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**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

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**FORM 10-K**

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**(Mark one)**

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**x**                              ANNUALREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

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**For the fiscal yearended  December 31, 2006**

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**o**                                 TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

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**For the transition periodfrom                       to                       **

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**Commission filenumber  0-5576**

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**SPHERIX INCORPORATED**

(Exact name of Registrant as specified in its Charter)

 

| **Delaware**                                                    | ** ** | **52-0849320**                        |
|-----------------------------------------------------------------|------------|---------------------------------------|
| (State or other  jurisdiction of incorporation or organization) |       | (I.R.S. Employer  Identification No.) |

 

**12051 Indian Creek Court,Beltsville, Maryland 20705**

(Address of principal executive offices)

 

**Registrant’s telephone number, including area code:  **301-419-3900

** **

**Securitiesregistered pursuant to Section 12(b) of the Act:**

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| **Title of each class**                   | ** ** | **Name of  each exchange on which registered** |
|-------------------------------------------|------------|------------------------------------------------|
| Common Stock  ($.005 par value per share) |       | NASDAQ Global  Market                          |

 

Securities registered pursuant to Section 12(g) of theAct:  None.

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

Indicate by check mark if the registrant is notrequired 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) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the Registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days. Yes x   No o

Indicate by check mark if disclosure of delinquentfilers pursuant to Item 405 of Regulation S-K is not contained herein, and willnot be contained, to the best of Registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of this Form 10-Kor any amendment to this Form 10-K. o

Indicate by check mark whether the Registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer (asdefined in Rule 12b-2 of the Act).

Large AcceleratedFiler o      AcceleratedFiler o      Non-accelerated Filer x

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

State the aggregate market value of the voting andnon-voting common equity held by non-affiliates computed by reference to theprice at which the common equity was last sold, or the average bid and askedprice of such common equity, as of the last business day of the registrant’smost recently completed second fiscal quarter (for purposes of thisdetermination, only our Directors and Executive Officers have been deemedaffiliates):  Common Stock (Par Value$.005)—$19,300,000

Therewere 14,254,562 shares of the Registrant’s Common Stock outstanding as of March23, 2007.

 

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**PART I**

Certain statementscontained in this Form 10-K, including without limitation, statementscontaining the words “believes,” “estimates,” “expects” and words of similarimport, constitute “forward looking statements” within the meaning of Section27A of the Securities Act of 1933 and Section 21E of the Securities ExchangeAct of 1934.  Such words and expressionsare intended to identify such forward looking statements, but are not intendedto constitute the exclusive means of identifying such statements.  Such forward looking statements involve knownand unknown risks, uncertainties and other factors that may cause the actualresults, performance or achievements of the Company, or industry results, to bematerially different from any future results, performance or achievementsexpressed or implied by such forward looking statements.  Given these uncertainties, prospectiveinvestors are cautioned not to place undue reliance on such forward lookingstatements.  The Company disclaims anyobligation to update any such factors or to publicly announce the results ofany revisions to any of the forward looking statements contained herein toreflect any events or developments.  Seethe Company’s Form 8-K filing dated March 26, 1999, for a more detailedstatement concerning forward looking statements.

**Item1.  DESCRIPTION OF BUSINESS**

**General**

SpherixIncorporated (the “Company” or “Registrant”), a Delaware corporation, wasfounded in 1967.  The Company consists ofa biotechnology segment (“BioSpherix”) and an information services segment (“InfoSpherix”).  At the May 2005 annual meeting shareholdersapproved the establishment of InfoSpherix as a wholly-owned subsidiary ofSpherix, which took effect January 2006.

The principalexecutive offices of the Company are located at 12051 Indian Creek Court,Beltsville, Maryland 20705, and its telephone number is (301) 419-3900.  The Company’s Common Stock trades on theNASDAQ Global Market system under the symbol SPEX.

**AvailableInformation**

Our principalInternet address is www.spherix.com.  Wemake available free of charge on www.spherix.com our annual, quarterly andcurrent reports, and amendments to those reports, as soon as reasonablypracticable after we electronically file such material with, or furnish it to,the Securities and Exchange Commission (“SEC”).

**BioSpherix**

This division isthe Company’s biotechnology research and development arm, dedicated todeveloping proprietary products with a view toward commercialapplications.  The Company hasaccumulated a number of patents on the products and processes developed byBioSpherix.  As set forth below, theseproducts are in the development stage and will require substantial additionalinvestment to bring any of these products to market.

Tagatose as aLow-Calorie, Full-Bulk Sweetener.  Spherix has patented the use of a naturallyoccurring sugar, tagatose, as a low-calorie, full-bulk sweetener.  It is a true sugar that looks, feels, andtastes like table sugar.  The Company hasdeveloped and patented a method for making tagatose from whey or lactose.  Whey is a waste product from cheesemanufacturing.

The Firm has beendeveloping its sweetener since receiving a U.S. patent for its use andmanufacture as a low-calorie sweetener in 1988, which patent expired August 29,2006.  The Company received two U.S.patents for its tagatose production process in 1991 and 1992, which both expireJuly 19, 2009.  It has received a numberof foreign patents corresponding to these three and other U.S. patents.  These countries include Canada and Japan,both large potential markets.

In January 1997,the Company completed a license agreement with Arla Foods Ingredients amba (“Arla”)(formerly MD Foods Ingredients amba, “MDFI”) of Denmark for the exclusive,worldwide rights to market and distribute tagatose as a food and beverageingredient in return for a non-refundable up-front payment and fees on netsales of the sugar for these purposes. Arla manufactures a wide variety of dairy products, foods and foodingredients; it ranks as one of the largest dairy products manufacturers in theworld.  Arla operates cheese plantsproducing large amounts of whey as a by-product.  The License Agreement and an amendmentthereto provide Arla the world-wide right to manufacture and sell tagatose forfood uses, and the right to manufacture tagatose for all uses.

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A panel of expertsretained by Arla declared tagatose as Generally Recognized As Safe (“GRAS”) onApril 11, 2001, permitting sale of tagatose as a food ingredient in theU.S.  The U.S. Food and Drug Administration(“FDA”) issued a “no objection” letter on October 25, 2001.  Tagatose was recommended by the Joint FAO/WHOExpert Committee on Food Additives (JECFA) panel in June 2001 to its manymember countries for use in foods, and in June 2004, JECFA removed its formerlimit on daily consumption of tagatose. In 2003, approval was obtained in South Korea.  In April 2004, tagatose was approved by theFood Standards Australia New Zealand (“FSANZ”), the food health and safetyagency for Australia and New Zealand.  InDecember 2005, tagatose was approved in the European Union.  Arla has begun the approval process fortagatose in Canada, Japan and Mexico.

The U.S. FDAapproved Arla’s recommended caloric value of 1.5 kilocalories per gram,permitting labeling of products containing it as “reduced calorie” in the U.S.

In 2002, Arlaformed a 50/50 joint venture with Nordzucker, a German sugar producer, for themanufacture and sale of tagatose.  Thejoint venture factory was capable of producing 1,200 metric tons per year.  At present Arla believes it has produced asufficient backlog of inventory to satisfy its needs for the foreseeable futurebased on current demand, and accordingly has stopped production at its pilotplant until there is a sufficient increase in the demand for tagatose.  To date, Spherix has earned minimal royaltiesfrom Arla and given the cessation of production by Arla, Spherix does notcurrently expect to receive any future royalties.  With Spherix’s efforts focusing on thenon-food potentials of Naturlose, the Company is pursing the possibility ofrecovering its technology from Arla or securing other production options.

Spherix retainsthe rights to the non-food uses to tagatose. The Company has discovered and patented a number of health and medicaluses for its product, which it has branded “Naturlose®” for uses in health andmedicine as outlined below.  A priorityamong these patented uses is the use of Naturlose in treating Type 2 diabetes.

*Treatmentfor Type 2 Diabetes.* Trials at the University of Maryland School of Medicine have foundtagatose effective as a treatment of Type 2 diabetes in humans.  In addition to alleviating symptoms of thismajor disease, over the one-year trial, all subjects lost weight at physician-approvedrates and showed a significant increase in the desirable type of cholesterol,HDL.  Other than for initial laxation athigh doses (45 to 75 grams per capita per day), accommodated in about twoweeks, no untoward effects were found in any of the research.  In addition, the studies found that Naturloseproduced no rise in blood glucose or insulin levels in diabetic or normalsubjects.  Naturlose taken before theconsumption of glucose produced a blunting effect on the otherwise normallyexpected rise in blood glucose.

In late 2005, theFDA gave BioSpherix permission to begin a Phase 3 clinical trial for Naturloseas a stand-alone drug to treat diabetes. Since then, BioSpherix’s research and development (R&D) activity hasbeen focused primarily on planning and instituting the Phase 3 trial. The Phase3 clinical trial is the last major test, if successful, before requesting drugapproval.  The Company has negotiated twoagreements with contract research organizations (CRO) to conduct the trial, andhas retained Environ International, an FDA regulatory consultant, to guide thetrial.

The Company hascompleted the dose range-finding study and will now proceed with recruitingpatients for the trial, which will take place in Australia and the UnitedStates.  The first participants are expectedto begin the Phase 3 clinical trial in April 2007.  More than 300 subjects from the United Statesand abroad, representing the demographic mix in the U.S., will receive oraldoses of Naturlose to test its ability to treat Type 2 diabetes.  A Phase 3 clinical trial, which gathersevidence regarding effectiveness and safety, is needed to evaluate the overallbenefit-risk relationship of new drugs proposed to the FDA.  The Company believes its chances for a successfuloutcome are enhanced by the widely demonstrated safety of the product; lack ofsafety being the primary cause for failure of most drug candidates.

*Anti-plaqueAgent*:* *In 2005, the Company contractedwith the University of Maryland School of Dentistry to conduct human clinicaltrials on the oral anti-plaque efficacy of Naturlose.  The study demonstrated tagatose to be muchmore resistant to oral bacteria, which form plaque, than is sorbitol, a sugarsubstitute that is widely used in oral care products.  The study suggested ways of modifying theNaturlose product to effect desired plaque reduction.  Such modifications have been made, and theCompany has arranged with the University of Maryland School of Dentistry toconduct a trial of Naturlose toothpaste formulated by the Company in an attemptto establish an anti-plaque claim for the toothpaste.  The clinical trial started in early 2007.

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*Anti-hyperglycemicAgent.*  Tagatosefunctions as an anti-hyperglycemic agent to prevent the formation ofadvanced glycosylation end-products, which is one of the major causes of aging.

*Increasingthe shelf life of stored blood, platelets and medicinal proteins.*  The outsourced project seeking to establishthe use of Naturlose to extend the shelf-life of blood fractions and variousother medical products has been suspended as BioSpherix concentrates on theType 2 diabetes trial.

*Anemiaand Hemophilia Treatment*. Naturlose has been shown to improve blood factors indicating thattagatose may be useful as a drug or drug adjuvant in the treatment of anemiaand hemophilia.

*IncreasedFertility and Improved Fetal Development Drug.*  Naturlose may increase the fertility ofhumans and other animals, to effect higher percentages of live fetuses, and tocause those fetuses to be heavier, but within normal bounds, than those ofhuman or animal controls.

*Preservativeof Human Organs.* Naturlose has shown potential for use in the transplanting and storageof human organs to protect against cyto-oxidation and toxic chemicals.

Prototypes ofNaturlose-based mouthwash, cough syrup, and a fiber digestive aid have beendeveloped by BioSpherix.  Other projectsare in the conceptual stage.

All of thepotential uses mentioned above require further clinical trial studies andregulatory approval before they can be brought to market.

Capital forDevelopment.  While theproducts under development show promise, continued progress is dependent uponmany factors, including, but not limited to, the Company’s having sufficientfunds and resources to pursue them.  Overits history, the Company has supported its research and development in part byusing funds generated by InfoSpherix; however, due to the capital needs ofInfoSpherix, and bank covenants restrictions, InfoSpherix may not be able tosupport the activities of BioSpherix. Funds have also been raised from private placements of Company stock andwarrants, some of the proceeds of which have been used to increase the state ofdevelopment, market penetration and sales of the products mentioned above.  The Company believes that it will requiresubstantial amounts of additional capital to develop and bring its BioSpherixproducts to market.  In order to fullydevelop, manufacture, distribute and sell Naturlose for these purposes, theCompany is seeking to raise funds and will also seek a relationship with amajor pharmaceutical company.

