves as the Mayor of the Incorporated Village of
Nissequogue and as a Trustee of the Smithtown Historical Society. He is also a
former Trustee for St. Catherine’s Medical Center in Smithtown, NY.





Ronald J.
Macklin, age 46, was appointed to the Board of Directors in June 2003. Mr.
Macklin currently serves as Deputy General Counsel for National Grid and
formerly KeySpan Corporate Services where he has held various positions within
the Office of General Counsel from 1991 to present. Previously, he was
associated with the law firms of Roseman & Colin and Cullen & Dykman. He
received a B.A. degree from Stony Brook University and his Juris Doctorate from
Union University’s Albany Law School.





Nader
G.M. Salour, age 50, was appointed to the Board of Directors in October 2006 and
then elected by the shareholders at the Company’s annual meeting in December
2006. Mr. Salour has been a Principal of Cypress Realty of Florida since 2000.
He has served as President of Abacoa Development Company, from June 1996 to June
2006, and as a Director of Abacoa Partnership for Community from December 1997
to present.





Naveen
Bhatia, age 29, was elected to the Board of Directors in December 2008. Mr.
Bhatia is Co-Founder and Partner of Eagle Lake Capital, LLC, an investment
management firm. He has been with the firm from August 2003 to present. He was
formerly an Investment Banking Analyst for Rothschild Inc., an investment bank,
from July 2001 to August 2003.





(c)
            Section
      16(a) Beneficial Ownership Reporting
Compliance





Section
16(a) of the Exchange Act requires that the Company directors, executive
officers, and any person holding more than ten percent (“10% Holder”) of
Gyrodyne Common Stock, $1.00 par value per share, file with the SEC reports of
ownership changes, and that such individuals furnish the Company with copies of
the reports.





Based
solely on the Company’s review of copies of Forms 3 and 4 and amendments thereto
received by it during fiscal 2008 and Forms 5 and amendments thereto received by
the Company with respect to fiscal 2008 and any written representations from
certain reporting persons that no Form 5 is required, Gyrodyne believes that
none of the Company’s executive officers, directors or 10% Holders failed to
file on a timely basis reports required by section 16(a) of the Exchange Act
during fiscal 2008 or prior fiscal years.




20


(d)
            Audit
      Committee Financial Expert





The Board
of Directors has a separately-designated Audit Committee established in
accordance with section 3(a)(58)(A) of the Exchange Act, which currently
consists of Messrs. Smith, Levine and Macklin. All members are “financially
literate” and have been determined to be “independent” within the meaning of SEC
regulations and NASDAQ rules. The Board of Directors has determined that at
least one member, Mr. Levine, a CPA, qualifies as an “audit committee financial
expert” as a result of relevant experience as a partner in the accounting firm
of Levine & Seltzer, LLP. In addition, Mr. Levine has 10.5 years of
accounting experience as a partner and director of taxes at Leslie Sufrin &
Co. P.C. as well as several other years of experience in the field of public
accounting.





(e)
            Code
      of Ethics





The
Company has adopted a written Code of Ethics that applies to all of its
directors, officers and employees. It is available on the Company’s website at
www.gyrodyne.com  and
any person may obtain without charge a paper copy by writing to the Secretary at
the address set forth on page 1. Any amendments to the Code of Ethics, or waiver
thereof, will be disclosed on the website promptly after such
amendment.





Item11. Executive Compensation.





(a)
            Executive
      Compensation





The
following table sets forth the total compensation awarded to, earned by or paid
to each of the Company’s executive officers for services rendered during
the years ended December 31, 2008 and 2007.





2008
SUMMARY COMPENSATION TABLE


Name
      and principal position
                          Year
                          Salary
                            ($)
                          Bonus
                            ($)
                          Stock
      awards
                            ($)
                          Option
      awards
                            ($)
                          Non-equity
                            incentive
      plan compensation
                            ($)
                          Nonqualified
      deferred compensation earnings
                            ($)
                          All
      other compensation
                            ($)
                          Total
                            ($)(a)
                          (b)
                          (c)
                          (d)
                          (e)
                          (f)
                          (g)
                          (h)
                          (i)
                          (j)Stephen
      V. Maroney
                          2008
                          220,000
                          10,000
      (A)
                          0
                          0
                          0
                          0
                          0
                          230,000President
      and CEO
                          2007
                          220,000
                          50,000
      (C)
                          0
                          0
                          0
                          0
                          74,954
      (B)
                          344,954Peter
      Pitsiokos
                          2008
                          169,548
                          35,000
      (A)
                          0
                          0
                          0
                          0
                          38,242
      (D)
                          242,790COO
      and Secretary
                          2007
                          160,790
                          50,000
      (C)
                          0
                          0
                          0
                          0
                          0
                          210,790




(A)
Consists of a performance bonus issued to Mr. Maroney on December 31, 2008 for
$10,000 as well as performance bonuses to Mr. Pitsiokos on June 6, 2008 and
December 31, 2008 for $20,000 and $15,000, respectively.





(B) In FY
07, Mr. Maroney exercised non-qualified stock options with a value of
$74,954.





(C)
Consists of $25,000 paid on April 1, 2007 in respect of a performance bonus
during 2006, and $25,000 paid on December 26, 2007 in respect of a performance
bonus during 2007.





(D)
Consists of vacation time paid in cash during the fiscal year.





The
Registrant has concluded that aggregate amounts of perquisites and other
personal benefits, securities or property to any of the current executives does
not exceed $10,000 and that the information set forth in tabular form above is
not rendered materially misleading by virtue of the omission of such personal
benefits.





21


Employment
Agreements





The
Company is a party to separate employment agreements with each of its executive
officers, Mr. Maroney and Mr. Pitsiokos.  Each employment agreement
provides for an annual base salary and discretionary annual incentive cash
bonuses and/or stock option awards (stock option awards are no longer
available).  Each agreement provides for a severance benefit over a
prescribed term in the event an executive’s employment is terminated without
cause, if his duties are materially changed, if he terminates the agreement for
“Good Reason” (as defined below) or if his employment is terminated in
connection with a “Change-In-Control,” (as defined below).  Each
agreement also provides that no severance benefit is due in the event of an
executive’s voluntary termination or a termination of employment for
“Cause.”  Cause includes fraud, dishonesty, embezzlement, willful
failure of the executive to follow directions of the Board, or any willful
misconduct, criminal conviction, unexcused absence or similar conduct or
activities.  Upon termination of employment by the Company without
Cause or by the executive for Good Reason or following a Change-In-Control,
under each agreement, each executive also has the right to receive a cash
severance payment and certain other benefits until the thirdanniversary following
termination.  Under each agreement, the employment term is extended at
the end of each day, to automatically add an additional day, so that a remaining
three-year employment term is always outstanding.  Each employment
agreement may be terminated in the event of death or
disability.





Each
executive may terminate his agreement at any time upon one years’ prior written
notice, or upon thirty days prior notice if for “Good Reason,” subject to the
Company’s right to remedy the condition entitling the executive to terminate
employment for Good Reason.  Good Reason is defined to include a material
change in the executive’s duties, relocation of the corporate headquarters
outside 25 miles of its current location, or breach by the Company of any
material term of the agreement and, in each case, the executive must separate
from service within a limited period of time, not to exceed sixty days following
the occurrence of the reason for the Good Reason termination.  The
executive officer may also terminate employment upon 30 days written notice
within ninety days following a “Change-In-Control.”  Change-In-Control
means the occurrence of any one of the following events:  a change in
the composition of the Board of Directors of the Company from its composition on
the date the agreement was executed such that more than one-third of the
directors have changed; the sale or transfer of shares of the Company such that
there is a change in the beneficial ownership by more than 30% of the voting
shares of the Company; the sale of a substantial portion of the Company’s
assets; the Board of Directors’ approval of a liquidation or dissolution of the
Company; or a change in ownership or effective control of the Company or in the
ownership of a substantial portion of the assets of the Company as defined under
Section 409A of the Internal Revenue Code.  In the event of a
termination without Cause, for Good Reason, or upon a Change-In-Control, the
executive shall be entitled to severance benefits as described below under the
heading, “Severance and Change in Control Benefits.”  As of December
31, 2008, each of the employment agreements was amended.  The intent
of these amendments was solely to revise the terms of each employment agreement
to the extent necessary to avoid the potential of adverse tax consequences under
Section 409A of the Internal Revenue Code associated with these severance
payments and/or to delay certain payments as required under such
section.





(b)
            Outstanding
      Equity Awards at Fiscal Year End





As of the
year ended December 31, 2008, there were no unexercised options, stock that has
not vested or equity incentive plan awards held by any of the Company’s named
executive officers.





(c)
            Severance
      and Change-in-Control Benefits





As
indicated above under the heading “Employment Agreements,”  Mr.
Maroney and Mr. Pitsiokos are each covered by an employment agreement which
specifically provides for a severance payment in the event of a
Change-in-Control, termination by the Company without Cause, or by the executive
for Good Reason.  Under such agreements, the executive’s employment
term is extended at the end of each day, to automatically add an additional day,
so that a remaining three-year employment term is always outstanding. 
Nevertheless, the employment term terminates three years after delivery of
written notice by either the Company or the executive officer to the other
party. See,
“Executive Compensation - - Employment Agreements,” above.





Under
each agreement, as amended to comply with Section 409A, upon any of the
enumerated events, the executive is entitled to receive an amount equal to three
times the executive’s base salary to be paid in a single lump sum cash payment
to the extent such amount does not exceed the lesser of the executive’s salary
for the two year period prior to termination or two times the Internal Revenue
Code Section 401(a)(17) limitation.  To the extent the amount payable
exceeds such limitation, the excess over the limitation is to be paid on the
15th
day of the 7th month
following the separation of service, with interest equal to prime plus
2%.   In addition to the cash severance payment, each executive
will be entitled to receive certain other benefits.





The
primary reasons for providing severance and change-in-control benefits for the
executive officers are to retain the executives and their talents and to
encourage them to remain impartial when evaluating a transaction that may be
beneficial to shareholders yet could negatively impact continued
employment.   As indicated above, as of December 31, 2008, each
of the employment agreements were amended to avoid the potential of any adverse
tax consequences under Section 409A of the Internal Revenue Code associated with
the severance payments and/or to delay certain payments as required under such
Code section.





22


(d)
              Incentive
      Compensation upon a Change-in-Control or
Death





The
Company believes that providing severance in a change-in-control situation is
beneficial to shareholders because it encourages management and the Board to
remain impartial when evaluating a transaction that may be beneficial to
shareholders yet could negatively impact the continued employment or board
position of an executive officer or director, and to promote long term value
maximization.  The Company established an incentive compensation plan
(the “Incentive Plan”) in 1999 for all full-time employees and members of the
Board.  The benefits of the Incentive Plan are realized only upon a
change-in-control of the Company or upon the death of a participant when
employed by, or serving as a director of, the
Company.  Change-in-control is defined as the accumulation by any
person, entity or group of 30% or more of the combined voting power of the
Company's voting stock or the occurrence of certain other specified
events.  In the event of a change-in-control, the Incentive Plan
provides for a cash payment equal to the difference between the Incentive Plan’s
"establishment date" price of $15.39 per share and the per share price of the
Common Stock on the closing date, equivalent to 100,000 shares of Common Stock,
such number of shares and "establishment date" price per share subject to
adjustments to reflect changes in capitalization.  The payment amount
would be distributed to eligible participants based upon their respective
weighted percentages (ranging from 0.5% to 18.5%).  Messrs. Maroney
and Pitsiokos are currently entitled to 18.5% and 13.5%, respectively, of any
distribution under the Incentive Plan with the balance being distributable to
other eligible employees (11.5%) and members of the Board of Directors
(56.5%).  There are currently 110,000 units granted under the
Incentive Plan, equal to 110,000 shares of Common Stock.





In the
event of death of a participant, the beneficiary of the participant in the
Incentive Plan is entitled to exercise a deceased participant’s vested
benefit.  The decedent’s benefit would be paid to the beneficiary, or
if there is no beneficiary, to the personal representative of the decedent’s
estate.  Upon death, payments can be made even without a
change-in-control.  Death benefits, however, are not paid if the
termination of employment or the cessation of membership on the Board of a
participant, occurs prior to a subsequent disability or death.





Payments
under the Incentive Plan may be deemed to be a form of deferred compensation
(within the meaning of Section 409A of the Internal Revenue Code) to the extent
any employee or director participant has been granted units at a discount, after
October 4, 2004.   In this regard, however, no actual deferral of
compensation is intended to exist under this plan since immediate payment is
required only upon a change-in-control or the death of participant, regardless
of whether any other adverse employment or other events
occur.  Nevertheless, on December 27, 2008, the Incentive Plan was
amended to incorporate certain applicable provisions of  Section 409A
in order to avoid the potential of adverse tax consequences associated with the
payments due under the plan and/or to delay certain required
payments.  Specifically, the amendment provides that in the event of
the death of participant, the required payment is to be made within sixty days
after the date of death but no later than two and one-half months after the end
of the calendar year in which the death occurs.  Further,
notwithstanding any other provision, if the participant is a “Specified
Employee,” as defined under Code Section 409A (generally, a key employee of a
public company, such as the Company) on the date of separation of service or
death, then the required amount is to be paid, in a single lump sum cash payment
to the extent such amount does not exceed the lesser of the executive’s salary
for the two year period prior to separation of service or death or two times the
Internal Revenue Code Section 401(a)(17) limitation.  To the extent
the amount payable exceeds such limitation, the excess over the limitation is to
be paid on the 15th day of
the 7th month
following the separation of service or death.