BioSpherix revenueaccounted for less than 1% of the Company’s total revenue in 2006.

**InfoSpherixIncorporated**

In January 2006,the InfoSpherix business started operating as a wholly-owned subsidiary ofSpherix Incorporated under the name “InfoSpherix Incorporated.”

InfoSpherix professionals design and operate contact centers,websites, and field kiosks providing information management and materials tothe public on various socially beneficial subjects, as well as otherinformation services, such as reservations and tourism.  InfoSpherix focuses on those clients who arelooking to leverage technology in the ever-advancing world of informationmanagement.  InfoSpherix researches,collects, organizes and disseminates information by providing customizedcontact center services combining advanced data collection systems, expertdecision support systems, tele-support utilizing live operators, and advancedtelecommunication technologies such as Interactive Voice Response (“IVR”).  InfoSpherix answers millions of callsannually from professionals and the public nationwide.  It operates a contact center in Cumberland,Maryland and a second contact center in Carmel, Indiana.  During 2006, the operations of the RapidCity, South Dakota contact center were relocated to Carmel, Indiana.  All contact centers efficiently manage andtrack high volumes of data.  CouplingInfoSpherix’s expert staff with its advanced technologies results in aneffective system to collect and disseminate large amounts of information.  The Company also provides reservationservices for campgrounds and other parks via its ReserveWorld businessline.  Since 1998, InfoSpherix has grownits government park reservation business from one contract to seventeen parkreservation contracts.  InfoSpherix isone of only two major companies in this market. In 2006, Spherix won a new park reservation contract, won the re-competeon two park reservation contracts, and will be the subcontractor onanother.  InfoSpherix’s reservationbusiness accounted for 64% of the Company’s revenue in 2006.

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In October 2006,the Company agreed to a $6 million settlement to end its longstanding legaldispute with the U.S. Department of Agriculture over the government’s award ofa national park and reservation contract to ReserveAmerica.  The Company operated the National ParkService contract for nine years; revenue recognized was $4.0 million, $4.0million and $3.9 million for the years ended December 31, 2006, 2005 and 2004,respectively, or 16%, 17% and 17% of total revenue for each year.  The Company’s National Park Service contractended January 23, 2007.

InfoSpherixaccounted for substantially all of the Company’s revenue in 2006.  Most of InfoSpherix’s revenue traditionallyhas been generated by a few large government contracts.  See Note 1, “Concentrations,” of the Notes tothe consolidated Financial Statements included herein pursuant to Part II ofthis Form 10-K.

**GovernmentContracts**

See Note 10, “Commitmentand Contingencies — *Government Contracts*,”of the Notes to the Financial Statements included herein pursuant to Part II,Item 8 of this Form 10-K, which information is incorporated herein byreference.

Governmentcontracts typically have terms and conditions which, while providing annual ormulti-year terms, subject them to termination upon convenience or default.

**IndustrySegments**

See Note 13, “Informationby Business Segment,” of the Notes to the Financial Statements included hereinpursuant to Part II, Item 8 of this Form 10-K for industry segment informationof the Company, which information is incorporated herein by reference.

**MarketConcentration**

During 2006, 2005,and 2004, essentially all of the Company’s revenue was generated byInfoSpherix.  The Company’s businessoperations are usually dependent upon substantial revenue from a select groupof customers.  In 2006, 2005, and 2004,revenue from the U.S. Government, the State of Michigan and the State ofMaryland each accounted for more than 10% of total Company revenue.

It is currentlyexpected that revenue from the U.S. Government, the State of Michigan, theState of Maryland, and the State of Ohio will each account for more than 10% oftotal Company revenue in 2007.

**Patents and Trademarks**

The Company hasestablished a strong worldwide patent position for tagatose.  These patents and other significant Companypatents are detailed in the following table:

 
| **Patent No.**     | ** ** | **Patent Title**                                                                                | ** ** | **Issue Date** | ** ** | **Expiration Date** |
|--------------------|------------|-------------------------------------------------------------------------------------------------|------------|----------------|------------|---------------------|
| U.S. 7,189,351     |       | D-tagatose as an Anti-Biofilm Agent                                                             |       | 3/13/07        |       | 8/20/22             |
| U.S. 6,585,964     |       | Method for Preventing or Minimizing Biodegradation  of a Substance                              |       | 7/1/03         |       | 5/6/19              |
| U.S. 6,355,409     |       | Tagatose as a Cytoprotective Supplement for the  Storage of Organs to Reduce Reperfusion Injury |       | 3/12/02        |       | 9/1/20              |
| Canada  2,077,257* |       | Process for Manufacturing D-Tagatose                                                            |       | 2/19/02        |       | 1/7/11              |
| U.S. 6,225,452     |       | Increased Fertility and Improved Fetal Development  Drug                                        |       | 5/1/01         |       | 4/26/19             |
| Finland 106861*    |       | Process for Manufacturing D-Tagatose                                                            |       | 4/30/01        |       | 1/7/11              |
| Japan 3,120,403*   |       | Process for Manufacturing D-Tagatose                                                            |       | 10/20/00       |       | 1/7/11              |
| U.S. 6,015,793     |       | Use of Tagatose to Enhance Key Blood Factors                                                    |       | 1/18/00        |       | 4/26/19             |
| Korea 190671*      |       | Process for Manufacturing D-Tagatose                                                            |       | 1/21/99        |       | 1/7/11              |
| Japan 2,138,363*   |       | D-Tagatose as a Low-Calorie Carbohydrate Sweetener  and Bulking Agent                           |       | 9/18/98        |       | 8/29/07             |
| U.S. 5,690,950     |       | Insecticidal Aliphatic Carboxylic Acid Compositions                                             |       | 11/25/97       |       | 10/4/16             |

 

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| **Patent No.**      | ** ** | **Patent Title**                                                      | ** ** | **Issue Date** | ** ** | **Expiration Date** |
|---------------------|------------|-----------------------------------------------------------------------|------------|----------------|------------|---------------------|
| EPO 0 518 874*      |       | Process for Manufacturing D-Tagatose                                  |       | 5/15/96        |       | 1/7/11              |
| U.S. 5,447,917      |       | D-Tagatose as Anti-Hyperglycemic Agent                                |       | 9/5/95         |       | 9/5/12              |
| Hong Kong  127095A* |       | D-Tagatose as a Low-Calorie Carbohydrate Sweetener  and Bulking Agent |       | 8/18/95        |       | 8/25/07             |
| U.S. 5,356,879      |       | D-Tagatose an Anti-Hyperglycemic Agent                                |       | 10/18/94       |       | 2/14/12             |
| Canada 1,321,730*   |       | D-Tagatose as a Low-Calorie Carbohydrate Sweetener  and Bulking Agent |       | 8/31/93        |       | 8/31/10             |
| U.S. 5,166,193      |       | Method for Killing Pests                                              |       | 11/24/92       |       | 11/24/09            |
| Australia  655,166* |       | Process for Manufacturing D-Tagatose                                  |       | 1/7/92         |       | 1/7/07              |
| U.S. 5,078,796*     |       | Process for Manufacturing D-Tagatose (Tagatate)                       |       | 1/7/92         |       | 7/19/09             |
| U.S. 5,002,612*     |       | Process for Manufacturing D-Tagatose                                  |       | 03/26/91       |       | 7/19/09             |
| EPO 257 626*        |       | D-Tagatose as a Low-Calorie Carbohydrate Sweetener  and Bulking Agent |       | 7/25/90        |       | 8/25/07             |

 

*  Licensed toArla Foods.

Trademarks.  The Company has trademarked its name, “Spherix,”“ReserveWorld,” its reservation system, “FlyCracker,” its safe-for-humanspesticide, “Naturlose,” for non-food uses of tagatose, and “BioSpherix.”  It retains trademarks on its original name, “Biospherics,”and a former subsidiary, “Vitalian Corp.”

With respect toall of its inventions, the Company has received approximately 130 patents,including foreign issues.  It has severalpatents pending and many additional invention disclosures.  In addition to its strong patent position,the Company relies on the common law protection of such information as tradesecrets and on confidentiality agreements to protect the value of these assets.

**Seasonality**

Revenue fromreservation and tourism services is greatest in the spring and summer whenvacation planning is the heaviest. Revenue from other sources tends to be more evenly spread throughout theyear, although the fourth quarter is historically the low period of the year.

**SalesBacklog**

Sales backlog, consistingof both funded and unfunded amounts, at December 31, 2006 and 2005, were asfollows (in $000s):

 
| ** **                | ** ** | **December 31, 2006** | ** ** | **December 31, 2005** | ** ** |
|---------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **                | ** ** | **Current**                     | ** ** | **Non-Current**                 | ** ** | **Total** | ** ** | **Current** | ** ** | **Non-Current** | ** ** | **Total** | ** ** |
| InfoSpherix -  Government |       | $                               | 20,800     |                            | $          | 36,000 |   | $ | 56,800 |   | $ | 24,100 |   | $ | 48,200 |   | $ | 72,300 |   |
| InfoSpherix -  Commercial |       | 300                             |       | 300                             |       | 600 |   | 100 |   | — |   | 100 |   |
|                      |       | $                               | 21,100     |                            | $          | 36,300 |   | $ | 57,400 |   | $ | 24,200 |   | $ | 48,200 |   | $ | 72,400 |   |

 

As previouslynoted, the Company agreed to a $6 million settlement of its longstanding legaldispute over the award of the NRRS contract to ReserveAmerica.  As a result the Company’s National ParkService contract ended January 23, 2007. Despite the loss of the National Park Service contract, the Company hasdeveloped a successful niche in providing government campground reservationservices, growing from one to 17 reservation contracts over the past nine yearsand won the re-compete on two of its state reservation contracts.  The Company will continue to pursue itsexpansion into the state campground reservation niche.

**Competition**

**InfoSpherix**

The informationsystems industry is subject to rapid and significant technological change.  The Company is in competition with otherinformation services companies across the nation.  Many of these competitors have substantiallygreater financial and technical resources than the Company.  While acknowledging strong competition fromother information services firms, the Company has developed a specialized nicheby concentrating on high quality, 

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personalized service combined with computerization forefficiency and cost-effectiveness.  TheCompany has established a reputation for rapidly starting up informationprojects to meet its clients’ critical needs, while not compromising highquality and reasonable pricing.  TheCompany has also established a successful niche in government campgroundreservation services and is now one of only two major suppliers of campgroundservices in the U.S.  The other majorsupplier is IAC/InterActiveCorp’s ReserveAmerica, a subsidiary ofTicketmaster.  Over the last three years,the Company has invested over $3 million in computer and telephony systems andnearly $3 million in the development of specialized computer software productsto improve its competitive position.  TheCompany continues to upgrade and enhance those systems.

**BioSpherix**

Competitors ofBioSpherix are numerous and include, among others, major pharmaceutical,chemical, consumer, and biotechnology companies, specialized firms,universities and other research institutions. The Company’s competitors may succeed in developing technologies andproducts that are more effective than any that are being developed by theCompany, and that could render the Company’s technology and potential productsobsolete and noncompetitive.  Many ofthese competitors have substantially greater financial and technical resourcesand production and marketing capabilities than the Company.

**Researchand Development**

BioSpherixexpenditures for research and development were approximately $884,000,$288,000, and $196,000 in 2006, 2005, and 2004, respectively.  These expenditures were incurred primarily inthe ongoing efforts to commercialize Naturlose, including its development fordrug uses and improved production processes.

**GovernmentalRegulation**

The businessactivities of the Company are subject to a variety of Federal and statecompliance, licensing, and certification requirements.  Management believes that the Company is, andhas been at all times, in full compliance with Federal and state environmentalprotection and worker safety laws.

The Company isalso required to comply with the Sarbanes-Oxley Act of 2002.  On September 21, 2005, the SEC announced theextension of the compliance dates of Section 404 of the Sarbanes-Oxley Act fornon-accelerated filers.  Under theextension, non-accelerated filers, such as Spherix, will begin to comply withthe internal control over financial reporting requirements for the first fiscalyear ending on or after December 15, 2007. The Company anticipates that the cost of implementing Section 404 overthe next two years could have a material impact on the results of operations.

**Environment**

Compliance withcurrent federal, state and local provisions regulating the discharge ofmaterials into the environment, or otherwise relating to the protection of theenvironment, has not had, and in the opinion of management will not have, amaterial effect on the Company’s financial position, results of operations,capital expenditures, cash flows or competitive position.

**Employees**

In 2006, theCompany employed an average of 588 individuals on a full- or part-timebasis.  Of this total, approximately 344were full-time employees.  The Company’semployees are not currently unionized, and management believes that itsrelation with the Company’s employees are harmonious.

**GeographicAreas**

InfoSpherix’sbusiness is, and has been, based in the United States.  Accordingly, InfoSpherix revenue is entirelyfrom U.S.-based operations.

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**Item1A.  RISK FACTORS**

Any of the riskfactors we describe below could severely harm our business, financial conditionand operating results.  The market priceof our common stock could decline if one or more of these risks anduncertainties develop into actual events.

**RISKS RELATED TO OUR BUSINESS**

**WE CONTINUETO BE DEPENDENT ON OUR INFORMATION SERVICES DIVISION FOR ALL OF OUR REVENUE**.  In each of 2006 and 2005, our informationservices segment accounted for nearly 100% of our revenue.  Despite licensing tagatose in 1996 for foodand beverage use, our principal biotechnology product, we have yet to receiveany substantial royalties from the sales of tagatose by our licensee.  We are actively pursuing various non-fooduses of Naturlose, including as a treatment for Type 2 diabetes.  Thus, we have incurred substantial andcontinuing losses in our biotechnology segment which have adversely affectedour overall financial results.  If wecontinue to be unsuccessful in commercializing our biotechnology products, ourfinancial results will continue to be adversely affected to the detriment ofour stock price.

**OURLARGEST INFORMATION SERVICES CONTRACT WAS AWARDED TO A COMPETITOR.**  In October 2006, the Company agreed to a $6million settlement to end its longstanding legal dispute with the U.S.Department of Agriculture over the government’s award of the NationalRecreation Reservation Service (NRRS) contract to ReserveAmerica, aTicketmaster subsidiary.  The Company’sNational Park Service contract ended January 23, 2007.  The National Park Service contract contributed$4.0 million in revenue for each of the years ended December 31, 2005 and2006.  We will need to replace it withother work to avoid an adverse impact on our financial results.

**OURINFORMATION SERVICES BUSINESS COULD BE ADVERSELY AFFECTED BY SIGNIFICANT CHANGESIN THE CONTRACTING OR FISCAL POLICIES OF THE U.S. FEDERAL GOVERNMENT.**  We derive substantial revenue from contractswith the U.S. federal government and we believe that the success anddevelopment of our business will continue to depend on our successfulparticipation in U.S. federal government contract programs.  Accordingly, changes in U.S. federalgovernment contracting policies could directly affect our financialperformance.  Among the factors thatcould have a material adverse affect on our U.S. federal government contractingbusiness are:

·                  budgetaryconstraints affecting U.S. federal government spending generally, or specificdepartments or agencies in particular, and changes in fiscal policies oravailable funding;

·                  technologicaldevelopments;

·                  U.S.federal governmental shutdowns and other potential delays in the governmentappropriations process;

·                  delaysin the payment of our invoices by government payment offices due to problemswith, or upgrades to, government information systems, or for other reasons;

·                  competitionand consolidation in the information services industry; and

·                  general economicconditions.

**OURINFORMATION SERVICES BUSINESS IS RELIANT ON TECHNOLOGY.**  We have devoted significant resources todeveloping and acquiring specialized hardware and software in our informationservices business.  In order to remaincompetitive, we must continue to select, invest in, acquire and develop new andenhanced technology on a timely ba-sis. We may not be successful in these efforts or in anticipatingdevelopments in technology.  In addition,competitors could develop similar applications. Third parties could independently develop similar technology, obtainunauthorized access to our proprietary technology or misappropriate technologyto which we have granted access.  Failureto remain current with technology or misappropriation of our technology couldadversely affect our ability to compete for information services business andcould lead to reduced business and reduced financial results.

**WE HAVENOT YET SUCCESSFULLY COMMERCIALIZED NATURLOSE.**  We are in the process of attempting todevelop other uses of tagatose, under the brand name Naturlose, in non-foodproducts such as a treatment for diabetes, toothpaste, mouthwash, andover-the-counter and pharmaceutical drugs. Efforts are presently limited to the Type 2 diabetes clinical trial andtoothpaste developments because of cash limitations.  To date, we have yet to secure anysubstantial revenue from Naturlose sales. One of the hurdles we will have to overcome is that our foreign licenseefor tagatose (which has the right to manufacture tagatose) does not currentlyhave sufficient capacity to manufacture enough tagatose to supply both food andnonfood markets if such markets mature and grow.  Failure to successfully commercializeNaturlose may adversely affect our stock price.

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**OTHERBIOTECH PRODUCTS ARE STILL IN THE DEVELOPMENT STAGE.**  We are developing other biotechproducts.  None of these have beendeveloped to a stage where any significant revenue has been generated.  Development of products will requiresignificant additional research and development.  Such additional effort will requiresubstantial funding which may not be available to us.  Further, our research and developmentactivities may not result in any saleable products.  It is also possible that we will license orseek an affiliation with a third party to bring some products to market.  In such an event, we would likely haveminimal control over the manufacture and marketing of such products.

**DEVELOPMENTOF ANY BIOTECH PRODUCTS WILL DEPEND ON OBTAINING FDA AND FOREIGN REGULATORYAPPROVALS.**  Developmentof new products is subject to extensive regulation by governmental regulatoryauthorities in the United States and other countries.  These rigorous regulatory approval processescan take five to ten years or more and require the expenditure of substantialresources.  We may not be able to obtainthe necessary approvals for clinical testing or for the marketing ofproducts.  Continuing failure tocommercialize biotechnology products may adversely affect our financial resultsand stock price.

**OURSUCCESS WILL DEPEND, IN PART, ON OUR ABILITY TO OBTAIN AND MAINTAIN PATENTPROTECTION FOR OUR PRODUCTS.** We have several patents for tagatose and other products underdevelopment.  We may not be able toobtain additional patents.  Further,future patents may not be held valid if subsequently challenged.  Failure to obtain and maintain patentprotection for our biotechnology products may further delay or eliminate ourability to commercialize such products, which may adversely affect ourfinancial results and stock price.

**WE HAVESUSTAINED LOSSES IN THE PAST AND WE MAY SUSTAIN LOSSES IN THE FUTURE.**  We have incurred losses in prior years,including the years 2005 and 2004. Our net losses for the years ended December31, 2005 and 2004 were $2.8 million and $2.8 million, respectively.  Our net income for the year ended December31, 2006, included $6 million from the U.S. Department of Agriculture settlement.  We may not return to profitable operations.

**WE MAYNOT BE ABLE TO OBTAIN ADDITIONAL FINANCING THAT WE WILL NEED. **During 2006, our workingcapital increased by $7.7 million, largely as a result of proceeds from theU.S. Department of Agriculture settlement and proceeds from stockissuances.  In recent years, we havefunded our operations through private placements of our common stock andthrough the exercise of warrants issued in connection with such private placementtransactions.  We believe that we willneed to raise additional funding to continue to finance our product developmentoperations.  We may not be able to obtainadditional financing on acceptable terms, or at all.  Failure to obtain required financing maycause us to curtail or cease our operations.

**WE MAYNOT BE ABLE TO RETAIN OUR KEY EXECUTIVES AND PERSONNEL.** As a small company, our success depends on theservices of key employees in executive and other positions.  None of our key employees have employmentagreements.  The loss of the services ofone or more of such employees could have a material adverse effect on us.

**WE FACEINTENSE COMPETITION BY COMPETITORS IN BOTH DIVISIONS.**  Our competitors in the information servicesbusiness are numerous.  Many of ourcompetitors have significantly greater financial, marketing and distributionresources than we do.  Our principalinformation services competitor, ReserveAmerica, is a division of Ticketmasterwhich is a subsidiary of IAC/InterActive Corp., a significantly larger publiccompany than Spherix.  Our competitorsmay succeed in developing or marketing technologies and biotechnology productsthat are more effective than ours.

**RISKS RELATED TO OWNERSHIP OF OUR COMMON STOCK**

**THE PRICEOF SPHERIX’S COMMON STOCK HAS BEEN HIGHLY VOLATILE DUE TO SEVERAL FACTORS WHICHWILL CONTINUE TO EFFECT THE PRICE OF OUR STOCK.**  Our common stock has traded as low as $1.18and as high as $3.92 between January 2, 2006 and December 29, 2006. Some of thefactors leading to this volatility include:

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·                  relativelysmall amounts of our stock trading on any given day;

·                  fluctuationsin our operating results;

·                  announcementsof technological innovations or new products which we or our competitors make;

·                  developmentswith respect to patents or proprietary rights.

**CORNELLCAPITAL PARTNERS WILL PAY LESS THAN THE MARKET PRICE AND WILL HAVE AN INCENTIVETO SELL ITS SHARES, WHICH MAY CAUSE OUR STOCK PRICE TO DECLINE.**  Cornell Capital Partners will purchase sharesof our common stock pursuant to the Standby Equity Distribution Agreement(SEDA) at a purchase price that is less than the then-prevailing market priceof our common stock.  Cornell CapitalPartners will have an incentive to immediately sell any shares of our commonstock that it purchases pursuant to the SEDA to realize a gain on thedifference between the purchase price and the then-prevailing market price ofour common stock.  To the extent CornellCapital Partners sells its common stock, the common stock price may decrease.

**NEWSHAREHOLDERS WILL EXPERIENCE SIGNIFICANT DILUTION FROM OUR SALE OF SHARES UNDERTHE SEDA.**  The sale ofshares pursuant to the SEDA will have a dilutive impact on ourstockholders.  As a result, our netincome per share could decrease in future periods, and the market price of ourcommon stock could decline.  In addition,the lower our stock price, the more shares of common stock we will have toissue under the SEDA.  If our stock priceis lower, then our existing stockholders would experience greater dilution.

**OURCOMMON STOCK WILL BE DELISTED FROM NASDAQ GLOBAL MARKET SYSTEM IF WE FAIL TOCOMPLY WITH CONTINUED LISTING STANDARDS.**  We were previously advised that we were indanger of our common stock being delisted from the NASDAQ Global Market due toour stockholders’ equity falling below the $10 million minimumrequirement.  At December 31, 2006, theCompany’s shareholder’s equity was $14.6 million.  If at some point we are unable to meet thelisting standards, we intend to apply to list our common stock on the NASDAQCapital Market.

**DIVIDENDSON OUR COMMON STOCK ARE NOT LIKELY. **Weintend to retain future earnings, if any, in order to provide funds for use inthe operation and expansion of our business and for further research anddevelopment.  Accordingly, we do notanticipate paying cash dividends on our common stock in the foreseeablefuture.  Investors must look solely toappreciation in the market price of the shares of our common stock to obtain areturn on their investment.

**BECAUSEOF THE RIGHTS AGREEMENT AND “ANTI-TAKEOVER” PROVISIONS IN OUR CERTIFICATE OFINCORPORATION AND BYLAWS, A THIRD PARTY MAY BE DISCOURAGED FROM MAKING ATAKEOVER OFFER WHICH COULD BE BENEFICIAL TO OUR STOCKHOLDERS.**  In 2001, we adopted a shareholder rightsplan.  The effect of this rights plan andof certain provisions of our Certificate of Incorporation, By-Laws, and theanti-takeover provisions of the Delaware General Corporation Law, could delayor prevent a third party from acquiring us or replacing members of our board ofdirectors, even if the acquisition or the replacements would be beneficial toour stockholders.  These factors couldalso reduce the price that certain investors might be willing to pay for sharesof the common stock and result in the market price being lower than it would bewithout these provisions.

**INSIDERSOWN A SIGNIFICANT PORTION OF OUR COMMON STOCK, WHICH COULD LIMIT OURSTOCKHOLDERS’ ABILITY TO INFLUENCE THE OUTCOME OF KEY TRANSACTIONS**.  As of December 31, 2006, our officers anddirectors and their affiliates owned approximately 20% of the outstandingshares of our common stock.  As a result,our officers and directors are able to exert considerable influence over theoutcome of any matters submitted to a vote of the holders of our common stock,including the election of our Board of Directors.  The voting power of these stockholders couldprevent or frustrate attempts to effect a transaction that is in the bestinterests of the other stockholders and could also discourage others fromseeking to purchase our common stock, which might depress the price of ourcommon stock.