(e)
            Pension
      Plan





The
Company maintains the Gyrodyne Company of America, Inc. Pension Plan, which is a
traditional defined benefit pension plan.  The Pension Plan is
believed to provide a reasonable benefit for the executives and all other
employees.  The (underfunded) and overfunded status of the Company’s
pension plan is included in pension liability and prepaid pension costs in the
accompanying consolidated balance sheets and is $(715,365) and $628,606 at
December 31, 2008 and 2007, respectively. The Company expects to contribute
$200,000 to fund the pension plan for the year ending December 31, 2009.
The Company does not maintain any nonqualified deferred compensation programs
(other than the Incentive Plan) or any qualified Profit Sharing or Section
401(k) Plans intended to qualify under Sections 401(a) and 501(a) of the
Internal Revenue Code.





(f)
            Compensation
      of Directors





Each
Director is entitled to receive a fee of $12,000 a year, $1,000 per Board
meeting attended and $500 for each Committee meeting attended and is reimbursed
for travel and Company business related expenses. In addition, the Chairman of
the Board is entitled to receive a Chairman’s fee of $24,000 a year which
commenced in September 2004. The Company continued its policy which states that
Directors who are also employees of the Company do not receive any additional
compensation for their services as Directors.





23




DIRECTOR
COMPENSATION





The
following table shows the compensation earned by each of the Company’s
non-officer directors for the year ended December 31, 2008:





Name
                                                                Fees
      earned or paid in cash
                                                                  ($)
                                                                Stock
      awards
                                                                  ($)
                                                                Option
      awards
                                                                  ($)
                                                                Non-equity
      incentive plan compensation
                                                                  ($)
                                                                Nonqualified
      deferred compensation earnings
                                                                  ($)
                                                                All
      other compensation
                                                                  ($)
                                                                Total
                                                                  ($)(a)
                                                                (b)
                                                                (c)
                                                                (d)
                                                                (e)
                                                                (f)
                                                                (g)
                                                                (h)A
                                                                Paul
      L. Lamb
                                                                46,000
                                                                0
                                                                0
                                                                0
                                                                0
                                                                0
                                                                46,000B
                                                                Robert
      H. Beyer
                                                                20,000
                                                                0
                                                                0
                                                                0
                                                                0
                                                                0
                                                                20,000C
                                                                Philip
      F. Palmedo
                                                                24,500
                                                                0
                                                                0
                                                                0
                                                                0
                                                                0
                                                                24,500D
                                                                Elliot
      H. Levine
                                                                27,500
                                                                0
                                                                0
                                                                0
                                                                0
                                                                0
                                                                27,500E
                                                                Richard
      B. Smith
                                                                25,000
                                                                0
                                                                0
                                                                0
                                                                0
                                                                0
                                                                25,000F
                                                                Ronald
      J. Macklin
                                                                30,500
                                                                0
                                                                0
                                                                0
                                                                0
                                                                0
                                                                30,500G
                                                                Nader
      G.M. Salour
                                                                28,000
                                                                0
                                                                0
                                                                0
                                                                0
                                                                0
                                                                28,000H
                                                                Naveen
      Bhatia (1)
                                                                4,000
                                                                0
                                                                0
                                                                0
                                                                0
                                                                0
                                                                4,000(1)Mr.
      Bhatia was elected as a director at the annual meeting of stockholders
      held on December 10,
2008.




Item12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters.





(a)
            As
      of December 31, 2008, there were no equity compensation plans under which
      securities of the Company were authorized for
  issuance.





(b)
            The
      following table sets forth certain information as of February 18, 2009
      regarding the beneficial ownership of the Company’s common shares by (i)
      each person who the Company believes to be beneficial owner of more than
      5% of its outstanding common shares, (ii) each present director, (iii)
      each person listed in the Summary Compensation Table under “Executive
      Compensation,” and (iv) all of the Company’s present executive officers
      and directors as a group.





Name and addressof beneficial owner
            Amount and
              nature of beneficial
              ownership
            Percent of
              class (8)Common
      Stock $1 Par Value
            More
      Than 5% ShareholdersBulldog
      Investors/Goldstein/Dakos
              60
      Heritage Drive
              Pleasantville,
      NY 10570
            225,246(1)
            17.46River
      Road Asset Management, LLC
              462
      South Fourth Street, Suite 1600
              Louisville,
      KY 40202
            106,279(2)
            8.24Gerard
      Scollan
              80
      Browns River Road
              Sayville,
      NY 11782
            99,249(3)
            7.69AmTrust
      Capital Management, Inc.
              Jan
      Loeb
              10451
      Mill Run Circle
              Owings
      Mills, MD 21117
            75,959(4)
            5.89  24
 Directors
      and Executive OfficersStephen
      V. Maroney
            81,087(5)
            6.29Peter
      Pitsiokos
            2,291(6)
            *Paul
      L. Lamb
            24,364(7)
            1.89Naveen
      Bhatia
            12,179
            *Philip
      F. Palmedo
            12,749
            *Richard
      B. Smith
            1,000
            *Ronald
      J. Macklin
            200
            *Elliot
      H. Levine
            100
            *Nader
      G.M. Salour
            943
            *All
      executive officers andDirectors
      as a group (9 persons)
            134,913
            10.46





(1)  On
November 7, 2008, Bulldog Investors, Phillip Goldstein and Andrew Dakos filed a
joint Schedule 13D/A with the Securities and Exchange Commission stating that
Bulldog Investors, a group of investment funds, Phillip Goldstein and Andrew
Dakos beneficially own an aggregate of 225,246 shares of Gyrodyne stock. Power
to dispose and vote securities resides either with Mr. Goldstein, Mr. Dakos or
with clients.





(2)  On
February 17, 2009, River Road Asset Management, LLC filed a Schedule 13G/A with
the Securities and Exchange Commission stating that it is the beneficial owner,
with sole power to dispose or to direct the disposition of 106,279 shares of
Gyrodyne stock and the sole power to vote or direct the vote of 76,169
shares.





(3)  Includes
96,994 shares of Company stock held by Lovin Oven Catering of Suffolk, Inc., of
which Mr. Scollan is the majority shareholder. Mr. Scollan has sole voting and
dispositive power with respect to 2,255 shares, and shared voting and
dispositive power with respect to 96,994 shares.





(4)  On
July 17, 2007, AmTrust Capital Management, Inc. and Jan Loeb filed a Schedule
13G with the Securities and Exchange Commission stating that each reporting
person beneficially owns 75,959 shares of Common Stock with the sole power to
vote or direct the vote and to dispose or direct the disposition of all
shares.





(5)  On
March 29, 2007, Stephen V. Maroney filed a Schedule 13D with the Securities and
Exchange Commission stating that he and his spouse jointly and beneficially own
and have shared power to vote and to dispose of 81,087 shares of Gyrodyne stock.
Mr. Maroney has pledged 20,000 shares of Common Stock as security.





(6)   Does
not include his wife's and children's ownership of 359 shares in which he denies
any beneficial interest. Mr. Pitsiokos has pledged 2,291 shares of Common Stock
as security.





(7)  Includes
14,747 shares held by Lamb & Barnosky, LLP Profit Sharing Trust and 500
shares held by the Paul L. Lamb, P.C. Defined Benefit Plan. Mr. Lamb is a
trustee of the Profit Sharing Trust and the Defined Benefit Plan.





(8)  The
percent of class is calculated on the basis of the number of shares outstanding,
which is 1,289,878 as of February 18, 2009.





*     Less
than 1%.




25


Item13. Certain Relationships and Related Transactions and
Director Independence.





There
were no transactions in effect since January 1, 2007 or currently proposed in
which the Company was or is to be a participant and the amount involved exceeds
$120,000, and in which any related person (as such term is defined in Item 404
(a) of Regulation S-K) had or will have a direct or indirect material
interest.





The
majority of the members of the Board of Directors are independent directors as
defined by the listing requirements of the NASDAQ Stock Market. Such independent
directors are Messrs. Bhatia, Lamb, Levine, Macklin, Palmedo, Salour and Smith.
Mr. Beyer, who served as a director during fiscal 2008, was also independent in
accordance with NASDAQ listing requirements. The Company has compensation,
nominating, investment and audit committees, the members of which are also
independent as defined by the listing requirements of the NASDAQ Stock
Market.





Item14. Principal Accountant Fees and Services.





The
following is a summary of the fees billed to the Company by Holtz Rubenstein
Reminick LLP, its independent auditors, for professional services rendered for
the years ended December 31, 2008 and December 31, 2007:





Fee
      Category
                            
                            Fiscal
      December 31, 2008
                            
                            
                            Fiscal
      December 31, 2007Audit
      Fees (1)
                            
                            $
                            90,000
                            
                            
                            $
                            85,438Audit-Related
      Fees (2)
                            
                            
                            19,535
                            
                            
                            
                            24,171Tax
      Fees (3)
                            
                            
                            24,786
                            
                            
                            
                            22,027All
      Other Fees (4)
                            
                            
                            -
                            
                            
                            
                            -Total
      Fees
                            
                            $
                            134,321
                            
                            
                            $
                            131,636





(1) Audit
Fees consist of aggregate fees billed for professional services rendered for the
audit of the Company’s annual financial statements, review of the interim
financial statements included in quarterly reports, and services that are
normally provided by the independent auditors in connection with statutory and
regulatory filings or engagements for the fiscal years ended December 31, 2008
and 2007, respectively.




(2)
Audit-Related Fees consist of aggregate fees billed for assurance and related
services that are reasonably related to the performance of the audit or review
of the Company’s financial statements and are not reported under "Audit Fees."
Such services include review of Form 8-K filings, proxy filings and research
into various accounting issues.





(3) Tax
Fees consist of aggregate fees billed for professional services rendered by the
Company’s principal accountant for tax compliance, tax advice and tax planning.
The amounts disclosed consist of fees paid for the preparation of federal and
state income tax returns and research into the tax implications of the Company’s
REIT election.





(4) All
Other Fees consist of aggregate fees billed for products and services provided
by Holtz Rubenstein Reminick LLP, the Company’s principal accountant, other than
those disclosed above.





The Audit
Committee is responsible for the appointment, compensation and oversight of the
work of the independent auditors and approves in advance any services to be
performed by the independent auditors, whether audit-related or not. The Audit
Committee reviews each proposed engagement to determine whether the provision of
services is compatible with maintaining the independence of the independent
auditors. The Audit Committee  has determined not to adopt any blanket
pre-approval policies or procedures. All of the fees shown above were
pre-approved by the Audit Committee.


26


PART
IV





Item15. Exhibits and Financial Statement
Schedules.





(a)
            Financial
      Statements:





Report of
Independent Registered Public Accounting Firm


Consolidated
Balance Sheets


Consolidated
Statements of Operations


Consolidated
Statement of Stockholders' Equity


Consolidated
Statements of Cash Flows


Notes to
Consolidated Financial Statements





Schedules


All
      other information required by the following schedules has been included in
      the consolidated financial statements, is not applicable, or not
      required:Schedule
      I, III, IV, V, VI, VII, VIII, IX, X, XI, XII and
  XIII.





(b)
            Exhibits: The
      following Exhibits are either filed as part of this report or are
      incorporated herein by reference:





3.1
              Restated
      Certificate of Incorporation of Gyrodyne Company of America, Inc.
      (1)3.2
              Amended
      and Restated Bylaws of Gyrodyne Company of America, Inc.
  (5)







4.1
            Form
      of Stock Certificate of Gyrodyne Company of America, Inc.
    (6)





4.2
            Rights
      Agreement, dated as of August 10, 2004, by and between Gyrodyne Company of
      America, Inc. and Registrar and Transfer Company, as Rights Agent,
      including as Exhibit B the forms of Right Certificate and of Election to
      Exercise. (2)





10.1
            Incentive
      Compensation Plan. (1)





10.2
            Amended
      and Restated Employment Agreement, with Stephen V. Maroney, dated January
      23, 2003. (9)





10.3
            Amended
      and Restated Employment Agreement, with Peter Pitsiokos, dated January 23,
      2003. (9)





10.4
            Second
      Amended and Restated Agreement of Limited Partnership of Callery-Judge
      Grove, dated as of February 9, 2005, by and among CJG Management, Ltd., as
      the general partner and those persons and entities whose names and
      addresses appear on the books and records of the Partnership as partners.
      (3)





10.5
            Contract
      of Sale dated October 12, 2006 by and between Frank M. Pellicane Realty,
      LLC, Pelican Realty, LLC and Gyrodyne Company of America, Inc.
      (4)





10.6
            Agreement
      dated February 12, 2007 between Gyrodyne Company of America, Inc. and
      DPMG, Inc. d/b/a Landmark National.
(4)





10.7
            First
      Amendment to Contract of Sale dated October 12, 2006 by and between Frank
      M. Pellicane Realty, LLC, Pelican Realty, LLC, and Gyrodyne Company of
      America, Inc., dated as of February 1, 2007.
(4)





10.8
            Agreement
      between the Company, the Bulldog Investors and Mr. Naveen Bhatia, dated as
      of October 27, 2008. (8)





27





10.9
            Amendment
      to the Company 1999 Incentive Compensation Plan, dated December 27, 2008.
      (7)





10.10
            Amendment
      Number 1 to the Company Amended and Restated Employment Agreement for
      Stephen V. Maroney (January 23, 2003), dated December 31, 2008.
      (7)





10.11
            Amendment
      Number 1 to the Company Amended and Restated Employment Agreement for
      Peter Pitsiokos (January 23, 2003), dated December 31, 2008.
      (7)





21.1
              List
      of all subsidiaries. (10)31.1
              Rule
      13a-14(a)/15d-14(a) Certifications.
(10)




32.1
            CEO/CFO
      Certifications Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
      Section 906 of the Sarbanes-Oxley Act of 2002.
  (10)





(1)
            Incorporated
      herein by reference to the Annual Report on Form 10-KSB/A, filed with the
      Securities and Exchange Commission on September 5,
  2001.