**WEEXPERIENCE QUARTERLY VARIATIONS IN OUR OPERATING RESULTS.**  We have experienced and expect to continue toexperience quarterly variations in revenue and operating income as a result ofmany factors, including the seasonality of our information services business,timing of customers’ budget processes and slowdowns or accelerations of work bycustomers.  General work economicconditions may result in customer deferral of projects or cancellation inplanned expenditures.  These factors mayadversely affect our financial results and our stock price.

10

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**Item1B.  UNRESOLVED STAFF COMMENTS**

None.

**Item2.  PROPERTIES**

In November 1997,the Company signed a lease agreement effective May 1, 1998, for 51,625 squarefeet of office, call center, research labs, and warehouse space in the sameBeltsville, Maryland, facility previously occupied, under the terms of a leasethat expires on February 28, 2009.  Thisfacility contains corporate administration, human resources, accounting, salesand marketing, technical services and warehousing, for support of both InfoSpherixand BioSpherix, and through September 2005 contained call center operations forInfoSpherix.

In November 2003,the Company signed a lease agreement for 31,526 square feet of office and callcenter space in Cumberland, Maryland. This lease has been extended to coincide with the Company’s move fromthis facility to another facility in the area, but no later than February 28,2008.  The new lease agreement for 32,423square feet of office and call center space in Frostburg, Maryland, was signedin February 2007.  The lease is targetedto commence December 1, 2007, and expire November 30, 2017.

In 2004, as partof its acquisition of certain assets of Daksoft, Inc.’s reservation business,the Company signed an agreement to lease 8,280 square feet of call center spacein Rapid City, South Dakota.  The leaseexpired December 31, 2006.

In 2006, theCompany signed an agreement to lease up to 18,601 square feet of call centerspace in Carmel, Indiana, effective April 1, 2006.  The lease expires December 31, 2011.  During 2006, the operations of the RapidCity, South Dakota facility were transferred to the Carmel, Indiana facility.

In 2004, theCompany signed an agreement to lease 5,000 square feet of office, research laband warehouse space for BioSpherix in Annapolis, Maryland.  The lease expires June 30, 2009.

Throughout 2006,the Beltsville, Carmel and Annapolis facilities had sufficient capacity.  The Cumberland and Rapid City facilities wereoperating at an estimated 75%-90% capacity during the peak months.

**Item3.  LEGAL PROCEEDINGS**

Informationrequired by this Item 3 is included in Note 10 “Commitments and Contingencies”of the Notes to Financial Statements, included herein pursuant to Part II ofthis Form 10-K.

**Item4.  SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS**

There were nomatters submitted by the Company during the fourth quarter of 2006 to a vote ofsecurity holders through solicitation of proxies or otherwise.

**PART II**

**Item5.  MARKET FOR REGISTRANT’S COMMONEQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.**

The Company’scommon stock is traded in the over-the-counter market and is quoted in theNASDAQ Global Market System under the symbol SPEX.  No cash dividends have been paid.

As of March 10,2007, the number of shareholders of record of the Company’s common stock wasapproximately 7,000.  The following tablestates the high and low sales prices of the Company’s common stock for eachquarter during the two year period ended December 31, 2006, based on the dailyclosing prices as reported on the NASDAQ Global Market System:

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|                  | ** ** | **High** | ** ** | **Low** | ** ** |
|------------------|------------|----------|------------|---------|------------|
| 1st Quarter 2006 |       | $        | 3.920      |    | $          | 2.000 |   |
| 2nd Quarter 2006 |       | $        | 3.090      |    | $          | 1.510 |   |
| 3rd Quarter 2006 |       | $        | 2.320      |    | $          | 1.340 |   |
| 4th Quarter 2006 |       | $        | 2.710      |    | $          | 1.330 |   |
|             |       |     |       |    |       |
| 1st Quarter 2005 |       | $        | 3.940      |    | $          | 2.540 |   |
| 2nd Quarter 2005 |       | $        | 3.029      |    | $          | 1.500 |   |
| 3rd Quarter 2005 |       | $        | 2.150      |    | $          | 1.370 |   |
| 4th Quarter 2005 |       | $        | 5.850      |    | $          | 1.190 |   |

 

The Companyrecognized that, as of June 30, 2005, it was approximately $454,000 short ofmeeting NASDAQ’s Global Market listing requirement of maintaining a minimum of$10,000,000 in shareholders’ equity. NASDAQ gave the Company until September 1, 2005, to correct thissituation, which the Company achieved through its third quarter results.  However, in anticipation of incurring lossesdue to seasonal fluctuations in the InfoSpherix business segment that occur inthe first and fourth quarters of the year, the Company, on July 22, 2005,entered into a Standby Equity Distribution Agreement (“SEDA”) with CornellCapital Partners, L.P. (“Cornell”). Under the SEDA, Spherix can require Cornell to purchase up to $4,000,000of the Company’s common stock over a two-year period following the effectivedate, October 12, 2005, of the registration covering the shares of our commonstock to be sold to Cornell.  The SEDAestablishes what is sometimes termed an “equity line of credit” or an “equitydraw-down facility.”  The $4,000,000facility may be drawn down upon by us in installments, the maximum amount ofeach draw down is limited to $350,000. For each share of common stock purchased under the SEDA, Cornell willpay 95% of the lowest volume weighted average price (“VWAP”) of our sharesduring the five trading days following our draw down notice to Cornell.  The VWAP used in the calculation is thatreported by Bloomberg, LLC, a third-party reporting service.  In general, the VWAP represents the sum ofthe value of all the sales of our common stock for a given day (the total sharessold in each trade times the sales price per share of the common stock for thattrade), divided by the total number of our shares sold on that day.  We are also committed to pay to Cornell anamount equal to 5% of each purchase of our common stock made by Cornell underthe SEDA.  Under the terms of the SEDAagreement, we are not obligated to draw down on the SEDA facility, but once wesatisfy normal conditions for this type of transaction, we have the right torequire Cornell to purchase our common shares under the SEDA.  In connection with the SEDA, we have issuedto Cornell 95,000 shares of our common stock and paid a due diligence fee of$5,000.  We also paid Yorkville AdvisorsManagement, LLC, the investment manager for Cornell, a structuring fee of$15,000, and on each sale under the SEDA we will pay an additional structuringfee of $500.  Newbridge SecuritiesCorporation acted as our placement agent for the SEDA, and we paid that firm afee of 5,000 shares of our common stock as compensation valued at approximately$10,000.  We also granted NewbridgeSecurities Corporation piggy-back registration rights covering theseshares.  Registration of our commonshares allocated to this facility was completed in October 2005.  During the term of the SEDA, our Officers andDirectors have agreed not to sell any of their shares of our common stock,except to the extent permitted under Rule 144. The number of shares of our common stock issuable to Cornell under theSEDA is subject to a 9.99% cap on the beneficial ownership that Cornell and itsaffiliates may have at the time of each sale (beneficial ownership is to becalculated in accordance with Section 13(d) of the Exchange Act).  Further, we may not issue more than 19.99% ofour currently outstanding shares under the SEDA unless shareholder approval isreceived.  In 2006 and 2005, the Companysold 819,453 and 310,076 shares under the SEDA agreement for total proceeds of$1,896,500 and $376,500, respectively.

On February 18,2004, warrants for 500,000 shares of Common Stock were exercised at $6.91 pershare, compared to the then current market price of $6.76 per share, by aninstitutional investor, and the expiration date of the remaining 585,973warrants was extended until February 25, 2008, at an exercise price of $7.00per share of common stock.  The remainingwarrants were assigned and transferred to another institutional investor in2004.  On March 9, 2006, in exchange forthe Company’s agreement to reduce the exercise price to $2.04 per share, theInvestor agreed to exercise the warrants for the full 585,973 shares for totalproceeds of approximately $1.2 million. In connection with these warrants, the Investor agreed that it would notexercise any of the warrants to the extent that it would acquire shares ofCommon Stock exceeding 9.9% of the outstanding Common Stock, nor would itknowingly sell shares to anyone to the extent that their holdings in theCompany would exceed 4.9% of the outstanding Common Stock.  The warrants and shares of Common Stock wereissued in transactions exempt from Registration pursuant to Section 4(2) of theSecurities Act.  The Company hasregistered the shares issuable upon exercise of the warrants for resale by theinstitutional Investor.

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At December 31,2006, the Company’s shareholder’s equity was $14.6 million.

The Company has ashare repurchase program in place that initially authorized the purchase of upto $1,000,000 of the Company’s shares in the open market.  To date, only 34,750 shares aggregating$160,000 of the Company’s shares have been repurchased.  There was no repurchase activity during 2005or 2006.

**Equity Compensation PlanInformation**

The following tableprovides information about the Company’s Common Stock that may be issued uponthe exercise of options and rights under all of the Company’s existing equitycompensation plans as of December 31, 2006, as well as rights to acquire sharesof Company Common Stock granted to the independent members of the Board ofDirectors of the Company.

 
| **Plan Category**                                        | ** ** | **Number of securities  to be issued upon  exercise of outstanding  options, warrants and  rights  (a)** | ** ** | **Weighted average  exercise price of  outstanding options,  warrants and rights  (b)** | ** ** | **Number of securities  remaining available for  future issuance under  equity compensation plans  (excluding securities  reflected in column  (a)) (c)** | ** ** |
|---------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| Equity  compensation plans approved by security holders       |       | 481,100                                                                                                                                               |       | 7.12                                                                                                                  |       | 403,100                                                                                                                                                                                                               |       |
| Equity  compensation plans not approved by securities holders |       | Options1: 20,000                                                                                                                                      |       | $                                                                                                                     | 6.65       |                                                                                                                                                                                                                  | N/A        |   |
| Total                                                         |       | 501,100                                                                                                                                               |       | $                                                                                                                     | 7.34       |                                                                                                                                                                                                                  | 403,100    |   |

 

(1)             Consistsof stock options issued to the Board of Directors prior to May 12, 2005.

**CumulativeTotal Return**

**Based upon an initial investmentof $100 on December 31, 2001**

**withdividends reinvested**

The following graphassumes $100 was invested on December 31, 2001 in Spherix Common Stock,the S&P 500 Index and the S&P small cap 600.  It compares the cumulative total return oneach, assuming reinvestment of dividends, for the five-year period endedDecember 31, 2006.

 

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**Item 6.****           SELECTED FINANCIAL DATA**
| ** **                                    | ** ** | **2006** | ** ** | **2005** | ** ** | **2004**   | ** ** | **2003** | ** ** | **2002** | ** ** |
|-----------------------------------------------|------------|----------|------------|----------|------------|------------|------------|----------|------------|----------|------------|
|                                          |       |     |       |     |       |       |       |     |       |     |       |
| Revenue                                       |       | $        | 24,838,174 |     | $          | 23,045,657 |       | $        | 22,348,418 |     | $          | 18,086,711 |   | $ | 15,131,855 |   |
|                                          |       |     |       |     |       |       |       |     |       |     |       |
| Net income  (loss)                            |       | $        | 3,512,881  |     | $          | (2,848,748 | )          | $        | (2,822,046 | )        | $          | (2,256,770 | ) | $ | (2,921,926 | ) |
|                                          |       |     |       |     |       |       |       |     |       |     |       |
| Net income  (loss) per share, diluted         |       | $        | 0.26       |     | $          | (0.24      | )          | $        | (0.24      | )        | $          | (0.20 | ) | $ | (0.26 | ) |
|                                          |       |     |       |     |       |       |       |     |       |     |       |
| Total assets                                  |       | $        | 18,375,926 |     | $          | 13,118,263 |       | $        | 15,243,949 |     | $          | 14,167,257 |   | $ | 15,453,140 |   |
|                                          |       |     |       |     |       |       |       |     |       |     |       |
| Long-term debt  and capital lease obligations |       | $        | 364,199    |     | $          | 27,455     |       | $        | 45,580     |     | $          | 63,310 |   | $ | 90,530 |   |
|                                          |       |     |       |     |       |       |       |     |       |     |       |
| Cash dividends  declared per common share     |       | $        | —     |     | $          | —     |       | $        | —     |     | $          | — |   | $ | — |   |
|                                          |       |     |       |     |       |       |       |     |       |     |       |
| Stockholders  equity                          |       | $        | 14,550,597 |     | $          | 7,879,220  |       | $        | 10,367,690 |     | $          | 9,489,236 |   | $ | 11,261,458 |   |
|                                          |       |     |       |     |       |       |       |     |       |     |       |
| Working capital                               |       | $        | 10,865,583 |     | $          | 3,139,711  |       | $        | 4,215,573  |     | $          | 5,043,672 |   | $ | 8,787,502 |   |

 

**Item 7.****           MANAGEMENT’S DISCUSSIONAND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

**Overview**

The Company operates via two principal segments, BioSpherix andInfoSpherix.  BioSpherix developsproprietary products for commercial applications.  InfoSpherix provides contact centerinformation and reservation services for government and industry.