(2)
            Incorporated
      herein by reference to Form 8-K, filed with the Securities and Exchange
      Commission on August 13, 2004.





(3)
            Incorporated
      herein by reference to the Annual Report on Form 10-KSB, filed with the
      Securities and Exchange Commission on July 5,
  2005.





(4)
              Incorporated
      herein by reference to the Annual Report on Form 10-K, filed with the
      Securities and Exchange Commission on March 15,
  2007.





(5)
            Incorporated
      herein by reference to Form 8-K, filed with the Securities and Exchange
      Commission on June 18, 2008.





(6)
              Incorporated
      herein by reference to the Quarterly Report on Form 10-Q, filed with the
      Securities and Exchange Commission on November 13,
  2008





(7)
            Incorporated
      herein by reference to Form 8-K, filed with the Securities and Exchange
      Commission on December 31, 2008.





(8)
            Incorporated
      herein by reference to Form 8-K, filed with the Securities and Exchange
      Commission on October
28, 2008.





(9)
            Incorporated
      herein by reference to the Quarterly Report on Form 10-QSB, filed with the
      Securities and Exchange Commission on March 12,
  2003.





(10)
            Filed
      as part of this report.




28




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.





GYRODYNE
      COMPANY OF AMERICA, INC./S/
      Stephen V. MaroneyBy
      Stephen V. Maroney, President, Treasurer and Principal Executive
      OfficerDate:
      March 30, 2009/S/
      Frank D’AlessandroBy
      Frank D’Alessandro, Controller
                  Date:
      March 30, 2009





********************





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.





/S/
      Richard B. SmithBy
      Richard B. Smith, DirectorDate:
      March 30, 2009/S/
      Elliot H. LevineBy
      Elliot H. Levine, DirectorDate:
      March 30, 2009/S/
      Ronald J. MacklinBy
      Ronald J. Macklin, DirectorDate:
      March 30, 2009/S/
      Stephen V. MaroneyBy
      Stephen V. Maroney, DirectorDate:
      March 30, 2009





/S/
      Paul L. LambBy
      Paul L. Lamb, DirectorDate:
      March 30, 2009





29


ExhibitIndex


3.1
                Restated
      Certificate of Incorporation of Gyrodyne Company of America, Inc.
      (1)


3.2
              Amended
      and Restated Bylaws of Gyrodyne Company of America, Inc. (5)




4.1
            Form
      of Stock Certificate of Gyrodyne Company of America, Inc.
    (6)





4.2
            Rights
      Agreement, dated as of August 10, 2004, by and between Gyrodyne Company of
      America, Inc. and Registrar and Transfer Company, as Rights Agent,
      including as Exhibit B the forms of Right Certificate and of Election to
      Exercise. (2)





10.1
            Incentive
      Compensation Plan. (1)





10.2
            Amended
      and Restated Employment Agreement, with Stephen V. Maroney, dated January
      23, 2003. (9)





10.3
            Amended
      and Restated Employment Agreement, with Peter Pitsiokos, dated January 23,
      2003. (9)





10.4
            Second
      Amended and Restated Agreement of Limited Partnership of Callery-Judge
      Grove, dated as of February 9, 2005, by and among CJG Management, Ltd., as
      the general partner and those persons and entities whose names and
      addresses appear on the books and records of the Partnership as partners.
      (3)





10.5
            Contract
      of Sale dated October 12, 2006 by and between Frank M. Pellicane Realty,
      LLC, Pelican Realty, LLC and Gyrodyne Company of America, Inc.
      (4)





10.6
            Agreement
      dated February 12, 2007 between Gyrodyne Company of America, Inc. and
      DPMG, Inc. d/b/a Landmark National.
(4)





10.7
            First
      Amendment to Contract of Sale dated October 12, 2006 by and between Frank
      M. Pellicane Realty, LLC, Pelican Realty, LLC, and Gyrodyne Company of
      America, Inc., dated as of February 1, 2007.
(4)





10.8
            Agreement
      between the Company, the Bulldog Investors and Mr. Naveen Bhatia, dated as
      of October 27, 2008. (8)





10.9
            Amendment
      to the Company 1999 Incentive Compensation Plan, dated December 27, 2008.
      (7)





10.10
            Amendment
      Number 1 to the Company Amended and Restated Employment Agreement for
      Stephen V. Maroney (January 23, 2003), dated December 31, 2008.
      (7)





10.11
            Amendment
      Number 1 to the Company Amended and Restated Employment Agreement for
      Peter Pitsiokos (January 23, 2003), dated December 31, 2008.
      (7)





21.1
              List
      of all subsidiaries. (10)31.1
              Rule
      13a-14(a)/15d-14(a) Certifications.
(10)




32.1
            CEO/CFO
      Certifications Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
      Section 906 of the Sarbanes-Oxley Act of 2002.
  (10)





(1)
              Incorporated
      herein by reference to the Annual Report on Form 10-KSB/A, filed with the
      Securities and Exchange Commission on September 5,
  2001.





(2)
              Incorporated
      herein by reference to Form 8-K, filed with the Securities and Exchange
      Commission on August 13,
2004.





(3)
              Incorporated
      herein by reference to the Annual Report on Form 10-KSB, filed with the
      Securities and Exchange Commission on July 5,
  2005.





30


(4)
                Incorporated
      herein by reference to the Annual Report on Form 10-K, filed with the
      Securities and Exchange Commission on March 15,
  2007.





(5)
              Incorporated
      herein by reference to Form 8-K, filed with the Securities and Exchange
      Commission on June 18, 2008.





(6)
                Incorporated
      herein by reference to the Quarterly Report on Form 10-Q, filed with the
      Securities and Exchange Commission on November 13,
  2008





(7)
              Incorporated
      herein by reference to Form 8-K, filed with the Securities and Exchange
      Commission on December 31,
2008.





(8)
              Incorporated
      herein by reference to Form 8-K, filed with the Securities and Exchange
      Commission on October
28,   2008.





(9)
              Incorporated
      herein by reference to the Quarterly Report on Form 10-QSB, filed with the
      Securities and Exchange Commission on March 12,
  2003.





(10)
              Filed
      as part of this report.





31








GYRODYNE
      COMPANY OF AMERICA, INC.
                    AND
      SUBSIDIARIESREPORT
      ON AUDITS OF CONSOLIDATED
                    FINANCIAL
      STATEMENTSYears
      Ended December 31, 2008 and 2007
   GYRODYNE
COMPANY OF AMERICA, INC.
 AND
SUBSIDIARIES
   ContentsYears
      Ended December 31, 2008 and 2007
                          PagesReport
      of Independent Registered Public Accounting Firm
                            
                            Consolidated
      Balance Sheets
                            
                            Consolidated
      Statements of Operations
                            
                            Consolidated
      Statement of Stockholders' Equity
                            
                            Consolidated
      Statements of Cash Flows
                            
                            Notes
      to Consolidated Financial Statements
                          F-1
                            
                            F-2
                            
                            F-3
                            
                            F-4
                            
                            F-5
                            
                            F-6-
      F-23
  Report
of Independent Registered Public Accounting Firm
 
 
 Board of
Directors and Stockholders
 Gyrodyne
Company of America, Inc. and Subsidiaries
 St.
James, New York
 
 We have
audited the accompanying consolidated balance sheets of Gyrodyne Company of
America, Inc. and Subsidiaries (the "Company") as of December 31, 2008 and
December 31, 2007 and the related consolidated statements of operations,
stockholders' equity and cash flows for the years ended December 31, 2008 and
December 31, 2007. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audits.
 
 We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, audits of its internal control
over financial reporting. Our audits include consideration of internal control
over financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
 
 In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Gyrodyne Company of America,
Inc. and Subsidiaries as of December 31, 2008 and December 31, 2007 and the
results of their operations and their cash flows for the years ended December
31, 2008 and December 31, 2007 in conformity with accounting principles
generally accepted in the United States of America.
 
 
 
 /s/ Holtz
Rubenstein Reminick LLP
 
 
 Melville,
New York
 March 30,
2009
   F-1
 GYRODYNE
      COMPANY OF AMERICA, INC. AND SUBSIDIARIESConsolidated
      Balance Sheets
                                                                                      
                                                                                      December
      31,2008
                                                                                      
                                                                                      
                                                                                      2007AssetsReal
      Estate:Rental
      property:Land
                                                                                      
                                                                                      $
                                                                                      2,929,017
                                                                                      
                                                                                      
                                                                                      $
                                                                                      2,303,017Building
      and improvements
                                                                                      
                                                                                      
                                                                                      17,887,414
                                                                                      
                                                                                      
                                                                                      
                                                                                      10,345,449Machinery
      and equipment
                                                                                      
                                                                                      
                                                                                      254,352
                                                                                      
                                                                                      
                                                                                      
                                                                                      179,33521,070,783
                                                                                      
                                                                                      
                                                                                      
                                                                                      12,827,801Less
      Accumulated Depreciation
                                                                                      
                                                                                      
                                                                                      3,010,709
                                                                                      
                                                                                      
                                                                                      
                                                                                      2,651,08418,060,074
                                                                                      
                                                                                      
                                                                                      
                                                                                      10,176,717Land
      held for development:Land
                                                                                      
                                                                                      
                                                                                      558,466
                                                                                      
                                                                                      
                                                                                      
                                                                                      558,466Land
      development costs
                                                                                      
                                                                                      
                                                                                      1,213,092
                                                                                      
                                                                                      
                                                                                      
                                                                                      781,4261,771,558
                                                                                      
                                                                                      
                                                                                      
                                                                                      1,339,892Total
      Real Estate, net
                                                                                      
                                                                                      
                                                                                      19,831,632
                                                                                      
                                                                                      
                                                                                      
                                                                                      11,516,609Cash
      and Cash Equivalents
                                                                                      
                                                                                      
                                                                                      1,205,893
                                                                                      
                                                                                      
                                                                                      
                                                                                      3,455,141Investment
      in Marketable Securities
                                                                                      
                                                                                      
                                                                                      8,413,279
                                                                                      
                                                                                      
                                                                                      
                                                                                      10,816,269Rent
      Receivable, net of allowance for doubtfulaccounts
      of $35,000 and $14,000, respectively
                                                                                      
                                                                                      
                                                                                      118,076
                                                                                      
                                                                                      
                                                                                      
                                                                                      94,693Interest
      Receivable
                                                                                      
                                                                                      
                                                                                      49,678
                                                                                      
                                                                                      
                                                                                      
                                                                                      64,712Prepaid
      Expenses and Other Assets
                                                                                      
                                                                                      
                                                                                      571,129
                                                                                      
                                                                                      
                                                                                      
                                                                                      352,477Prepaid
      Pension Costs
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      
                                                                                      1,125,328Total
      Assets
                                                                                      
                                                                                      $
                                                                                      30,189,687
                                                                                      
                                                                                      
                                                                                      $
                                                                                      27,425,229Liabilities
      and Stockholders' EquityLiabilities:Accounts
      payable
                                                                                      
                                                                                      $
                                                                                      379,948
                                                                                      
                                                                                      
                                                                                      $
                                                                                      617,558Accrued
      liabilities
                                                                                      
                                                                                      
                                                                                      118,227
                                                                                      
                                                                                      
                                                                                      
                                                                                      174,007Tenant
      security deposits payable
                                                                                      
                                                                                      
                                                                                      393,360
                                                                                      
                                                                                      
                                                                                      
                                                                                      275,343Mortgages
      payable
                                                                                      
                                                                                      
                                                                                      10,560,486
                                                                                      
                                                                                      
                                                                                      
                                                                                      5,502,623Deferred
      income taxes
                                                                                      
                                                                                      
                                                                                      5,336,000
                                                                                      
                                                                                      
                                                                                      
                                                                                      7,832,000Pension
      liability
                                                                                      
                                                                                      
                                                                                      715,365
                                                                                      
                                                                                      
                                                                                      
                                                                                      -Total
      Liabilities
                                                                                      
                                                                                      
                                                                                      17,503,386
                                                                                      
                                                                                      
                                                                                      
                                                                                      14,401,531Commitments
      and ContingenciesStockholders'
      Equity:Common
      stock, $1 par value; authorized 4,000,000 shares;
1,531,086shares
      issued; 1,289,878 shares outstanding, respectively
                                                                                      
                                                                                      
                                                                                      1,531,086
                                                                                      
                                                                                      
                                                                                      
                                                                                      1,531,086Additional
      paid-in capital
                                                                                      
                                                                                      
                                                                                      7,978,395
                                                                                      
                                                                                      
                                                                                      