InfoSpherix generates substantially all of the Company’s revenue.  In 2006, 2005, and 2004, InfoSpherixgenerated substantially all of its revenue from government customers.  The Company has developed a niche inproviding campground and other reservation services via its ReserveWorldbusiness line, which accounted for approximately 64%, 62%, and 58% of theCompany’s revenue in 2006, 2005, and 2004. During 2006, the Company won a reservation contract for the State ofMaine, and the re-compete of the contracts from the States of Indiana andMinnesota.  The Company’s National ParkService contract ended January 23, 2007.

BioSpherix engages in product development, notably tagatose.  The rights to manufacture tagatose have beenlicensed to Arla along with the rights to sell tagatose for food and beverageuses.  Our licensee has not beensuccessful in marketing tagatose for food and beverage uses and has announced acessation of further product manufacturing. Accordingly, we have focused our efforts on non-food use of tagatose,which we will market under the name “Naturlose”.  Our principal efforts have been to explorewhether Naturlose is an effective treatment for Type 2 diabetes.  We are about to commence a Phase 3 clinicaltrial for this purpose.

**Resultsof Operations****3⁄42006 Compared with2005**

In 2006, theCompany reported a net income of $3.5 million ($0.26 per diluted share) onrevenue of $24.8 million for the year, compared with a net loss of $2.8 million($0.24 per diluted share) on revenue of $23 million in 2005.

**Revenue**

The Companyexperienced a $1.8 million (8%) increase in revenue between years as a resultof InfoSpherix’s State of Pennsylvania campground reservation contract that wasawarded to the Company in 2005 and became operational at the beginning of 2006.

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**DirectContract and Operating Costs**

Direct contractand operating costs increased $431,000 (2%) between years with the addition ofthe State of Pennsylvania contract.

**Selling, General and Administrative**

Selling,general and administrative expense (“S,G&A”) for 2006 increased by $360,000(7%) as the result of increased legal costs relating to the Company’s challengeof the U.S. Department of Agriculture’s award of the NRRS contract to anothercompetitor, as noted above.

**Researchand Development**

Research anddevelopment costs increased $595,000 between years.  The Company is focusing its efforts on thedevelopment of Naturlose as a treatment for Type 2 diabetes.  In 2006, the Company expended approximately$780,000 in preparation for the Phase 3 clinical trial which is expected tocommence in April 2007.  The Phase 3clinical trial is expected to take at least two (2) years to complete.  If the Phase 3 clinical trial is successful,the Company will submit an appropriate drug application to the FDA.

The cost ofpreparing for and conducting the Phase 3 trial has substantially increased asthe Company has increased the number of participants and the FDA requested achange in the form of delivery of the drug to the participants.  The Company estimates that it could expend upto $5 million in 2007 in furtherance of this trial.  Additional sums will be required to completethe trial in 2008 and, if successful, to file and pursue the FDA application.

The Company hasalso outsourced to others preliminary testing of Naturlose to establish ananti-plaque claim for toothpaste.  In2005, the Company contracted with the University of Maryland School ofDentistry to conduct human clinical trials on the oral anti-plaque efficacy ofNaturlose.  The study demonstratedtagatose to be much more resistant to oral bacteria, which form plaque, than issorbitol, a sugar substitute that is widely used in oral care products.  The study suggested ways of modifying theNaturlose product to effect desired plaque reduction.  Such modifications have been made, and theCompany has negotiated with the University of Maryland School of Dentistry toconduct a trial of Naturlose toothpaste formulated by the Company in an attemptto establish an anti-plaque claim for the toothpaste.  The clinical trial started in early 2007.

**OtherIncome**

In October 2006,the Company agreed to a $6 million settlement to end its longstanding legaldispute with the U.S. Department of Agriculture over the government’s award ofthe National Recreation Reservation Service (NRRS) contract to ReserveAmerica,a Ticketmaster subsidiary.  The Company’sNational Park Service contract ended January 23, 2007.  The National Park Service contractcontributed approximately $4.0 million in revenue for each of the years endedDecember 31, 2006 and 2005.

**InfoSpherixOperations**

The followingschedule summarizes the breakdown of InfoSpherix revenue between government andcommercial contracts (in $000s):

 

|            | ** ** | **For the Year Ended December 31** | ** ** |
|------------|------------|-------------------------------------------------------------|------------|
| ** ** | ** ** | **2006**                                                    | ** ** | **2005** | ** ** |
| ** ** | ** ** | ** **                                                  | ** ** | ** ** | ** ** |
| Government |       | $                                                           | 24,699     |   | $ | 22,935 |   |
| Commercial |       | 132                                                         |       | 88 |   |
|       |       | $                                                           | 24,831     |   | $ | 23,023 |   |

 

As noted above,InfoSpherix revenue for 2006 increased $1.8 million (8%) over that of the prioryear.

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During 2006, the Company won a reservation contract from the State ofMaine, and the re-compete of the contracts from the States of Indiana andMinnesota.  The Company’s National ParkService contract ended January 23, 2007. The Company operated the NPRS contract for nine years; revenuerecognized was $4.0 million for each of the years ended December 31, 2006, and2005, or 16% and 17% of total revenue for each year.  Park reservation contracts during 2006 and2005 made up over 60% of the Company’s revenue and the Company is one of onlytwo major suppliers of campground reservation services in the U.S.

Starting October1, 2005, as part of the cost reduction efforts, the Maryland information centercontracts began operating exclusively in the Company’s Cumberland officeinstead of the Beltsville office, and its margins for the fourth quarter of2005 and for all of 2006 are now consistent with our other contracts.

Currently, theCompany is bidding on several contracts and expects to bid on more contractsthroughout the coming year, although no assurance can be given at this timethat these efforts will result in new business for the Company.

**BioSpherixOperations**

BioSpherix is entitled to high end royalties from Arla’s sales oftagatose until at least 2011, and, depending upon certain conditions, until2016.  The payments are net ofaccumulated and continuing foreign patent maintenance costs.  -Accumulated patent maintenance costs wereapproximately $213,000 at year-end.  Wehave earned minimal royalties from Arla in 2006, 2005, and 2004.  While tagatose has been introduced intoseveral food and beverage products, Arla currently has insufficient salesvolume and manufacturing capacity to produce tagatose at the rate necessary togenerate meaningful royalties.  Atpresent, Arla believes it has produced a sufficient backlog of inventory tosatisfy its needs for the foreseeable future based on current demand, andaccordingly has stopped production at its plant.  Spherix is also pursing the possibility ofother production options.

The Company isfocusing its efforts on the development of Naturlose as a treatment for Type 2diabetes.  In 2006, the Company expendedapproximately $780,000 in preparation for the Phase 3 clinical trial which isexpected to commence in April 2007.  ThePhase 3 clinical trial is expected to take at least two (2) years tocomplete.  If the Phase 3 clinical trialis successful, the Company will submit a New Drug Application (NDA) to theFDA.  Approval would allow the product tobe sold for its intended use to treat Type 2 diabetes.  The Company would seek to partner with orlicense a major drug firm for such commercialization.

The cost ofpreparing for and conducting the Phase 3 trial has substantially increased asthe FDA has provided more stringent parameters for the trial.  The Company estimates that it could expend upto $5 million in 2007 in furtherance of this trial.  Additional sums will be required to completethe trial in 2008 and, if successful, to file and pursue the FDA application.

The Company hasalso outsourced to others preliminary testing of Naturlose to establish ananti-plaque claim for toothpaste.

**Sales Backlog**

The Company’s funded and unfunded backlog as of December 31, 2006, was$57 million, compared to $72 million as of December 31, 2005.  In 2006, the Company won a reservationcontract from the State of Maine, and the re-compete of the contracts from theStates of Indiana and Minnesota.  The NPScontract ended in January 2007.

**Resultsof Operations****3⁄42005 Compared with2004**

In 2005, theCompany reported a net loss of $2.8 million ($0.24 per diluted share) onrevenue of $23.0 million for the year, compared with a net loss of $2.8 million($0.24 per diluted share) on revenue of $22.3 million in 2004.

**Revenue**

Revenue betweenyears increased $697,000 (3%).  Revenuefrom the InfoSpherix Division increased $802,000 (4%) and the BioSpherixDivision’s revenue decreased by $104,000 (82%). The increased revenue from the InfoSpherix Division was less thananticipated as a result of an unexpected temporary funding shortage on one ofour major Federal contracts that lasted for a period of four months until theFederal Government’s fiscal year ended September 2005, and from hurricanes andthe rise in gasoline prices that impacted reservation sales on our parkreservation contracts during the third quarter of 2005.  The Division also saw a decrease in revenueof approximately 

16

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$2.9 million between years as a result of the decreasein revenue under the new State of Maryland contract that started November 2004and the IRS contract that ended in April 2004. However, these set-backs were more than off-set by the division’scontinued overall growth from the award of new contracts.  The revenue growth was primarily driven bycontracts such as the Federal Retirement Thrift Investment Board that startedin May 2004, the Georgia contract that started in March 2004, and fromincreases under existing contracts with the state of Ohio and the Office ofPersonnel Management.  The decrease inBioSpherix revenue was related to the discontinuance of the sale of FlyCrackerin 2004.

**DirectContract and Operating Costs**

Direct contractand operating costs increased $863,000 (4%) between years.  This increase included the recognition of aforward loss provision of $135,000 on one of the Company’s contracts.  The increase is also attributed toapproximately $100,000 in start-up costs related to the new State of Pennsylvaniacontract that began in January 2006. South Dakota operations operated at a break-even for 2005, up $100,000from 2004.

**Selling, General and Administrative**

Selling,general and administrative expense (“S,G&A”) for 2005 decreased by $217,000(4%) from that of the prior year.  In2005, the Company cut its consulting costs by approximately $265,000, most ofwhich were related to marketing.

**Researchand Development**

Research anddevelopment costs increased $92,000 between years.  In 2004, the BioSpherix Division began aprogram of outsourcing development of its patented drug uses of Naturlose.  A research project was funded at the AlbertEinstein College of Medicine to follow up on that institution’s discovery thatNaturlose may lengthen shelf life of stored blood fractions and medicinalproteins.  In 2005, the Companycontracted with the University of Maryland School of Dentistry to conduct humanclinical trials on the oral anti-plaque efficacy of Naturlose.  The study demonstrated tagatose to be muchmore resistant to oral bacteria, which form plaque, than is sorbitol, a sugarsubstitute that is widely used in oral care products.  Contrary to earlier laboratory findings bySpherix, however, a human study at the University of Maryland School of Dentistrydid not show anti-plaque activity. Conditions in the mouth may have prevented the desired effect, accordingto the University researchers.  Spherixis following up on corrective suggestions made by the University, and plans toconduct new human trials.

**InfoSpherixOperations**

The followingschedule summarizes the breakdown of InfoSpherix revenue between government andcommercial contracts (in $000s):

 

|            | ** ** | **For the Year Ended December 31** | ** ** |
|------------|------------|-------------------------------------------------------------|------------|
| ** ** | ** ** | **2005**                                                    | ** ** | **2004** | ** ** |
| ** ** | ** ** | ** **                                                  | ** ** | ** ** | ** ** |
| Government |       | $                                                           | 22,935     |   | $ | 22,054 |   |
| Commercial |       | 88                                                          |       | 167 |   |
|       |       | $                                                           | 23,023     |   | $ | 22,221 |   |

 

As noted above,InfoSpherix revenue for 2005 increased $802,000 (4%) over that of the prioryear.  The increased revenue from theInfoSpherix Division was less than anticipated as a result of an unexpectedtemporary funding shortage on one of our major Federal contracts that lastedfor a period of four months until the Federal Government’s fiscal year endedSeptember 2005, and from hurricanes and the rise in gasoline prices thatimpacted reservation sales on our park reservation contracts during the thirdquarter of 2005.  The Division also saw adecrease in revenue of approximately $2.9 million between years from thedecrease in revenue under the new State of Maryland contract that startedNovember 2004, and the IRS contract that ended in April 2004.  However, these set-backs were more thanoff-set by the division’s continued overall growth.  This revenue growth was primarily driven bycontracts such as the Federal Retirement Thrift Investment Board that startedin May 2004, Georgia that started in March 2004, and from increases underexisting contracts such as Ohio and the Office of Personnel Management.  The fourth quarter in particular saw asignificant improvement over the prior year, with an increase in revenue of$399,000 as a result of increased revenue in the Federal Retirement ThriftInvestment Board contract and a general growth across the board on our existingreservation contracts.  This combinedwith a reduction in direct costs of $139,000 between the fourth quarter of 2005and 2004, contributed to the $472,000 improvement in operations betweenquarters.

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In 2005, Spherixwon park reservation contracts for Orange County, California, the State ofPennsylvania, and the State of Michigan. The Orange County contract consists of three base years and is valued atless than half a million.  The State ofPennsylvania contract is a five-year contract, consisting of one base year andfour option years, valued at approximately $8 million.  The State of Michigan contract is acontinuation of our current contract with the State.  The new contract is for five years, andconsists of three base years plus two option years, valued at approximately $14million.

In March 2004, theCompany won a one-year, multi-million dollar Federal Retirement ThriftInvestment Board (“FRTIB”) contract with four option years.  Also, on March 1, 2004, the Company purchasedcertain assets of Daksoft, Inc. related to its reservation business, whichoperates under the name “ReserveIt.”  Thepurchase included the acquisition of six additional government reservationcontracts and the intellectual property rights to the name “ReserveIt,” as wellas other assets of the division.  Spherixpurchased the assets for $700,000 plus 43,029 shares of the Company’s commonstock, then trading at $6.699 per share.

In 2004, theCompany won the re-procurement of the Maryland information center contracts,which the company has operated since 1998. The new contracts are for three years plus two additional optionyears.  The combined Maryland contractscontributed 12% to the Company’s revenue in 2005 and 22% in 2004.  The new contract started on November 1, 2004,and is subject to a more competitive pricing structure, which was necessary towin the re-compete.  While Spherix wasnot the lowest bidder, the Company’s higher technical scoring resulted in theCompany achieving an overall higher score than the competition.  Management is uncertain as to the long-termfinancial impact the price reduction will have over the course of the contractand believes that the lower rates may encourage the state to outsource more ofits call center needs to Spherix under this contract.  The previous contract initially operated at aloss during its first year and had matured to a respectable contribution marginby the time the contract ended in late 2004. This increase was gained through the continued outsourcing of more ofthe state’s call center needs to Spherix under the contract.  The new contract, which was bid at a lowercontribution margin, is the principal cause for the decrease in operatingincome between years.  Starting October1, 2005, as part of the cost reduction efforts, the Maryland contract beganoperating exclusively out of the Company’s Cumberland office instead of theBeltsville office, and its margins for the fourth quarter were now consistentwith our other contracts.

Revenue fromcommercial contracts decreased between years. Commercial contracts are typically for shorter terms than governmentcontracts and that can result in substantial variations in commercialrevenue.  Commercial contracts are beingpursued by the Company, but the Company’s recent history has been thatcontracts have been received on a sporadic basis.

**BioSpherixOperations**

The $104,000decrease in the BioSpherix revenue from $127,000 to $23,000 between years wasrelated to the discontinuance of the sale of FlyCracker in 2004.

**Sales Backlog**

The Company’sfunded and unfunded backlog as of December 31, 2005, was $72 million, comparedto $61 million as of December 31, 2004. In 2005, the Company won five-year contracts with the States ofPennsylvania and Michigan.

# **Critical Accounting Estimates**

The preparation offinancial statements in conformity with accounting principles generally acceptedin the United States of America requires management to make estimates andassumptions that affect the reported amounts of assets and liabilities and thedisclosure of the contingent assets and liabilities at the date of thefinancial statements and revenue and expenses for the period reported.  Estimates are based upon historicalexperience and various other assumptions that are believed to be reasonableunder the circumstances.  These estimatesare evaluated periodically and form the basis for making judgments regardingthe carrying values of assets and liabilities and the reported amount ofrevenue and expenses.  Actual results maydiffer substantially from these estimates.

18

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Spherix’s criticalaccounting policies are those it believes are the most important in determiningits financial condition and results, and require significant subjectivejudgment by management as a result of inherent uncertainties.  A summary of the Company’s significantaccounting policies is set out in the notes to the consolidated financialstatements.  Such policies are discussedbelow.

# ***Accountingfor Taxes and Valuation Allowances***

We currently havesignificant deferred tax assets, resulting from net operating loss carryforwards.  These deferred tax assets mayreduce taxable income in future periods. Based on the Company’s losses and its accumulated deficit, the Companyhas provided a full valuation allowance against the net deferred taxasset.  A valuation allowance is requiredwhen it is more likely than not that all or a portion of a deferred tax assetwill not be realized.  Cumulative lossesweigh heavily in the overall assessment of valuation allowances.

We expect tocontinue to maintain a full valuation allowance on future tax benefits until anappropriate level of profitability is sustained, or we are able to develop taxstrategies that would enable us to conclude that it is more likely than notthat a portion of our deferred tax assets would be realizable.

# ***Long-LivedAssets and Other Intangible Assets***

Long-lived assetsand other intangible assets are reviewed for impairment whenever the carryingamount of the asset may not be recoverable. An impairment loss is recognizedwhen the carrying amount of a long-lived asset exceeds the sum of theundiscounted cash flows expected to result from the asset’s use and eventualdisposition.

**New Accounting Pronouncements**

In June 2006, theFinancial Accounting Standards Board (“FASB”) issued FASB Interpretation No.48, “Accounting for Uncertainty in Income Taxes” (“FIN48”).  The Interpretation clarifies the accountingfor uncertainty in income taxes recognized in an enterprise’s financialstatements in accordance with FASB Statement No. 109, “Accounting for IncomeTaxes.”  We are required to adopt FIN 48effective January 1, 2007.  We are currentlyevaluating the impact this interpretation will have on our financial position,results of operations, and cash flows.

In September 2006,the FASB issued Statement of Financial Accounting Standards No. 157, “FairValue Measurements” (“SFAS 157”).  SFAS157 defines fair value, establishes a framework for measuring fair value, andexpands disclosures about fair value measurements.  We are required to adopt SFAS 157 effectiveJanuary 1, 2008. We do not expect the adoption of SFAS 157 to have a materialaffect on our financial position, results of operations or cash flows.

In September 2006,the U.S. Securities and Exchange Commission (“SEC”) issued Staff AccountingBulletin No. 108 (“SAB 108”).  SAB 108addresses diversity in practice in quantifying financial statementmisstatements and the potential under current practice for the build up ofimproper amounts on the balance sheet. The bulletin requires companies to quantify misstatements based on theirimpact on each of their financial statements and related disclosures.  We have adopted SAB 108 in connection withthe preparation of our financial statements for the year ended December 31,2006.  The adoption of SAB 108 did nothave a material impact on our financial position, results of operations or cashflows.

**Liquidityand Capital Resources**

On March 31, 2006,the Company entered into a new agreement with Bank of America (“the Bank”) toestablish a line-of-credit (“New Agreement”) for its subsidiary, InfoSpherixIncorporated, with the outstanding borrowings under the old line of credittransferred to the new agreement. Management considers the establishment of this credit facility for thesubsidiary necessary to ensure timely cash flow for the subsidiary’soperations.  The New Agreement, whichmatures June 30, 2008, provides for borrowings up to $1.5 million, iscollateralized by the subsidiary’s accounts receivables and equipment, andcontains covenants on tangible net worth and funded debt to EBITDA ratios.  Such covenants could have a limiting effecton the amount of cash that the subsidiary can advance to Spherix.  The interest rate under the Agreement isbased on the LIBOR daily floating rate plus 3% (approximately 8.34% at December31, 2006).  The Company had nooutstanding borrowings under the Agreement at December 31, 2006, and the totalamount available for future advance to the subsidiary was $1.5 million underthe Agreement.

Working capital asof December 31, 2006, was $10.9 million, which represents a $7.8 millionincrease from working capital of $3.1 million at December 31, 2005.  The increase in working capital between yearswas largely related to the U.S. Department of Agriculture settlement.

Spherix expects toexpend up to $5 million over the next year in costs related to thePhase 3 clinical trial.

19

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InfoSpherixIncorporated intends to finance its furniture and equipment needs throughfinancing or leasing arrangements where practicable, including those related tothe start-up costs of new contracts the Company may win.

Cash flow for theyear ended December 31, 2006, reflects a net cash inflow of $8.3 million,consisting of $6.7 million provided by operating activities, $586,000 providedby investing activities, and $1 million provided by financing activities.  The increase in cash provided by operatingactivities in 2006 from that of the prior year was primarily due to $6 millionsettlement with the U.S. Department of Agriculture over the award of the NRRScontract.  The increase in cash providedby investing activities was directly related to the expiration of restrictionson cash that was used as collateral on the Company’s line-of-credit in prioryears, and the increase in cash provided by financing activities was the resultof proceeds raised from the issuance of stock under the SEDA agreement and theexercise of warrants.

**Trendsand Outlooks**

**InfoSpherix**

·                  TheCompany’s National Park Service contract ended January 23, 2007.  The National Park Service contractcontributed approximately $4.0 million in revenue for each of the years endedDecember 31, 2006 and 2005.

·                  In2006, the Company won the re-compete on its park reservation services to theStates of Indiana and Minnesota and recently won a new state park reservationcontract for the State of Maine and will be a subcontractor on anothercontract.

·                  Since1998, InfoSpherix has grown its government park reservation business from onecontract to 17 government reservation contracts.  InfoSpherix’s reservation business accountedfor over 60% of the Company’s revenue in 2006 and 2005.  InfoSpherix is now one of only two majorsuppliers of Government campground reservation services in the U.S.

·                  OnFebruary 6, 2007, the Company signed an agreement to lease 32,423 square feetof facility space in Frostburg, Maryland effective December 1, 2007, for use asa call center to replace the existing Cumberland, Maryland facility.

**BioSpherix**

·                  BioSpherix’sprimary emphasis is on a Phase 3 clinical trial to demonstrate that Naturloseis a successful treatment for Type 2 diabetes.

·                  Costsof conducting the Phase 3 trial have substantially increased as we haveobtained further direction from the FDA concerning the processes to be employedin the trials.  The Company is exploringall of its alternatives to generate sufficient funds to complete the Phase 3trial, to further develop Naturlose as a diabetes treatment if the Phase 3trial is successful, and to further commercialize Naturlose for other uses.

**ContractualObligations**

The followingtable summarizes the Company’s known contractual obligations at December 31,2006, and indicates the year payments are due. In some cases estimates have been used where the exact amount and/ortiming of the obligation is not presently known.  The table does not include ordinary accountspayable and payroll type obligations and does not include estimates for futureinterest obligation payments under the Company’s bank line of credit notedabove in the Liquidity and Capital Resources sections.

20

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**TabularDisclosure of Contractual Obligations**
| **(numbers in 000’s)** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **      | ** ** | ** **      | ** ** | ** **     | ** ** |
|---------------------------------------|------------|------------|------------|------------|------------|-----------------|------------|-----------------|------------|----------------|------------|
| ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** | **2008 -** | ** ** | **2010 -** | ** ** | ** **     | ** ** |
| ** **                            | ** ** | **Total**  | ** ** | **2007**   | ** ** | **2009**        | ** ** | **2011**        | ** ** | **Thereafter** | ** ** |
| ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** **      | ** ** | ** **      | ** ** | ** **     | ** ** |
| Capital Lease  Obligations (1)        |       | $          | 413,000    |       | $          | 265,000         |       | $               | 148,000    |           | $          | — |   | $ | — |   |
| Operating Lease  Obligations (2)      |       | 3,520,000  |       | 1,440,000  |       | 1,525,000       |       | 555,000         |       | —         |       |
| Purchase  Obligations (3)             |       | 8,470,000  |       | 6,170,000  |       | 2,300,000       |       | —          |       | —         |       |
| Post-retirement  Obligations          |       | 695,000    |       | 70,000     |       | 205,000         |       | 275,000         |       | 145,000        |       |
| Total                                 |       | $          | 13,098,000 |       | $          | 7,945,000       |       | $               | 4,178,000  |           | $          | 830,000 |   | $ | 145,000 |   |

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(1)                      Includesinterest obligations of $40,000 ($33,000 in 2007 and $7,000 in 2008).