                                                                                      7,978,395Accumulated
      other comprehensive (loss) income
                                                                                      
                                                                                      
                                                                                      (1,731,231
                                                                                      )
                                                                                      
                                                                                      
                                                                                      148,415Balance
      of undistributed income from other than gain or loss on sales of
      properties
                                                                                      
                                                                                      
                                                                                      6,445,748
                                                                                      
                                                                                      
                                                                                      
                                                                                      4,903,49914,223,998
                                                                                      
                                                                                      
                                                                                      
                                                                                      14,561,395Less
      Cost of Shares of Common Stock Held in Treasury; 241,208
                                                                                      
                                                                                      
                                                                                      (1,537,697
                                                                                      )
                                                                                      
                                                                                      
                                                                                      (1,537,697
                                                                                      )Total
      Stockholders' Equity
                                                                                      
                                                                                      
                                                                                      12,686,301
                                                                                      
                                                                                      
                                                                                      
                                                                                      13,023,698Total
      Liabilities and Stockholders' Equity
                                                                                      
                                                                                      $
                                                                                      30,189,687
                                                                                      
                                                                                      
                                                                                      $
                                                                                      27,425,229See
      notes to consolidated financial statements.
  F-2
  GYRODYNE
      COMPANY OF AMERICA, INC. AND SUBSIDIARIESConsolidated
      Statements of Operations
                                                                                    
                                                                                    Years
      Ended December 31,2008
                                                                                    
                                                                                    
                                                                                    2007RevenuesRental
      income
                                                                                    
                                                                                    $
                                                                                    3,091,542
                                                                                    
                                                                                    
                                                                                    $
                                                                                    1,837,020ExpensesRental
      expenses
                                                                                    
                                                                                    
                                                                                    1,225,049
                                                                                    
                                                                                    
                                                                                    
                                                                                    853,478General
      and administrative expenses
                                                                                    
                                                                                    
                                                                                    2,550,713
                                                                                    
                                                                                    
                                                                                    
                                                                                    3,332,332Depreciation
                                                                                    
                                                                                    
                                                                                    359,626
                                                                                    
                                                                                    
                                                                                    
                                                                                    150,176Provision
      for loss of interest on condemnation proceeds
                                                                                    
                                                                                    
                                                                                    -
                                                                                    
                                                                                    
                                                                                    
                                                                                    332,377Total
                                                                                    
                                                                                    
                                                                                    4,135,388
                                                                                    
                                                                                    
                                                                                    
                                                                                    4,668,363Other
      Income (Expense):Interest
      income
                                                                                    
                                                                                    
                                                                                    556,058
                                                                                    
                                                                                    
                                                                                    
                                                                                    1,038,150Interest
      expense
                                                                                    
                                                                                    
                                                                                    (465,963
                                                                                    )
                                                                                    
                                                                                    
                                                                                    (162,450
                                                                                    )Loss
      Before Benefit for Income Taxes
                                                                                    
                                                                                    
                                                                                    (953,751
                                                                                    )
                                                                                    
                                                                                    
                                                                                    (1,955,643
                                                                                    )Benefit
      for Income Taxes
                                                                                    
                                                                                    
                                                                                    (2,496,000
                                                                                    )
                                                                                    
                                                                                    
                                                                                    (403,989
                                                                                    )Net
      Income (Loss)
                                                                                    
                                                                                    $
                                                                                    1,542,249
                                                                                    
                                                                                    
                                                                                    $
                                                                                    (1,551,654
                                                                                    )Net
      Income (Loss) Per Common Share:Basic
      and Diluted
                                                                                    
                                                                                    $
                                                                                    1.20
                                                                                    
                                                                                    
                                                                                    $
                                                                                    (1.21
                                                                                    )Weighted
      Average Number of Common Shares Outstanding:Basic
      and Diluted
                                                                                    
                                                                                    
                                                                                    1,289,878
                                                                                    
                                                                                    
                                                                                    
                                                                                    1,279,867See
      notes to consolidated financial statements.
  F-3
  GYRODYNE
      COMPANY OF AMERICA, INC.AND
      SUBSIDIARIESConsolidated
      Statement of Stockholders' EquityYears
      Ended December 31, 2008 and 2007$1
      Par Value
                                                
                                                
                                                
                                                
                                                
                                                AccumulatedCommon
      Stock
                                                
                                                
                                                Additional
                                                
                                                
                                                Other
                                                
                                                
                                                
                                                
                                                
                                                Treasury
      StockPar
                                                
                                                
                                                Paid
      in
                                                
                                                
                                                Comprehensive
                                                
                                                
                                                Income
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                TotalShares
                                                
                                                
                                                Value
                                                
                                                
                                                Capital
                                                
                                                
                                                Income
      (Loss)
                                                
                                                
                                                (Deficit)
                                                
                                                
                                                Shares
                                                
                                                
                                                Cost
                                                
                                                
                                                EquityBalance,
      January 1, 2007
                                                
                                                
                                                1,531,086
                                                
                                                
                                                $
                                                1,531,086
                                                
                                                
                                                $
                                                8,205,134
                                                
                                                
                                                $
                                                280,042
                                                
                                                
                                                $
                                                11,615,310
                                                
                                                
                                                
                                                293,867
                                                
                                                
                                                $
                                                (1,840,486
                                                )
                                                
                                                $
                                                19,791,086Exercise
      of Stock Options
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                (226,739
                                                )
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                (52,659
                                                )
                                                
                                                
                                                302,789
                                                
                                                
                                                
                                                76,050Unrealized
      Loss from Marketable Securities
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                (131,627
                                                )
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                (131,627
                                                )Cash
      Distribution Payment
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                (5,160,157
                                                )
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                (5,160,157
                                                )Net
      Loss
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                (1,551,654
                                                )
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                (1,551,654
                                                )Balance,
      December 31, 2007
                                                
                                                
                                                1,531,086
                                                
                                                
                                                
                                                1,531,086
                                                
                                                
                                                
                                                7,978,395
                                                
                                                
                                                
                                                148,415
                                                
                                                
                                                
                                                4,903,499
                                                
                                                
                                                
                                                241,208
                                                
                                                
                                                
                                                (1,537,697
                                                )
                                                
                                                
                                                13,023,698Unrealized
      Loss from Marketable Securities
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                (51,070
                                                )
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                (51,070
                                                )Unrecognized
      Actuarial Pension Loss
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                (1,828,576
                                                )
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                (1,828,576
                                                )Net
      Income
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                1,542,249
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                1,542,249Balance,
      December 31, 2008
                                                
                                                
                                                1,531,086
                                                
                                                
                                                $
                                                1,531,086
                                                
                                                
                                                $
                                                7,978,395
                                                
                                                
                                                $
                                                (1,731,231
                                                )
                                                
                                                $
                                                6,445,748
                                                
                                                
                                                
                                                241,208
                                                
                                                
                                                $
                                                (1,537,697
                                                )
                                                
                                                $
                                                12,686,301See
      notes to consolidated financial statements.
    F-4
 GYRODYNE
      COMPANY OF AMERICA, INC.AND
      SUBSIDIARIESConsolidated
      Statements of Cash Flows
                                                                            
                                                                            Years
      Ended December 31,2008
                                                                            
                                                                            
                                                                            2007Cash
      Flows from Operating Activities:Net
      income (loss)
                                                                            
                                                                            $
                                                                            1,542,249
                                                                            
                                                                            
                                                                            $
                                                                            (1,551,654
                                                                            )Adjustments
      to reconcile net income (loss) to net cashused
      in operating activities:Depreciation
      and amortization
                                                                            
                                                                            
                                                                            381,239
                                                                            
                                                                            
                                                                            
                                                                            164,594Bad
      debt expense
                                                                            
                                                                            
                                                                            24,000
                                                                            
                                                                            
                                                                            
                                                                            34,000Net
      periodic pension benefit cost (income)
                                                                            
                                                                            
                                                                            12,117
                                                                            
                                                                            
                                                                            
                                                                            (44,855
                                                                            )Provision
      for loss of interest on condemnation proceeds
                                                                            
                                                                            
                                                                            -
                                                                            
                                                                            
                                                                            
                                                                            332,377Changes
      in operating assets and liabilities:(Increase)
      decrease in assets:Land
      development costs
                                                                            
                                                                            
                                                                            (431,666
                                                                            )
                                                                            
                                                                            
                                                                            (459,912
                                                                            )Accounts
      receivable
                                                                            
                                                                            
                                                                            (47,383
                                                                            )
                                                                            
                                                                            
                                                                            (21,734
                                                                            )Interest
      receivable
                                                                            
                                                                            
                                                                            15,034
                                                                            
                                                                            
                                                                            
                                                                            71,590Prepaid
      expenses and other assets
                                                                            
                                                                            
                                                                            (81,832
                                                                            )
                                                                            
                                                                            
                                                                            83,395(Decrease)
      increase in liabilities:Accounts
      payable
                                                                            
                                                                            
                                                                            (237,610
                                                                            )
                                                                            
                                                                            
                                                                            (69,825
                                                                            )Accrued
      liabilities
                                                                            
                                                                            
                                                                            (55,780
                                                                            )
                                                                            
                                                                            
                                                                            (2,000,453
                                                                            )Deferred
      income taxes
                                                                            
                                                                            
                                                                            (2,496,000
                                                                            )
                                                                            
                                                                            
                                                                            (303,000
                                                                            )Tenant
      security deposits
                                                                            
                                                                            
                                                                            118,017
                                                                            
                                                                            
                                                                            
                                                                            115,558Total
      adjustments
                                                                            
                                                                            
                                                                            (2,799,864
                                                                            )
                                                                            
                                                                            
                                                                            (2,098,265
                                                                            )Net
      Cash Used in Operating Activities
                                                                            
                                                                            
                                                                            (1,257,615
                                                                            )
                                                                            
                                                                            
                                                                            (3,649,919
                                                                            )Cash
      Flows from Investing Activities:Purchase
      of medical office buildings
                                                                            
                                                                            
                                                                            (7,038,863
                                                                            )
                                                                            
                                                                            
                                                                            (3,363,153
                                                                            )Costs
      associated with property, plant and equipment
                                                                            
                                                                            
                                                                            (1,208,545
                                                                            )
                                                                            
                                                                            
                                                                            (86,773
                                                                            )Proceeds
      from sale of marketable securities
                                                                            
                                                                            
                                                                            -
                                                                            
                                                                            
                                                                            
                                                                            7,199,204Principal
      repayments on investment in marketable securities
                                                                            
                                                                            
                                                                            2,351,920
                                                                            
                                                                            
                                                                            
                                                                            5,650,415Net
      Cash (Used in) Provided by Investing Activities
                                                                            
                                                                            
                                                                            (5,895,488
                                                                            )
                                                                            
                                                                            
                                                                            9,399,693Cash
      Flows from Financing Activities:Proceeds
      of mortgage
                                                                            
                                                                            
                                                                            5,250,000
                                                                            
                                                                            
                                                                            
                                                                            -Principal
      payments on mortgage
                                                                            
                                                                            
                                                                            (192,137
                                                                            )
                                                                            
                                                                            
                                                                            (48,601
                                                                            )Cash
      Distribution Payment
                                                                            
                                                                            
                                                                            -
                                                                            
                                                                            
                                                                            
                                                                            (5,160,157
                                                                            )Loan
      origination fees
                                                                            
                                                                            
                                                                            (154,008
                                                                            )
                                                                            
                                                                            
                                                                            (113,211
                                                                            )Proceeds
      from exercise of stock options
                                                                            
                                                                            
                                                                            -
                                                                            
                                                                            
                                                                            
                                                                            76,049Net
      Cash Provided by (Used in) Financing Activities
                                                                            
                                                                            
                                                                            4,903,855
                                                                            
                                                                            
                                                                            
                                                                            (5,245,920
                                                                            )Net
      (Decrease) Increase in Cash and Cash Equivalents
                                                                            
                                                                            
                                                                            (2,249,248
                                                                            )
                                                                            
                                                                            
                                                                            503,854Cash
      and Cash Equivalents, beginning of year
                                                                            
                                                                            
                                                                            3,455,141
                                                                            
                                                                            
                                                                            
                                                                            2,951,287Cash
      and Cash Equivalents, end of year
                                                                            
                                                                            $
                                                                            1,205,893
                                                                            
                                                                            
                                                                            $
                                                                            3,455,141Supplemental
      cash flow information:Interest
      paid
                                                                            
                                                                            $
                                                                            465,963
                                                                            
                                                                            
                                                                            $
                                                                            162,450Cash
      distribution payment
                                                                            
                                                                            $
                                                                            -
                                                                            
                                                                            
                                                                            $
                                                                            5,160,157Mortgage
      payable  - assumed
                                                                            
                                                                            $
                                                                            -
                                                                            
                                                                            
                                                                            $
                                                                            5,551,191See
      notes to consolidated financial statements.
  F-5
 
 GYRODYNE
      COMPANY OF AMERICA, INC.AND
      SUBSIDIARIESNotes
      to Consolidated Financial
Statements
 Years
Ended December 31, 2008 and 2007
   1.
              Summary
      of Significant Accounting Policies
  Organization and
nature of operations - Gyrodyne Company of America, Inc. and Subsidiaries
(the "Company") is primarily a lessor of industrial and commercial real
estate to unrelated diversified entities located in Long Island and
Cortlandt Manor, New York, and is also pursuing development plans of its
remaining real estate holdings. The Company has qualified, and expects to
continue to qualify in the current fiscal year, as a real estate investment
trust (“REIT”) under the Internal Revenue Code.
  Principles of
consolidation - The accompanying consolidated financial statements
include the accounts of Gyrodyne Company of America, Inc. ("GCA") and all
majority owned subsidiaries. Investments in affiliates in which the Company has
the ability to exercise significant influence, but not control, would be
accounted for under the equity method. Investment interests in excess of 5% in
limited partnerships are accounted for under the equity method.
  All
consolidated subsidiaries are wholly owned. All significant inter-company
transactions have been eliminated.
  Rental real
estate - Rental real estate assets, including land, buildings and
improvements, furniture, fixtures and equipment, are stated at cost, and
reported net of accumulated depreciation and amortization. Tenant improvements,
which are included in buildings and improvements, are also stated at cost.
Expenditures for ordinary maintenance and repairs are expensed to operations as
they are incurred. Renovations and or replacements, which improve or extend the
life of the asset are capitalized and depreciated over their estimated useful
lives.
  Real estate held
for development - Real estate held for development is stated at the lower
of cost or net realizable value. In addition to land, land development and
construction costs, real estate held for development includes interest, real
estate taxes and related development and construction overhead costs which are
capitalized during the development and construction period.
  Net
realizable value represents estimates, based on management's present plans and
intentions, of sale price less development and disposition cost, assuming that
disposition occurs in the normal course of business.
  Long-lived assets
- On an annual basis, management assesses whether there are any
indicators that the value of the real estate properties may be impaired. A
property's value is impaired only if management's estimate of the aggregate
future cash flows (undiscounted and without interest charges) to be generated by
the property are less than the carrying value of the property. Such cash flows
consider factors such as expected future operating income, trends and prospects,
as well as the effects of demand, competition and other factors. To the extent
impairment occurs, the loss will be measured as the excess of the carrying
amount of the property over the fair value of the property.
  The
Company is required to make subjective assessments as to whether there are
impairments in the value of its real estate properties and other investments.
These assessments have a direct impact on the Company's net income, since an
impairment charge results in an immediate negative adjustment to net
income.
  Depreciation and
amortization - Depreciation and amortization are provided on the
straight-line method over the estimated useful lives of the assets, as
follows:
  Buildings
      and Improvements
                      10
      to 39 yearsMachinery
      and Equipment
                      3
      to 20 years
  Expenditures for
maintenance and repairs are charged to operations as incurred. Significant
renovations are capitalized.
   F-6
 
 GYRODYNE
COMPANY OF AMERICA, INC.
 AND
SUBSIDIARIES
 
 Notes
      to Consolidated Financial StatementsYears
      Ended December 31, 2008 and
2007
  Revenue
recognition - Minimum revenues from rental property are recognized on a
straight-line basis over the terms of the related leases. The excess of rents
recognized over amounts contractually due, if any, are included in deferred
rents receivable on the Company's balance sheets. Certain leases also provide
for tenant reimbursements of common area maintenance and other operating
expenses and real estate taxes. Ancillary and other property related income is
recognized in the period earned.
  Allowance for
doubtful accounts - Management must make estimates of the
uncollectability of accounts receivable. Management specifically analyzes
accounts receivable and analyzes historical bad debts, customer concentrations,
customer credit-worthiness, current economic trends and changes in customer
payment terms when evaluating the adequacy of the allowance for doubtful
accounts.
  Investments
- The Company has a 10.93% limited partnership interest in Callery-Judge
Grove, L.P. (the "Grove") that owns a 3700+ acre citrus grove in Palm Beach
County, Florida. The Company is accounting for this investment under the equity
method in accordance with Emerging Issue Task Force ("EITF") Topic D-46
"Accounting for Limited Partnership Investments" and the guidance in paragraph 8
of AICPA Statement of Position ("SOP") 78-9, "Accounting for Investments in Real
Estate Ventures."
  Cash equivalents
- The Company considers all highly liquid debt instruments purchased with
maturities of three months or less to be cash equivalents.
 Investment in
Marketable Securities -Marketable securities are carried at fair value
and consist primarily of investments in mortgage backed securities guaranteed by
U.S. Government Agencies. The Company classifies its marketable securities
portfolio as available-for-sale. This portfolio is continually monitored for
differences between the cost and estimated fair value of each security. If the
Company believes that a decline in the value of a security is temporary in
nature, the Company records the change in other comprehensive income
(loss) in stockholders’ equity. If the decline is believed to be other than
temporary, the security is written down to the fair value and a realized loss is
recorded on the Company’s statement of operations. There was no write down
recorded by the Company due to the realized loss in value for the years ended
December 31, 2008 and 2007. The Company’s assessment of a decline in value
includes, among other things, the Company’s current judgment as to the financial
position and future prospects of the entity that issued the security. If that
judgment changes in the future, the Company may ultimately record a realized
loss after having initially concluded that the decline in value was
temporary.
  Depositson Property -Deposits are paid on properties the Company is evaluating for purchase.
Real estate deposits are capitalized when paid and may become nonrefundable
under certain circumstances. When properties are acquired, the deposits paid by
the Company are applied to the total purchase price.
  Net income (loss)
per common share and per common equivalent share - The reconciliations
for the years ended December 31, 2008 and 2007 are as
follows:
 Year
      Ended December 31, 2008
                            
                            Net
      Income
                            
                            
                            Weighted
      Average Shares
                            
                            
                            Net
      Income Per ShareBasic
      EPS
                            
                            $
                            1,542,249
                            
                            
                            
                            1,289,878
                            
                            
                            $
                            1.20Effect
      of Dilutive Securities - common stock options
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -Diluted
      EPS
                            
                            $
                            1,542,249
                            
                            
                            
                            1,289,878
                            
                            
                            $
                            1.20
  F-7
 
 GYRODYNE
COMPANY OF AMERICA, INC.
 AND
SUBSIDIARIES
 
 Notes
      to Consolidated Financial StatementsYears
      Ended December 31, 2008 and
2007
  Year
      Ended December 31, 2007
                            
                            Net
      Loss
                            
                            
                            Weighted
      Average Shares
                            
                            
                            Net
      Loss Per ShareBasic
      EPS
                            
                            $
                            (1,551,654
                            )
                            
                            
                            1,279,867
                            
                            
                            $
                            (1.21
                            )Effect
      of Dilutive Securities – common stock options
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -Diluted
      EPS
                            
                            $
                            (1,551,654
                            )
                            
                            
                            1,279,867
                            
                            
                            $
                            (1.21
                            )
  Income taxes –Effective May 1, 2006, the Company operated as a real estate investment
trust (REIT) for federal and state income tax purposes. As a REIT, the Company
is generally not subject to income taxes. To maintain its REIT status, the
Company is required to distribute at least 90% of its annual REIT taxable
income, as defined by the Internal Revenue Code (“IRC”), to its shareholders,
among other requirements. If the Company fails to qualify as a REIT in any
taxable year, the Company will be subject to federal and state income tax on its
taxable income at regular corporate tax rates. Although the Company qualified
for taxation as a REIT, the Company may be subject to certain state and local
taxes on its income and property and Federal income and excise taxes on its
undistributed income. The Company believes that it has met the REIT distribution
and technical requirements for the years ended December 31, 2008 and
December 31, 2007 and therefore, qualified as a REIT and was not subject to any
federal and state income taxes. Management intends to continue to adhere to
these requirements and maintain the Company’s REIT status. See Note 18 with
regard to contingencies.
  The
Company’s investment in the Grove is held as a taxable REIT subsidiary of the
Company and is subject to federal and state income taxes. Taxable REIT
subsidiaries perform non-customary services for tenants, hold assets that the
Company cannot hold directly and generally may engage in any real estate or
non-real estate related business. Accordingly, through the investment in the
Grove, the Company is subject to corporate federal and state income
taxes on the Company’s share of the Grove’s taxable income for the years ended
December 31, 2008 and December 31, 2007.
  Deferred
tax assets and liabilities are determined based on differences between financial
reporting and tax bases of assets and liabilities, and are measured using the
enacted tax rates and laws that will be in effect when the differences are
expected to reverse.
  In July
2006, the FASB issued Interpretation No. 48, "Accounting for Uncertainty in
Income Taxes," or FIN 48. This interpretation, among other things, creates
a two-step approach for evaluating uncertain tax positions. Recognition (step
one) occurs when an enterprise concludes that a tax position, based solely on
its technical merits, is more-likely-than-not to be sustained upon examination.
Measurement (step two) determines the amount of benefit that
more-likely-than-not will be realized upon settlement. Derecognition of a tax
position that was previously recognized would occur when a company subsequently
determines that a tax position no longer meets the more-likely-than-not
threshold of being sustained. FIN 48 specifically prohibits the use of a
valuation allowance as a substitute for derecognition of tax positions, and it
has expanded disclosure requirements. The adoption of FIN 48 had no impact
on the Company’s consolidated financial statements.
  Stock-based
compensation - The Company’s stock options are accounted for in
accordance with the recognition and measurement provisions of Statement of
Financial Accounting Standards ("FAS") No. 123 (revised 2004), Share-Based
Payment ("FAS 123(R)"), which replaces FAS No. 123, Accounting for Stock-Based
Compensation, and supersedes Accounting Principles Board Opinion ("APB") No. 25,
Accounting for Stock Issued to Employees, and related interpretations. FAS 123
(R) requires compensation costs related to share-based payment transactions,
including employee stock options, to be recognized in the financial statements.
In addition, the Company adheres to the guidance set forth within Securities and
Exchange Commission ("SEC") Staff Accounting Bulletin ("SAB") No. 107, which
provides the Staff's views regarding the interaction between SFAS No. 123(R) and
certain SEC rules and regulations and provides interpretations with respect to
the valuation of share-based payments for public companies.
  F-8
 
 GYRODYNE
COMPANY OF AMERICA, INC.
 AND
SUBSIDIARIES
 
 Notes
      to Consolidated Financial StatementsYears
      Ended December 31, 2008 and
2007
  Use of estimates
- The preparation of financial statements in conformity with generally
accepted accounting principles 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. The most
significant assumptions and estimates relate to depreciable lives and the
valuation of real estate.
 Comprehensive
income -The Company reports comprehensive income in accordance with
SFAS No. 130, Reporting Comprehensive
Income. This statement defines comprehensive income as the changes in
equity of an enterprise except those resulting from stockholders’ transactions.
Accordingly, comprehensive income includes certain changes in equity that are
excluded from net income. The Company’s comprehensive income items include net
income, the unrealized change in fair value of marketable securities and
unrecognized actuarial pension losses.
 New accounting
pronouncements– In February 2007, the Financial Accounting
Standards Board (“FASB”) issued Statement No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities—Including an amendment of FASB
Statement No. 115”. This Statement applies to all entities, including
not-for-profit organizations. Most of the provisions of this Statement apply
only to entities that elect the fair value option. However, the amendment to
FASB Statement No. 115, Accounting for Certain Investments in Debt and Equity
Securities, applies to all entities with available-for-sale and trading
securities. Some requirements apply differently to entities that do not report
net income. This Statement was effective for the Company on January 1, 2008 but
did not have a material effect on its financial statements.
  In December 2007, the FASB issued
Statement No. 141R (“FAS 141R”) “Business Combinations”. This Statement replaces
FASB Statement No. 141, “Business Combinations”.This Statement defines the acquirer as
the entity that obtains control of one or more businesses in the business
combination and establishes the acquisition date as the date that the acquirer
achieves control. This Statement’s scope is broader than that of Statement 141,
which applied only to business combinations in which control was obtained by
transferring consideration. By applying the same method of accounting—the
acquisition method—to all transactions and other events in which one entity
obtains control over one or more other businesses, this Statement improves the
comparability of the information about business combinations provided in
financial reports.This Statement requires the
acquiringentity in a business combination to
recognize all(and only) the assets acquired and
liabilities assumed in the transaction and establishes the acquisition-date fair
value as the measurement objective for all assets acquired and liabilities
assumed in a business combination. Certain provisions of this statement will,
among other things, impact the determination of acquisition-date fair value in a
business combination (including contingent consideration); exclude transaction
costs from acquisition accounting and change accounting practice for acquired
contingencies, acquisition-related restructuring costs and tax benefits. This
Statement applies prospectively to business combinations for which the
acquisition date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008. An entity may not apply it
before that date. The effective date of this Statement is the same as that of
the related FASB Statement No. 160, “Noncontrolling Interests in Consolidated
Financial Statements”. The Company is currently evaluating the future impacts
and disclosures of FAS 141R and FAS 160.
  F-9
 