(2)                      Includesestimated common area maintenance costs.

(3)                      Consistsprimarily of the estimated amounts on the committed obligations related to thePhase 3 clinical trial.

No dividends werepaid in 2006 and none are anticipated in 2007.

**Item7A.  QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK**

The Companymanages its debt and its available cash by considering available investmentopportunities, risks, tax consequences and overall financing strategies.

At December 31,2006, the Company did not have any fixed-rate or variable-rateindebtedness.  The Company has notentered into any interest rate swaps or other derivatives with respect to itsindebtedness.

Cash available forinvestment is typically invested in short term funds, which generally mature in30 days, or money-market funds.  Ingeneral, such funds are not subject to market risk because the interest paid onsuch funds fluctuates with the prevailing interest rate.  The carrying amounts approximate marketvalue.  It is the Company’s practice tohold these investments to maturity.

Assuming year-end2006 variable rate debt and cash available for investment, a one percent changein interest rates would impact net interest income by less than $100,000.

**Item 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA**

Financialstatements and supplementary data required by this Item 8 follow.
|                                                                                                                        | ** ** | **Page** |
|------------------------------------------------------------------------------------------------------------------------|------------|----------|
| **Index  to Financial Statements**                                                                                     |       |     |
| Report of  Independent Registered Public Accounting Firm                                                               |       | 22       |
| Consolidated  Statements of Operations for the years ended December 31, 2006, 2005, and  2004                          |       | 23       |
| Consolidated  Balance Sheets as of December 31, 2006 and 2005                                                          |       | 24       |
| Consolidated Statements of Changes in Stockholders’  Equity for the years ended December 31, 2006, 2005, and 2004 |       | 25       |
| Consolidated  Statements of Cash Flows for the years ended December 31, 2006, 2005, and  2004                          |       | 26       |
| Notes to  Consolidated Financial Statements                                                                            |       | 27       |

 

21

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**REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

**Board of Directors andShareholders of Spherix Incorporated**

We have audited theaccompanying consolidated balance sheets of Spherix Incorporated (a Delawarecorporation) and subsidiary (the Company) as of December 31, 2006 and 2005, andthe related consolidated statements of operations, changes in stockholders’equity, and cash flows for each of the three years in the period ended December31, 2006.   These financial statementsare the responsibility of the Company’s management.  Our responsibility is to express an opinionon these financial statements based on our audits.

We conducted our auditsin accordance with the standards of the Public Company Accounting OversightBoard (United States).  Those standards require that we plan and performthe audits to obtain reasonable assurance about whether the financialstatements are free of material misstatement.  The Company is not requiredto have, nor were we engaged to perform an audit of its internal control overfinancial reporting.  Our audits includedconsideration of internal control over financial reporting as a basis fordesigning audit procedures that are appropriate in the circumstances, but notfor the purpose of expressing an opinion on the effectiveness of the Company’sinternal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements, assessing the accountingprinciples used and significant estimates made by management, as well asevaluating the overall financial statement presentation.  We believe thatour audits provide a reasonable basis for our opinion.

In our opinion, theconsolidated financial statements referred to above present fairly, in allmaterial respects, the financial position of the Company as of December 31,2006 and 2005, and the results of its operations and its cash flows for each ofthe three years in the period ended December 31, 2006 in conformity withaccounting principles generally accepted in the United States of America.

As discussed in Note 1 tothe Notes to Consolidated Financial Statements, the Company adopted SFAS No.123R, “*Share-Based Payment*,” effective January1, 2006.

/s/ GRANT THORNTON LLP

McLean, VirginiaMarch 29, 2007

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**Spherix Incorporated**

**ConsolidatedStatements of Operations**

**For theyears ended December 31, 2006, 2005, and 2004**

 
| ** **                                    | ** ** | **2006**   | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|-----------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| **Revenue**                                   |       | $          | 24,838,174 |       | $          | 23,045,657 |       | $ | 22,348,418 |   |
|                                          |       |       |       |       |       |       |       |
| **Operating  expense**                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Direct contract and operating costs           |       | 20,794,538 |       | 20,363,374 |       | 19,500,732 |       |
| Selling, general and administrative expense   |       | 5,639,847  |       | 5,280,064  |       | 5,496,815  |       |
| Research and development expense              |       | 883,608    |       | 288,112    |       | 196,364    |       |
| Total operating expense                       |       | 27,317,993 |       | 25,931,550 |       | 25,193,911 |       |
|                                          |       |       |       |       |       |       |       |
| **Loss  from operations**                     |       | (2,479,819 | )          | (2,885,893 | )          | (2,845,493 | )          |
|                                          |       |       |       |       |       |       |       |
| Interest income (expense), net                |       | 97,750     |       | 37,145     |       | 23,447     |       |
| Other income                                  |       | 6,000,000  |       | —     |       | —     |       |
|                                          |       |       |       |       |       |       |       |
| Loss before  taxes                            |       | 3,617,931  |       | (2,848,748 | )          | (2,822,046 | )          |
| Income tax  expense                           |       | 105,050    |       | —     |       | —     |       |
|                                          |       |       |       |       |       |       |       |
| **Net  income (loss)**                        |       | $          | 3,512,881  |       | $          | (2,848,748 | )          | $ | (2,822,046 | ) |
|                                          |       |       |       |       |       |       |       |
| Net income  (loss) per share, basic           |       | $          | 0.26       |       | $          | (0.24      | )          | $ | (0.24 | ) |
| Net income  (loss) per share, diluted         |       | $          | 0.26       |       | $          | (0.24      | )          | $ | (0.24 | ) |
|                                          |       |       |       |       |       |       |       |
| Weighted average  shares outstanding, basic   |       | 13,578,363 |       | 12,037,479 |       | 11,890,470 |       |
| Weighted average shares  outstanding, diluted |       | 13,578,363 |       | 12,037,479 |       | 11,890,470 |       |

 

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

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**Spherix Incorporated**

**Consolidated****Balance Sheets**

**As ofDecember 31, 2006 and 2005**

 
| ** **                                                                                                                                                                          | ** ** | **2006**    | ** ** | **2005**    | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------|------------|-------------|------------|
| **ASSETS**                                                                                                                                                                          |       |        |       |        |       |
| Current assets                                                                                                                                                                      |       |        |       |        |       |
| Cash and cash equivalents                                                                                                                                                           |       | $           | 10,951,275 |        | $          | 2,667,733 |   |
| Restricted investments                                                                                                                                                              |       | —      |       | 2,000,000   |       |
| Trade accounts receivable, net of allowance for doubtful  accounts of $15,000                                                                                                       |       | 2,165,605   |       | 2,139,061   |       |
| Other receivables                                                                                                                                                                   |       | 13,759      |       | 271,287     |       |
| Prepaid expenses and other assets                                                                                                                                                   |       | 643,461     |       | 582,279     |       |
| Total current assets                                                                                                                                                                |       | 13,774,100  |       | 7,660,360   |       |
|                                                                                                                                                                                |       |        |       |        |       |
| Property and  equipment, net                                                                                                                                                        |       | 3,914,300   |       | 4,603,032   |       |
| Patents, net of  accumulated amortization of $529,971 and $402,026                                                                                                                  |       | 687,526     |       | 854,871     |       |
| Total assets                                                                                                                                                                        |       | $           | 18,375,926 |        | $          | 13,118,263 |   |
|                                                                                                                                                                                |       |        |       |        |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                                      | ** ** | ** **  | ** ** | ** **  | ** ** |
| Current  liabilities                                                                                                                                                                |       |        |       |        |       |
| Bank line of credit                                                                                                                                                                 |       | $           | —     |        | $          | 1,449,318 |   |
| Accounts payable and accrued expenses                                                                                                                                               |       | 1,535,543   |       | 1,950,584   |       |
| Accrued salaries and benefits                                                                                                                                                       |       | 1,147,523   |       | 1,104,102   |       |
| Capital lease obligations                                                                                                                                                           |       | 225,451     |       | 16,645      |       |
| Total current liabilities                                                                                                                                                           |       | 2,908,517   |       | 4,520,649   |       |
|                                                                                                                                                                                |       |        |       |        |       |
| Capital lease  obligations, net of current position                                                                                                                                 |       | 138,748     |       | 10,810      |       |
| Deferred  compensation                                                                                                                                                              |       | 495,000     |       | 511,325     |       |
| Deferred rent                                                                                                                                                                       |       | 283,064     |       | 196,259     |       |
| Total liabilities                                                                                                                                                                   |       | 3,825,329   |       | 5,239,043   |       |
|                                                                                                                                                                                |       |        |       |        |       |
| Commitments and  contingencies                                                                                                                                                      |       | —      |       | —      |       |
|                                                                                                                                                                                |       |        |       |        |       |
| Stockholders’  equity                                                                                                                                                          |       |        |       |        |       |
| Preferred stock, $0.01 par value, 2,000,000 shares  authorized; none issued and outstanding                                                                                         |       | —      |       | —      |       |
| Common stock, $0.005 par value, 50,000,000 shares  authorized; 13,892,642 and 12,448,456 issued, 13,812,204 and 12,368,018 outstanding  at December 31, 2006 and 2005, respectively |       | 69,463      |       | 62,242      |       |
| Paid-in capital in excess of par value                                                                                                                                              |       | 26,672,384  |       | 23,521,109  |       |
| Treasury stock, 80,438 shares, at cost at December  31, 2006 and 2005, respectively                                                                                                 |       | (464,786    | )          | (464,786    | )          |
| Accumulated deficit                                                                                                                                                                 |       | (11,726,464 | )          | (15,239,345 | )          |
| Total stockholders’ equity                                                                                                                                                     |       | 14,550,597  |       | 7,879,220   |       |
| Total  liabilities and stockholders’ equity                                                                                                                                    |       | $           | 18,375,926 |        | $          | 13,118,263 |   |

 