 GYRODYNE
COMPANY OF AMERICA, INC.
 AND
SUBSIDIARIES
 
 Notes
      to Consolidated Financial StatementsYears
      Ended December 31, 2008 and
2007
 In
December 2007, the FASB issued Statement No. 160 (“FAS 160”) “Noncontrolling
Interests in Consolidated Financial Statements—an amendment of ARB No. 51”.This Statement amends
ARB 51 to establish accounting and reporting standards for the noncontrolling
interest (“NCI”) in a subsidiary and for the deconsolidation of a subsidiary. It
clarifies that a noncontrolling interest in a subsidiary is an ownership
interest in the consolidated entity that should be reported as equity in the
consolidated financial statements. This Statement requires disclosure, on the
face of the consolidated statement of income, of the amounts of consolidated net
income attributable to the parent and to the noncontrolling interest. The
Statement requires that losses of a partially owned consolidated subsidiary be
allocated to the NCI even when such allocation might result in a deficit
balance. This Statement is effective for fiscal years, and interim periods
within those fiscal years, beginning on or after December 15, 2008 (that is,
January 1, 2009, for entities with calendar year-ends). Earlier adoption is
prohibited. The effective date of this Statement is the same as that of the
related Statement 141R. The Company is currently evaluating the future impacts
and disclosures of FAS 141R and FAS 160.
  Effective
January 1, 2008, the Company adopted Statement No. 157, “Fair Value
Measurements” (“FAS  157”), which establishes a framework for measuring
fair value by creating a three-level fair value hierarchy that ranks the quality
and reliability of information used to determine fair value, and requires new
disclosures of assets and liabilities measured at fair value based on their
level in the hierarchy. FAS 157 also defines fair value as the price that would
be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. FAS 157
applies to reported balances that are required or permitted to be measured at
fair-value under existing accounting pronouncements; accordingly, the standard
does not require any new fair-value measurements of reported balances.  The
application of FAS No. 157, however, may change current practice within an
organization. FAS No. 157 was effective January 1, 2008, applied prospectively.
In February 2008, the FASB issued FAS Staff Position No.157-2, "Effective Date
of FASB Statement No.  157", which provided a one-year deferral for
the implementation of FAS No. 157 for certain non-financial assets and
liabilities measured on a nonrecurring basis. The provisions of FAS No. 157
relating to certain non-financial assets and liabilities will be effective
January 1, 2009. The adoption of FAS No. 157 with respect to financial assets
and liabilities did not have a material financial impact on the Company’s
consolidated results of operations or financial condition. The Company is
currently evaluating the impact of implementation with respect to non-financial
assets and liabilities measured on a nonrecurring basis on the consolidated
financial statements.
  FAS 157
establishes a hierarchy for inputs used in measuring fair value that maximizes
the use of observable inputs and minimizes the use of unobservable inputs by
requiring that the most observable inputs be used when available. Observable
inputs are inputs that market participants would use in pricing the financial
instrument developed based on market data obtained from sources independent of
the Company. Unobservable inputs are inputs that reflect the Company’s estimates
about what assumptions market participants would use in pricing the financial
instrument developed based on the best information available in the
circumstances. The fair value hierarchy is broken down into three levels based
on the reliability of inputs as follows:
 •
                    Level
      1: Valuations based on unadjusted quoted prices in active markets for
      identical assets or liabilities that the Company has the ability to
      access. Since valuations are based on quoted prices that are readily and
      regularly available in an active market, valuation of these products does
      not entail a significant degree of
  judgment.
  Financial
instruments utilizing Level 1 inputs generally include exchange-traded equity
securities listed in active markets and most U.S. Government
securities.
  •
                  Level
      2: Valuations based on quoted prices for similar instruments in active
      markets or quoted prices for identical or similar instruments in markets
      that are not active or for which all significant inputs are observable,
      either directly or indirectly.
 F-10
 
 GYRODYNE
COMPANY OF AMERICA, INC.
 AND
SUBSIDIARIES
 
 Notes
      to Consolidated Financial StatementsYears
      Ended December 31, 2008 and
2007
 Financial
instruments utilizing Level 2 inputs generally include certain mortgage-backed
securities, or MBS, and corporate debt securities and certain financial
instruments classified as derivatives, including interest rate swap contracts
and credit default swaps, where fair value is based on observable market
inputs.
  •
                    Level
      3: Inputs are unobservable inputs for the asset or liability, and include
      situations where there is little, if any, market activity for the asset or
      liability. In certain cases, the inputs used to measure fair value may
      fall into different levels of the fair value hierarchy. In such cases, the
      level in the fair value hierarchy within which the fair value measurement
      in its entirety falls has been determined based on the lowest level input
      that is significant to the fair value measurement in its entirety. Our
      assessment of the significance of a particular input to the fair value
      measurement in its entirety requires judgment, and considers factors
      specific to the asset or liability.
  In March
2008, the FASB issued Statement No. 161, “Disclosures about Derivative
Instruments and Hedging Activities—an amendment of FASB Statement No. 133”. This
Statement applies to all entities. This Statement changes the disclosure
requirements for derivative instruments and hedging activities. Entities are
required to provide enhanced disclosures about (a) how and why an entity uses
derivative instruments, (b) how derivative instruments and related hedged items
are accounted for under Statement 133 and its related interpretations, and (c)
how derivative instruments and related hedged items affect an entity’s financial
position, financial performance, and cash flows. This Statement is effective for
financial statements issued for fiscal years and interim periods beginning after
November 15, 2008, with early application encouraged. This Statement encourages,
but does not require, comparative disclosures for earlier periods at initial
adoption. The Company does not believe this pronouncement will have a material
effect on its financial statements.
  Reclassifications:
  Certain
reclassifications have been made to the consolidated financial statements for
the twelve months ended December 31, 2007 to conform to the classifications used
in the current fiscal year.
  2.
              Investment
      in Marketable Securities
 
 The
historical cost and estimated fair value of investments in marketable securities
available for sale as of December 31, 2008 and 2007 are as
follows:
  Amortized
                      Cost
                    
                    
                    Gross
                      Unrealized
                      Gains
                    
                    
                    Gross
                      Unrealized
                      Losses
                    
                    
                    Fair
                      ValueMortgage-backed
      Securities - 2008
                    
                    $
                    8,315,934
                    
                    
                    $
                    97,345
                    
                    
                    $
                    -
                    
                    
                    $
                    8,413,279Mortgage-backed
      Securities - 2007
                    
                    $
                    10,667,854
                    
                    
                    $
                    148,415
                    
                    
                    $
                    -
                    
                    
                    $
                    10,816,269
  There
were no realized gains or losses on sales of securities available-for-sale for
the year ended December 31, 2008. There was a realized gain of $40,651 for the
year ended December 31, 2007. The fair value of mortgage-backed securities was
estimated using quoted market prices. None of the securities with an unrealized
loss at December 31, 2008 and 2007 are considered to be other-than-temporarily
impaired. The Company’s investment is in hybrid mortgage-backed securities, with
a AAA rating fully guaranteed by agencies of the U.S. Government. At December
31, 2008, marketable securities had an average life of approximately two and a
half years.
 
 F-11
 
 GYRODYNE
COMPANY OF AMERICA, INC.
 AND
SUBSIDIARIES
 
 Notes
      to Consolidated Financial StatementsYears
      Ended December 31, 2008 and
2007
 3.
              Interest
      Receivable
 
 In
connection with the condemnation of the Flowerfield property, the Company had
accrued interest commencing with the date Stony Brook University took title to
the property, in November 2005, until the time the Company received the advance
payment, in March 2006. Pursuant to the New York State Eminent Domain Procedure
Law, both the advance payment and any additional award from the Court of Claims
bear interest at the current statutory rate of 9% simple interest from the date
of the taking.
  As of
December 31, 2007, the Company recorded a provision for loss of interest on
condemnation proceeds amounting to $332,377 which represents a portion of the
previously recorded interest receivable of $921,385 pertaining to the Advance
Payment in connection with the 2005 condemnation of 245 acres of property and
certain buildings by the State University of New York at Stony Brook. During the
year ended December 31, 2006, the Company received $589,008 of interest on the
Advance Payment. Although the Company had been assured by counsel representing
the State that a statutory interest rate of 9% was due and payable on the
Advance Payment of $26.3 million, the State of New York has now taken the
position that a lesser interest rate was applicable. The Company plans on
pursuing the loss of interest on condemnation along with its claim for
additional compensation in the Court of Claims of the State of New York. See
Note 18.
  4.
              Investment
      in Grove Partnership
  The
Company has a 10.93% limited partnership interest in the Callery-Judge Grove,
L.P. (the "Grove"). As of December 31, 2008 and 2007, the carrying value of the
Company's investment, under the equity method, was $0. As a result, the Company
did not record any of the losses for either fiscal year.
  The Grove
has reported to its limited partners that in November 2008 it received an
independent appraisal report of the citrus grove property which reflects the
recent approval to develop 2,996 residential units and 235,000 square feet of
commercial and retail space. Based upon the appraised value of the citrus grove
property, at December 31, 2008 and 2007, strictly on a pro-rata basis, the
estimated fair value of the Company's interest in the Grove property would be
approximately $21,700,000 and $22,400,000 respectively, without adjustment for
minority interest and lack of marketability discount. The Company cannot predict
what, if any, value it will ultimately realize from this
investment.
  The
fiscal year end of the Grove is June 30. Summarized financial information of the
Grove as of June 30, 2008 and 2007 is as follows:
  
 Years
      Ended June 30,
                                
                                2008
                                
                                
                                2007(in
      thousands)
                                
                                
                                (in
      thousands)Total
      Current Assets
                                
                                $
                                3,351
                                
                                
                                $
                                9,686Total
      Assets
                                
                                
                                16,216
                                
                                
                                
                                21,234Total
      Current Liabilities
                                
                                
                                15,090
                                
                                
                                
                                1,687Total
      Liabilities
                                
                                
                                37,044
                                
                                
                                
                                34,730Total
      Partners’ Capital
                                
                                
                                (20,828
                                )
                                
                                
                                (13,496
                                )Total
      Revenues
                                
                                
                                1,391
                                
                                
                                
                                2,420Net
      Loss
                                
                                
                                (7,332
                                )
                                
                                
                                (12,668
                                )
  F-12
 
 GYRODYNE
COMPANY OF AMERICA, INC.
 AND
SUBSIDIARIES
 
 Notes
      to Consolidated Financial StatementsYears
      Ended December 31, 2008 and
2007
 5.
                        Accrued
      Liabilities
  December
      31,2008
                                            
                                            
                                            2007Payroll
      and related taxes
                                            
                                            $
                                            16,270
                                            
                                            
                                            $
                                            83,542Professional
      fees
                                            
                                            
                                            66,200
                                            
                                            
                                            
                                            64,700Directors
      fees
                                            
                                            
                                            30,000
                                            
                                            
                                            
                                            24,500Other
                                            
                                            
                                            5,757
                                            
                                            
                                            
                                            1,265Total
                                            
                                            $
                                            118,227
                                            
                                            
                                            $
                                            174,007
  6.
                                Mortgages
      Payable
  In June
2007, in connection with the purchase of the Port Jefferson Professional Park,
the Company assumed a $5,551,191 mortgage payable to a bank (the “Mortgage”).
The Mortgage bears interest at 5.75% through February 1, 2012 and adjusts to the
higher of 5.75% or 275 basis points in excess of the Federal Home Loan Bank’s
five year Fixed Rate Advance (“Fixed Rate Advance”) thereafter. The Mortgage is
payable in monthly installments of principal and interest totaling $33,439
through February 2012. From March 1, 2012 through February 1, 2022, the minimum
monthly installment will be no less than $33,439 and will vary based upon the
Fixed Rate Advance. In February 2022, a balloon payment is due of approximately
$3,668,000. The Mortgage is collateralized by the Port Jefferson Professional
Park in Port Jefferson Station, New York.
  In June
2008, in connection with the purchase of the Cortlandt Medical Center in
Cortlandt Manor, New York, the Company borrowed $5,250,000 from a bank (the
“Cortlandt Mortgage”). The Cortlandt Mortgage originally bore interest at a per
annum rate of 225 basis points above the one month LIBOR rate (4.71% at
inception) through July 1, 2018, subject to monthly adjustment. The Cortlandt
Mortgage is payable in monthly installments with a fixed principal payment of
$17,500 through June 1, 2018. In July 2018, a balloon payment is due of
approximately $3,168,000. The Cortlandt Mortgage is collateralized by the
Cortlandt Medical Center. As part of the terms and conditions of the Cortlandt
Mortgage, the Company exercised an option to enter into an interest rate swap
agreement in November 2008 with M&T Bank Corporation thereby fixing the
interest rate at 5.66% through November 1, 2011.
  The
mortgages payable mature as follows:
  Years
      Ending December31,
                                      
                                      Amount2009
                                      
                                      $
                                      302,0002010
                                      
                                      
                                      307,0002011
                                      
                                      
                                      313,0002012
                                      
                                      
                                      319,0002013
                                      
                                      
                                      326,000Thereafter
                                      
                                      
                                      8,994,000
  Interest
expense for the years ended December 31, 2008 and 2007 approximated $466,000 and
$162,000, respectively.
  F-13
 
 GYRODYNE
COMPANY OF AMERICA, INC.
 AND
SUBSIDIARIES
 
 Notes
      to Consolidated Financial StatementsYears
      Ended December 31, 2008 and
2007
 7.
              Income
      Taxes
 
 The
Company files a federal and state income tax return that includes all 100% owned
non taxable REIT subsidiaries. The Company files separate state income tax
returns for its taxable REIT subsidiary.
  The
benefit for income taxes is comprised of the following:
  Year
      Ended December 31,2008
                                      
                                      
                                      2007Current:Federal
                                      
                                      $
                                      -
                                      
                                      
                                      $
                                      (100,989
                                      )State
                                      
                                      
                                      -
                                      
                                      
                                      
                                      --
                                      
                                      
                                      
                                      (100,989
                                      )Deferred:Federal
                                      
                                      
                                      (1,880,000
                                      )
                                      
                                      
                                      (143,000
                                      )State
                                      
                                      
                                      (616,000
                                      )
                                      
                                      
                                      (160,000
                                      )(2,496,000
                                      )
                                      
                                      
                                      (303,000
                                      )$
                                      (2,496,000
                                      )
                                      
                                      $
                                      (403,989
                                      )
  December
      31,2008
                            
                            
                            2007Deferred
      Tax Liabilities:Unrealized
      gain on investment in Citrus Grove
                            
                            $
                            (1,209,000
                            )
                            
                            $
                            (905,000
                            )Gain
      on condemnation (a)
                            
                            
                            (4,127,000
                            )
                            
                            
                            (6,927,000
                            )Total
      Deferred Tax Liabilities
                            
                            
                            (5,336,000
                            )
                            
                            
                            (7,832,000
                            )Net
      Deferred Income Taxes
                            
                            $
                            (5,336,000
                            )
                            
                            $
                            (7,832,000
                            )
  The
Company is taxed as a REIT for federal and state income tax purposes under
section 856(c)(1) of the Internal Revenue Code (the “Code”). As long as the
Company qualifies for taxation as a REIT, it generally will not be subject to
federal and state income tax. If the Company fails to qualify as a REIT in any
taxable year, it will be subject to federal and state income tax on its taxable
income at regular corporate rates. Unless entitled to relief under specific
statutory provisions, the Company will also be disqualified for taxation as a
REIT for the four taxable years following the year in which it loses its
qualification. Even if the Company qualifies as a REIT, it may be subject to
certain state and local taxes on its income and property and to federal income
and excise taxes on its undistributed income.
  (a)
                In
      accordance with Section 1033 of the Internal Revenue Code, the Company has
      deferred recognition of the gain on the condemnation of its real property
      for income tax purposes. If the Company replaces the condemned property
      with like kind property by April 30, 2009 (or such extended period if
      requested and approved by the Internal Revenue Service at its discretion)
      recognition of the gain is deferred until the newly acquired property is
      disposed of. On June 27, 2007 and on June 2, 2008, the Company acquired
      the Port Jefferson Professional Park and the Cortlandt Medical Center,
      respectively. These purchases totaled approximately $15,914,000 and
      represent a reinvestment of only a portion of the condemnation proceeds.
      The Company has a deferred tax liability for the effect of the gain on
      condemnation. As of December 31, 2008, the remaining balance of
      condemnation proceeds to be reinvested is approximately
      $10,401,000.
  F-14
 
 GYRODYNE
COMPANY OF AMERICA, INC.
 AND
SUBSIDIARIES
 
 Notes
      to Consolidated Financial StatementsYears
      Ended December 31, 2008 and
2007
 A
reconciliation of the federal statutory rate to the Company’s effective tax rate
is as follows:
 Year
      Ended December 31,2008
                  
                  
                  2007U.S.
      Federal Statutory Income Rate
                  
                  
                  -
                  
                  
                  
                  -State
      Income Tax, net of federal tax benefits
                  
                  
                  -
                  
                  
                  
                  -Reversal
      of Deferred Taxes Resulting from REIT Election and Reinvestment of
      Condemnation Proceeds
                  
                  
                  (293.6
                  )%
                  
                  
                  (15.4
                  )%Differences
      Related to Investment in Citrus Grove
                  
                  
                  31.9
                  %
                  
                  
                  (5.3
                  )%(261.7
                  )%
                  
                  
                  (20.7
                  )%
  8.
                Retirement
      Plans
 The
Company has a noncontributory defined benefit pension plan covering
substantially all of its employees. The benefits are based on annual average
earnings for the highest sixty (60) months (whether or not continuous)
immediately preceding the Participant's termination date. Annual contributions
to the plan are at least equal to the minimum amount, if any, required by the
Employee Retirement Income Security Act of 1974 but no greater than the maximum
amount that can be deducted for federal and state income tax purposes.
Contributions are intended to provide not only for benefits attributed to
service to date but also those expected to be earned in the future. During the
years ended December 31, 2008 and 2007, the Company was not required and did not
make any contributions to the Plan. In the year ended 2009, the Company expects
to make a contribution of $200,000.
 F-15
 
 GYRODYNE
COMPANY OF AMERICA, INC.
 AND
SUBSIDIARIES
 
 Notes
      to Consolidated Financial StatementsYears
      Ended December 31, 2008 and
2007
 The
following tables provide a reconciliation of the changes in the plan's benefit
obligations and fair value of assets over years ended December 31, 2008 and 2007
and a statement of the funded status as of December 31, 2008 and
2007:
 December
      31,2008
                          
                          
                          2007Pension
      BenefitsReconciliation
      of Benefit Obligation:Obligation
                          
                          $
                          2,225,957
                          
                          
                          $
                          2,341,336Service cost
                          
                          
                          93,258
                          
                          
                          
                          121,392Interest cost
                          
                          
                          133,973
                          
                          
                          
                          132,108Actuarial (gain)
      loss
                          
                          
                          (132,644
                          )
                          
                          
                          (195,242
                          )Benefit payments
                          
                          
                          (139,756
                          )
                          
                          
                          (173,637
                          )Obligation
                          
                          $
                          2,180,788
                          
                          
                          $
                          2,225,957Reconciliation
      at Fair Value of Plan Assets:Fair value of plan assets,
      beginning of year
                          
                          $
                          2,854,563
                          
                          
                          $
                          3,808,671Actual return on plan
      assets
                          
                          
                          (1,249,384
                          )
                          
                          
                          (780,471
                          )Benefit payments
                          
                          
                          (139,756
                          )
                          
                          
                          (173,637
                          )Fair
      Value of Plan Assets, end of year
                          
                          $
                          1,465,423
                          
                          
                          $
                          2,854,563Funded
      Status:(Liability)
asset
                          
                          $
                          (715,365
                          )
                          
                          $
                          628,606Unrecognized (gain)
      loss
                          
                          
                          1,828,576
                          
                          
                          
                          496,722Net
      Amount Recognized
                          
                          $
                          1,113,211
                          
                          
                          $
                          1,125,328
  For the
year ended December 31, 2008, the actuarial pension loss recognized in other
comprehensive income was $1,828,576.  At December 31, 2008 and 2007,
unrecognized actuarial pension losses of $1,828,576 and $496,722 have not yet
been recognized as a component of net periodic pension benefit
cost.  The amounts in accumulated other comprehensive loss that are
expected to be recognized as components of net periodic benefit cost during 2009
total $225,775.
  The
accumulated benefit obligation was $1,926,676 and $1,883,163 as of December 31,
2008 and 2007, respectively.
  The
following table provides the components of net periodic benefit cost for the
plans for the years ended December 31, 2008 and 2007:
 December
      31,2008
                          
                          
                          2007Pension
      BenefitsService
      Cost
                          
                          $
                          93,258
                          
                          
                          $
                          121,392Interest
      Cost
                          
                          
                          133,973
                          
                          
                          
                          132,108Expected
      Return on Plan Assets
                          
                          
                          (222,240
                          )
                          
                          
                          (298,355
                          )Amortization
      of Actuarial (Gain)/Loss
                          
                          
                          7,126
                          
                          
                          
                          -Net
      Periodic Benefit Cost After Curtailments and Settlements
                          
                          $
                          12,117
                          
                          
                          $
                          (44,855
                          )
  F-16
 
 GYRODYNE
COMPANY OF AMERICA, INC.
 AND
SUBSIDIARIES
 
 Notes
      to Consolidated Financial StatementsYears
      Ended December 31, 2008 and
2007
  December
      31,2008
                        2007Pension
      BenefitsWeighted-Average
      AssumptionsDiscount rate
                        7.16%
                        6.59%Expected return on plan
      assets
                        8.00%
                        8.00%Rate of compensation
      increase
                        5.00%
                        5.00%
  The
Plan’s investment objectives are expected to be achieved through a portfolio mix
of Company stock, other investments, and cash and cash equivalents which reflect
the Plan’s desire for investment return.
  The
defined benefit plan had the following asset allocations as of their respective
measurement dates:
 
 
 December
      31,2008
                        
                        
                        2007Common
      Stock – Gyrodyne Company of America, Inc.
                        
                        
                        94.4%
                        
                        
                        
                        97.6%Other
      Funds
                        
                        
                        5.6%
                        
                        
                        
                        2.4%Total
                        
                        
                        100.0%
                        
                        
                        
                        100.0%
  Securities
of the Company included in plan assets are as
follows:
 December
      31,2008
                    
                    
                    2007Number
      of Shares
                    
                    
                    55,330
                    
                    
                    
                    60,580Market
      Value
                    
                    $
                    1,382,697
                    
                    
                    $
                    2,784,863
  Expected
approximate future benefit payments are as follows:
 Years
      Ending December 31,
                      
                      Amount2009
                      
                      $
                      164,0002010
                      
                      
                      155,0002011
                      
                      
                      172,0002012
                      
                      
                      163,0002013
                      
                      
                      154,0002014
      – 2018
                      
                      
                      669,000
  9.
                  Stock
      Option Plans
  Incentive Stock Option Plan -The Company had a stock option plan (the "Plan") which expired in October
2003, under which participants were granted Incentive Stock Options ("ISOs"),
Non-Qualified Stock Options ("NQSOs") or Stock Grants. The purpose of the Plan
was to promote the overall financial objectives of the Company and its
shareholders by motivating those persons selected to participate in the Plan to
achieve long-term growth in shareholder equity in the Company and by retaining
the association of those individuals who were instrumental in achieving this
growth. Such options or grants became exercisable at various intervals based
upon vesting schedules as determined by the Compensation Committee. In 2007,
67,105 options were exercised with a weighted average exercise price of $16.42.
There were no options outstanding as of December 31, 2008 and
2007.
  F-17
 
 GYRODYNE
COMPANY OF AMERICA, INC.
 AND
SUBSIDIARIES
 
 Notes
      to Consolidated Financial StatementsYears
      Ended December 31, 2008 and
2007
 Incentive Compensation Plan -The Company has an incentive compensation plan for all full-time
employees and members of the Board in order to promote shareholder value. The
benefits of the incentive compensation plan are realized only upon a change in
control of the Company. Change-in-control is defined as the accumulation by any
person, entity or group of 30% or more of the combined voting power of the
Company's voting stock or the occurrence of certain other specified events. In
the event of a change in control, the Company's plan provides for a cash payment
equal to the difference between the plan's "establishment date" price of $15.39
per share and the per share price of the Company's common stock on the closing
date, equivalent to 100,000 shares of Company common stock, such number of
shares and “establishment date” price per share subject to adjustments to
reflect changes in capitalization. The payment amount would be distributed to
eligible participants based upon their respective weighted percentages (ranging
from .5% to 18.5%).
  10.
                  Revolving
      Credit Line
  The
Company's line of credit has a borrowing limit of $1,750,000, bears interest at
the lending institution's prime-lending rate (3.25% at December 31, 2008) plus
1%, and is subject to certain financial covenants. The line is secured by
certain real estate and expires on June 1, 2009. As of December 31, 2008, and
2007, $1,750,000 was available under this agreement and the Company was in
compliance with the financial covenants.
  11.
                  Concentration
      of Credit Risk
  Financial
instruments, which potentially subject the Company to concentrations of credit
risk, consist principally of cash and cash equivalents and securities issued
with the guarantee of U.S. Government Agencies. The Company places its temporary
cash investments with high credit quality financial institutions and generally
limits the amount of credit exposure in any one financial institution. At times
the Company maintains bank account balances, which exceed FDIC limits. The
Company has not experienced any losses in such accounts and believes that it is
not exposed to any significant credit risk on cash. Management does not believe
significant credit risk exists at December 31, 2008 and 2007.
  12.
                    Commitments
 Lease revenue
commitments - The future minimum revenues from rental property under the
terms of all noncancellable tenant leases, assuming no new or renegotiated
leases are executed for such premises, for future years are approximately as
follows:
  Years
      Ending December 31,
                                                
                                                Amount2009
                                                
                                                $
                                                3,023,0002010
                                                
                                                
                                                1,980,0002011
                                                
                                                
                                                1,122,0002012
                                                
                                                
                                                560,0002013
                                                
                                                
                                                507,000Thereafter
                                                
                                                
                                                1,668,000$
                                                8,860,000
  Employment
agreements - Effective December 31, 2008, the Company amended the
existing employment contracts with two officers to comply with Section 409A of
the Internal Revenue Code. The annual salaries of both officers at December 31,
2008 aggregate to approximately $397,000.
  F-18
 
 GYRODYNE
COMPANY OF AMERICA, INC.
 AND
SUBSIDIARIES
 
 Notes
      to Consolidated Financial StatementsYears
      Ended December 31, 2008 and
2007
 Land development
contract - The Company entered into a Golf Operating and Asset Management
Agreement (the "Agreement") with Landmark National ("Landmark") for the design
and development of an 18-hole championship golf course community. On February
12, 2007, as a result of the State University of New York at Stony Brook’s (“the
University’s”) condemnation of the Flowerfield property, the Company entered
into an agreement with Landmark National to terminate two agreements, the Golf
Operating Agreement and the Asset Management Agreement, both dated April 9,
2002. In addition to abandoning its claim for 10% of all proceeds related to the
condemnation and any sale and/or development of the remaining Flowerfield
acreage, Landmark agreed to provide consulting services in connection with the
eminent domain litigation. The agreement also includes consideration for
previously provided services. The Company paid Landmark $2,000,000, of which
$500,000 was accrued by the Company during its year ended December 31, 2005 as a
termination fee. In addition the Company retained Landmark and will pay them
$1,000,000 over the next thirty-six months, commencing on March 1, 2007, in
recognition of services rendered between 2004 and 2006, and for general
consulting, review of pertinent documents, consultations regarding land planning
and economic feasibility studies and coordination with project engineers
associated with the Company’s claim for additional
compensation.
  13.
                      Fair
      Value of Financial
Instruments
  The
methods and assumptions used to estimate the fair value of the following classes
of financial instruments were:
  The
carrying amount of cash, receivables and payables and certain other short-term
financial instruments approximate their fair value.
  The
estimated fair value of the Company's investment in the Callery Judge Grove
property at December 31, 2008, based upon an independent third party appraisal
report, is approximately $21,700,000 without adjustment for minority interest
and lack of marketability discount, based strictly on a pro rata basis of the
Company's ownership percentage.
  Assets and Liabilities Measured at
Fair-Value - On January 1, 2008, the Company adopted
SFAS No. 157, Fair Value Measurements (“SFAS 157”), which defines
fair-value, establishes a framework for measuring fair-value, and expands
disclosures about fair-value measurements. SFAS 157 applies to reported
balances that are required or permitted to be measured at fair-value under
existing accounting pronouncements; accordingly, the standard does not require
any new fair-value measurements of reported balances.
  On
January 1, 2008, the Company adopted SFAS No. 159, The Fair Value
Option for Financial Assets and Financial Liabilities, which permits companies
to choose to measure certain financial instruments and other items at fair-value
in order to mitigate volatility in reported earnings caused by measuring related
assets and liabilities differently. However, we have not elected to measure any
additional financial instruments and other items at fair-value (other than those
previously required under other GAAP rules or standards) under the provisions of
this standard.
 
 SFAS 157
emphasizes that fair-value is a market-based measurement, not an entity-specific
measurement. Therefore, a fair-value measurement should be determined based on
the assumptions that market participants would use in pricing the asset or
liability. As a basis for considering market participant assumptions in
fair-value measurements, SFAS 157 establishes a fair-value hierarchy that
distinguishes between market participant assumptions based on market data
obtained from sources independent of the reporting entity (observable inputs
that are classified within Levels 1 and 2 of the hierarchy) and the
reporting entity’s own assumptions about market participant assumptions
(unobservable inputs classified within
Level 3 of the hierarchy).
 F-19
 GYRODYNE
COMPANY OF AMERICA, INC.
 AND
SUBSIDIARIES
 
 Notes
      to Consolidated Financial StatementsYears
      Ended December 31, 2008 and
2007
 Level 1
inputs utilize quoted prices (unadjusted) in active markets for identical assets
or liabilities that we have the ability to access. Level 2 inputs are
inputs other than quoted prices included in Level 1 that are observable for
the asset or liability, either directly or indirectly. Level 2 inputs may
include quoted prices for similar assets and liabilities in active markets, as
well as inputs that are observable for the asset or liability (other than quoted
prices), such as interest rates, foreign exchange rates, and yield curves that
are observable at commonly quoted intervals. Level 3 inputs are
unobservable inputs for the asset or liability, which is typically based on an
entity’s own assumptions, as there is little, if any, related market activity.
In instances where the determination of the fair-value measurement is based on
inputs from different levels of the fair-value hierarchy, the level in the
fair-value hierarchy within which the entire fair-value measurement falls is
based on the lowest level input that is significant to the fair-value
measurement in its entirety. Our assessment of the significance of a particular
input to the fair-value measurement in its entirety requires judgment, and
considers factors specific to the asset or liability.
 
 Currently,
we have investments in hybrid mortgage-backed securities, with a AAA rating
fully guaranteed by U.S. government agencies (the Federal National
Mortgage Association and the Federal Home Loan Mortgage Corporation). The fair
values of mortgage-backed securities originated by
U.S. government agencies are based on a pricing model that incorporates
prepayment speeds and spreads to determine appropriate average life of mortgage-backed securities. The spreads are sourced from
broker/dealer's trade prices and the new issue market. As the significant inputs
used to price the mortgage-backed securities are observable market inputs,
the fair values of these securities are included in the Level 2 fair value
hierarchy.
  14.
                      Related
      Party Transactions
  A law
firm related to a director provided legal services to the Company for which it
was compensated approximately $1,000 for each year ended December 31, 2008 and
December 31, 2007, respectively.
  15.
                      Major
      Customers
 For the
year ended December 31, 2008 rental income from the three largest tenants
represented 6%, 5% and 4% of total rental income.
  For the
year ended December 31, 2007 rental income from the three largest tenants
represented 9%, 7% and 5% of total rental income.
  16.
                      Supplementary
      Information - Quarterly Financial Data
  (Unaudited)
 Year
      Ended December 31, 2008
                        
                        First
                        
                        
                        Second
                        
                        
                        Third
                        
                        
                        FourthRental
      Income
                        
                        $
                        660,867
                        
                        
                        $
                        763,324
                        
                        
                        $
                        830,286
                        
                        
                        $
                        837,065Rental
      Property Expense
                        
                        
                        (254,041
                        )
                        
                        
                        (276,528
                        )
                        
                        
                        (356,035
                        )
                        
                        
                        (338,445
                        )Income
      from Rental Property
                        
                        
                        406,826
                        
                        
                        
                        486,796
                        
                        
                        
                        474,251
                        
                        
                        
                        498,620Net
      (Loss) Income
                        
                        $
                        (127,647
                        )
                        
                        $
                        2,642,711
                        
                        
                        $
                        (310,038
                        )
                        
                        $
                        (662,777
                        )Net
      (Loss) Income Per Common ShareBasic
                        
                        $
                        (.10
                        )
                        
                        $
                        2.05
                        
                        
                        $
                        (.24
                        )
                        
                        $
                        (.51
                        )Diluted
                        
                        $
                        (.10
                        )
                        
                        $
                        2.05
                        
                        
                        $
                        (.24
                        )
                        
                        $
                        (.51
                        )
   F-20
 GYRODYNE
COMPANY OF AMERICA, INC.
 AND
SUBSIDIARIES
 
 Notes
      to Consolidated Financial StatementsYears
      Ended December 31, 2008 and
2007
    Year
      Ended December 31, 2007
                        
                        First
                        
                        
                        Second
                        
                        
                        Third
                        
                        
                        FourthRental
      Income
                        
                        $
                        286,859
                        
                        
                        $
                        314,104
                        
                        
                        $
                        598,992
                        
                        
                        $
                        637,065Rental
      Property Expense
                        
                        
                        (200,258
                        )
                        
                        
                        (191,320
                        )
                        
                        
                        (212,507
                        )
                        
                        
                        (249,393
                        )Income
      from Rental Property
                        
                        
                        86,601
                        
                        
                        
                        122,784
                        
                        
                        
                        386,485
                        
                        
                        
                        387,672Net
      (Loss) Income
                        
                        $
                        (185,428
                        )
                        
                        $
                        434,842
                        
                        
                        $
                        (158,143
                        )
                        
                        $
                        (1,642,925
                        )Net
      (Loss) Income Per Common ShareBasic
                        
                        $
                        (.15
                        )
                        
                        $
                        .34
                        
                        
                        $
                        (.12
                        )
                        
                        $
                        (1.28
                        )Diluted
                        
                        $
                        (.15
                        )
                        
                        $
                        .34
                        
                        
                        $
                        (.12
                        )
                        
                        $
                        (1.28
                        )
  17.
                  Interest
      Income
  Interest
income consists of the following:
 Year
      Ended December 31,2008
                        
                        
                        2007Interest
      Income on Investments
                        
                        $
                        498,293
                        
                        
                        $
                        871,046Interest
      Income – Other
                        
                        
                        57,765
                        
                        
                        
                        167,104$
                        556,058
                        
                        
                        $
                        1,038,150
  18.
                Contingencies
  Gyrodyne Company of America, Inc. v. The State
University of New York at Stony Brook
  On May 1,
2006 the Company commenced litigation in the Court of the State of New York
seeking just compensation for the 245.5 acres in St. James and Stony Brook, New
York (the “Property”) that were appropriated by the State on November 2, 2005
under the power of eminent domain.  On November 10, 2008, Gyrodyne and
the State of New York filed with the Court of Claims their respective appraisals
regarding the value of the Property. As of the November 2005 appropriation date,
Gyrodyne’s appraiser has valued the Property at $125,000,000, based in part upon
a separate zoning analysis report that Gyrodyne also filed with the Court which
concluded that there was a high probability the Property would have been rezoned
from light industrial use to a Planned Development District.  The
State’s appraiser appraised the Property using the current light industrial
zoning at a fair market value of $22,450,000.
  As the
State's appraisal is $3,865,000 less than the $26,315,000 Advance Payment
already made to Gyrodyne if the Court of Claims were to adopt the State of New
York’s November 10, 2008 appraisal, the State could recoup the $3,865,000
difference between the Advance Payment and the State of New York’s November 10,
2008 appraisal, including interest already paid on the Advance
Payment.
  The
Company believes the State’s appraisal is fundamentally flawed in that it
misapplied the eminent domain law’s requirement that just compensation be
determined based upon the highest and best use and the probability that such use
could have been achieved.
  The Court
of Claims has by Order dated February 25, 2009 scheduled the trial in this case
to commence on August 3, 2009.
  F-21
 
 GYRODYNE
COMPANY OF AMERICA, INC.
 AND
SUBSIDIARIES
 
 Notes
      to Consolidated Financial StatementsYears
      Ended December 31, 2008 and
2007
 Faith Enterprises v. Gyrodyne, Supreme Court, Suffolk
County, Index # 3511/2007.
  Faith
Enterprises ("Faith") a prior tenant at 7 Flowerfield, failed to fulfill its
rental payment obligation. In February 2007, the Company served Faith with a
notice of default. Faith sued the Company in Suffolk Supreme Court, seeking to
stop the eviction and seeking damages. In November 2007, the Company
commenced a third-party action against the guarantors of Faith's lease. In late
2008 and early 2009, asset searches were conducted and it was determined that
Faith and the guarantors do not have assets that could be used to satisfy any
judgment that Gyrodyne may ultimately get in this case.  As a result,
the Company and Faith agreed to enter into a stipulation of
discontinuance, which would discontinue Faith's litigation against the
Company and the Company's litigation against Faith and its guarantors. The
stipulation has been drafted and is being circulated for review, comments
and finalization.
  Tax On Condemnation Proceeds.
  If the
Company does not reinvest the condemnation proceeds received on the condemned
property in accordance with Internal Revenue Code section 1033 by April 30,
2009, the uninvested proceeds will be subject to federal and state taxes as a
gain on the condemnation. On June 27, 2007 and on June 2, 2008, the Company
acquired the Port Jefferson Professional Park and the Cortlandt Medical Center,
respectively; both properties qualify as replacement property under IRC section
1033. These purchases totaled approximately $15,914,000 and represent a
reinvestment of only a portion of the condemnation proceeds. The Company will
continue to recognize a deferred tax liability for the potential effect of not
reinvesting the proceeds in like kind property. As of December 31, 2008, the
remaining balance of condemnation proceeds to be reinvested is approximately
$10,401,000.
  19.
                  Subsequent
      Events
  Property Purchase - On
February 2, 2009, the Company entered into a non-binding Purchase and Sale
Agreement (the “Agreement”) with Fairfax Medical Center, LLC (the “Seller”) to
acquire the land and buildings that comprise a medical office complex known as
the Fairfax Medical Center in Fairfax, Virginia, located at 10721 Main Street
(the “Property”). The Property consists of approximately 59,000 square feet
of rentable space and has a current occupancy rate of 84%. Other than with
respect to the Agreement itself, there is no material relationship between the
Company and the Seller.
  The
purchase price for the Property is approximately $13.1 million, $100,000 of
which was paid as a refundable deposit upon the signing of the Agreement, and
the remainder is required to be paid at closing. The closing is expected to
take place on or about March 31, 2009, but in no event later than April 30,
2009, and is subject to customary representations and conditions, including the
condition that the Company obtain financing in a principal amount equal to or
greater than 59% of the purchase price, or $8 million, in the form of a new loan
or, at the Company’s discretion, assumption and modification of existing debt
secured against the Property. The Agreement is subject to a 45-day
inspection period during which the Company may, at its own expense, arrange for
legal, environmental and/or engineering analyses. The Company may terminate
the Agreement prior to the expiration of the inspection period in the event that
the Seller fails to cure any title or survey objections pursuant to the terms of
the Agreement.
  The
proposed transaction qualifies for the deferral treatment under Section 1033 of
the Internal Revenue Code and would complete the reinvestment program of the
$26.3 million Advance Payment received in connection with the condemnation of
the 245 acres of the Flowerfield property.
  F-22
 
 GYRODYNE
COMPANY OF AMERICA, INC.
 AND
SUBSIDIARIES
 
 Notes
      to Consolidated Financial StatementsYears
      Ended December 31, 2008 and
2007
 Callery-Judge Grove, L.P.
Offering – In February 2009, the Callery-Judge Grove, L.P. (the "Grove")
made an offering to its partners to participate and invest additional funds in
the partnership. The offering, or capital call, has a minimum and maximum
offering amount of $4 million and $6 million, respectively. In March 2009, the
Company's management and Board of Directors informed the Grove that it would not
participate in the offering.
    F-23