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

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**Spherix Incorporated**

**Consolidated****Statements of Changes inStockholders’ Equity**

**For the years ended December 31,2006, 2005 and 2004**

 
| ** **                                     | ** ** | **Common Stock** | ** ** | **Paid-in** | ** ** | **Treasury Stock**                      | ** ** | **Retained  Earnings** | ** ** | ** ** | ** ** |
|------------------------------------------------|------------|-----------------------|------------|-------------|------------|----------------------------------------------|------------|------------------------|------------|------------|------------|
| ** **                                     | ** ** | **Shares**            | ** ** | **Amount**  | ** ** | **Capital in  Excess of Par** | ** ** | **Shares**             | ** ** | **Amount** | ** ** | **(Accumulated  Deficit)** | ** ** | **Stockholders’  Equity** | ** ** |
| Balance, December  31, 2003                    |       | 11,486,570            |       | $           | 57,433     |                                         | $          | 19,390,787             |       | 61,488     |       | $ | (390,434 | ) | $ | (9,568,551 | ) | $ | 9,489,235 |   |
|                                           |       |                  |       |        |       |                                         |       |                   |       |       |       |   |   |   |   |
| Issuance of common stock                       |       |                  |       |        |       |                                         |       |                   |       |       |       |   |   |   |   |
| Sale of common stock in private placement, net |       | 43,029                |       | 215         |       | 282,715                                      |       | —                 |       | —     |       | — |   | 282,930 |   |
| Proceeds from Employee Stock Purchase Plan     |       | 1,796                 |       | 9           |       | 7,739                                        |       | —                 |       | —     |       | — |   | 7,748 |   |
| Exercise of stock warrants                     |       | 500,000               |       | 2,500       |       | 3,450,625                                    |       | —                 |       | —     |       | — |   | 3,453,125 |   |
| Purchase of treasury stock                     |       | —                |       | —      |       | —                                       |       | 18,950                 |       | (74,352    | )          | — |   | (74,352 | ) |
| Stock-based compensation                       |       | —                |       | —      |       | 31,050                                       |       | —                 |       | —     |       | — |   | 31,050 |   |
| Net loss                                       |       | —                |       | —      |       | —                                       |       | —                 |       | —     |       | (2,822,046 | ) | (2,822,046 | ) |
| Balance, December  31, 2004                    |       | 12,031,395            |       | 60,157      |       | 23,162,916                                   |       | 80,438                 |       | (464,786   | )          | (12,390,597 | ) | 10,367,690 |   |
|                                           |       |                  |       |        |       |                                         |       |                   |       |       |       |   |   |   |   |
| Issuance of common stock                       |       |                  |       |        |       |                                         |       |                   |       |       |       |   |   |   |   |
| Sale of common stock in private placement, net |       | 410,076               |       | 2,050       |       | 312,428                                      |       | —                 |       | —     |       | — |   | 314,478 |   |
| Proceeds from Employee Stock Purchase Plan     |       | 6,985                 |       | 35          |       | 14,715                                       |       | —                 |       | —     |       | — |   | 14,750 |   |
| Stock-based compensation                       |       | —                |       | —      |       | 31,050                                       |       | —                 |       | —     |       | — |   | 31,050 |   |
| Net loss                                       |       | —                |       | —      |       | —                                       |       | —                 |       | —     |       | (2,848,748 | ) | (2,848,748 | ) |
| Balance, December  31, 2005                    |       | 12,448,456            |       | 62,242      |       | 23,521,109                                   |       | 80,438                 |       | (464,786   | )          | (15,239,345 | ) | 7,879,220 |   |
| ** **                                     | ** ** | ** **            | ** ** | ** **  | ** ** | ** **                                   | ** ** | ** **             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Issuance of common stock                       |       |                  |       |        |       |                                         |       |                   |       |       |       |   |   |   |   |
| Sale of common stock in private placement, net |       | 819,453               |       | 4,097       |       | 1,874,398                                    |       | —                 |       | —     |       | — |   | 1,878,495 |   |
| Exercise of stock warrants                     |       | 585,973               |       | 2,930       |       | 1,192,455                                    |       | —                 |       | —     |       | — |   | 1,195,385 |   |
| Stock-based compensation                       |       | 38,760                |       | 194         |       | 84,422                                       |       | —                 |       | —     |       | — |   | 84,616 |   |
| Net income                                     |       |                  |       |        |       |                                         |       |                   |       |       |       | 3,512,881 |   | 3,512,881 |   |
| Balance, December 31,  2006                    |       | 13,892,642            |       | $           | 69,463     |                                         | $          | 26,672,384             |       | 80,438     |       | $ | (464,786 | ) | $ | (11,726,464 | ) | $ | 14,550,597 |   |

 

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

25

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**Spherix Incorporated**

**Consolidated****Statements of Cash Flows**

**For theyears ended December 31, 2006, 2005 and 2004**

** **
| ** **                                                                                           | ** ** | **2006**   | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| **Cash  flows from operating activities**                                                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income  (loss)                                                                                   |       | $          | 3,512,881  |       | $          | (2,848,748 | )          | $ | (2,822,046 | ) |
| Adjustments to  reconcile net income (loss) to net cash provided by (used in) operating  activities: |       |       |       |       |       |       |       |
| Depreciation and amortization                                                                        |       | 2,601,218  |       | 2,574,247  |       | 2,277,682  |       |
| Provision for uncollectible accounts receivable                                                      |       | —     |       | —     |       | (5,000     | )          |
| Loss on disposal or write-down of assets                                                             |       | 7,944      |       | 8,576      |       | 11,426     |       |
| Loss on write-down of patents                                                                        |       | —     |       | 13,254     |       | —     |       |
| Stock-based compensation                                                                             |       | 84,616     |       | 31,050     |       | 31,050     |       |
| Changes in assets and liabilities:                                                                   |       |       |       |       |       |       |       |
| Trade accounts receivable                                                                            |       | (26,544    | )          | (396,362   | )          | (245,972   | )          |
| Other receivables                                                                                    |       | 257,528    |       | (130,973   | )          | (123,131   | )          |
| Prepaid expenses and other assets                                                                    |       | (61,182    | )          | 56,704     |       | 214,320    |       |
| Accounts payable and accrued expenses                                                                |       | 210,716    |       | (139,906   | )          | 221,503    |       |
| Deferred rent                                                                                        |       | 86,805     |       | (44,316    | )          | 16,330     |       |
| Deferred compensation                                                                                |       | (16,325    | )          | 385,366    |       | 3,304      |       |
| Deferred revenue                                                                                     |       | —     |       | (34,632    | )          | 34,632     |       |
| Net cash  provided by (used in) operating activities                                                 |       | 6,657,657  |       | (525,740   | )          | (385,902   | )          |
|                                                                                                 |       |       |       |       |       |       |       |
| **Cash  flows from investing activities**                                                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Purchase of property and equipment                                                                   |       | (1,417,381 | )          | (1,359,283 | )          | (3,212,340 | )          |
| Restricted cash                                                                                      |       | 2,000,000  |       | 700,000    |       | —     |       |
| Proceeds from the sale of property and equipement                                                    |       | 3,600      |       | —     |       | 1,093      |       |
| Patent expenditures                                                                                  |       | —     |       | —     |       | (7,736     | )          |
| Purchase of certain assets of Daksoft, Inc.                                                          |       | —     |       | —     |       | (700,000   | )          |
| Net cash  provided by (used in) investing activities                                                 |       | 586,219    |       | (659,283   | )          | (3,918,983 | )          |
|                                                                                                 |       |       |       |       |       |       |       |
| **Cash  flows from financing activities**                                                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net change on bank line of credit                                                                    |       | (1,449,318 | )          | (517,466   | )          | 250,041    |       |
| Net change in book overdraft                                                                         |       | (470,333   | )          | 583,273    |       | (99,780    | )          |
| Payments on capital lease obligations                                                                |       | (114,564   | )          | (18,125    | )          | (17,730    | )          |
| Proceeds from issuance of common stock, net                                                          |       | 3,073,881  |       | 329,228    |       | 3,455,551  |       |
| Purchase of treasury stock                                                                           |       | —     |       | —     |       | (74,352    | )          |
| Net cash  provided by financing activities                                                           |       | 1,039,666  |       | 376,910    |       | 3,513,730  |       |
|                                                                                                 |       |       |       |       |       |       |       |
| **Net  increase (decrease) in cash and cash equivalents**                                            |       | 8,283,542  |       | (808,113   | )          | (791,155   | )          |
| **Cash  and cash equivalents, beginning of year**                                                    |       | 2,667,733  |       | 3,475,846  |       | 4,267,001  |       |
|                                                                                                 |       |       |       |       |       |       |       |
| **Cash  and cash equivalents, end of year**                                                          |       | $          | 10,951,275 |       | $          | 2,667,733  |       | $ | 3,475,846 |   |
|                                                                                                 |       |       |       |       |       |       |       |
| **Supplemental  cash flow information**                                                              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest paid                                                                                        |       | $          | 83,665     |       | $          | 75,802     |       | $ | 60,550 |   |
| Property and equipment financed by accounts payable                                                  |       | $          | 102,718    |       | $          | 214,721    |       | $ | 66,131 |   |
| Property and  equipment financed by capital leases                                                   |       | $          | 451,308    |       | $          | —     |       | $ | — |   |

 

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

26

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**Spherix Incorporated****Notes to Financial Statements**

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** **

**1.             Summary of Significant AccountingPolicies**

# ***Nature of Business***

On January 1,2006, Spherix Incorporated transferred the assets of its information servicessegment (the “InfoSpherix Division”) to a new wholly-owned subsidiary,InfoSpherix Incorporated (“InfoSpherix”). Spherix Incorporated (“Spherix”) was founded in 1967, and both Companiesare incorporated in Delaware.  Theactivities of the biotechnology segment (“BioSpherix”) continue to operate throughSpherix Incorporated.  BioSpherix isdedicated to research, development, and productization of proprietaryproducts.  InfoSpherix operates contactcenter services providing consulting, information management, and materialsmanagement to the public as well as reservation and tourism solutions.  These services are provided primarily undergovernment contracts.  The Companymaintains three facilities in Maryland, including its corporate headquarters inBeltsville, and one facility in Indiana.

***Basis of Presentation***

Beginning January1, 2006, the consolidated financial statements include the accounts of bothSpherix Incorporated and InfoSpherix Incorporated (collectively, the “Company”).  All intercompany balances and transactionshave been eliminated.

***Use of Estimates and Assumptions***

The accompanyingconsolidated financial statements have been prepared in conformity withaccounting principles generally accepted in the United States of America.  This requires management to make estimatesand assumptions that affect certain reported amounts of assets and liabilitiesand disclosures of contingent assets and liabilities at the date of thefinancial statements, and the reported amounts of revenue and expenses duringthe period.  Accordingly, actual resultscould differ from those estimates and assumptions.

***CashEquivalents***

The Companyconsiders all highly liquid investments with original maturities of threemonths or less to be cash equivalents. At December 31, 2006, the Company had approximately $6.5 million investedin treasury funds with a maturity of three months or less, which are includedas cash and cash equivalents. The Company maintains cash balances at severalbanks. Accounts at each institution are insured by the Federal DepositInsurance Corporation up to $100,000. At December 31, 2006, the Company’s cashand cash equivalent in excess of the FDIC limits was $10,751,000.

***Concentrations***

During 2006,revenue from three major government contracts accounted for 16%, 15%, and 11%of the Company’s total revenue.  No othercontracts were greater than 10%.  AtDecember 31, 2006, four major contracts constituted 68% of the trade accountsreceivable, the components of which were 26%, 16%, 15% and 11%.  No other single contract was greater than 10%of total trade accounts receivable. Receivables from Federal and state government agencies represented 83%of the total trade accounts receivable.

During 2005,revenue from four major government contracts accounted for 17%, 16%, 12%, and12% of the Company’s total revenue.  Noother contracts were greater than 10%. At December 31, 2005, four major contracts constituted 75% of the tradeaccounts receivable, the components of which were 30%, 16%, 15% and 14%.  No other single contract was greater than 10%of total trade accounts receivable. Receivables from Federal and state government agencies represented 91%of the total trade accounts receivable. Government contracts accounted for approximately 99%, 100%, and 99% ofthe InfoSpherix revenue in 2006, 2005, and 2004, respectively.

***Propertyand Equipment and Depreciation***

Property andequipment are stated at cost and consist of office furniture and equipment,computer hardware and software, leasehold improvements, and capitalleases.  Computer hardware and softwareinclude the cost of internally developed software programs, which havelong-term benefits.  The Company hasdeveloped and continues to develop a large variety of software applicationsthat are used in the performance of its multiple contact center and parkreservation contracts.  Theseapplications are designed to aid our telephone operators in providinginformation to the public as well as collecting caller information.  The Company has also developed softwareapplications that we use to 

27

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**Spherix Incorporated****Notes to Financial Statements**

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process park reservationtransactions.  The Company capitalizesthe labor and fringe costs incurred by our software programmers in thedevelopment of these applications as well as the costs incurred in creatingfunctionality enhancements.  In 2006 and2005, the Company capitalized approximately $790,000 and $804,000 in internallydeveloped software, respectively.  TheCompany computes depreciation and amortization under the straight-line methodand typically over the following estimated useful lives of the related assets:

| Office furniture and  equipment |   | 3 to 10 years |
|---------------------------------|--------|---------------|
| Computer  hardware and software |   | 3 to 5 years  |

 

Leaseholdimprovements are depreciated or amortized over the lesser of the term of therelated lease or the estimated useful lives of the assets (generally 5 to 10years).  Major additions, improvementsand renewals are capitalized and ordinary repairs, maintenance, and renewalsare expensed in the year incurred.  Gainsor losses from the sale or retirement of property and equipment result from thedifference between sales proceeds (if any) and the assets’ net book value, andare recorded in the consolidated Statement of Operations.

***Inventory***

Included inprepaid expenses at December 31, 2006, is approximately $65,000 of Naturloseinventory.  The inventory is valued atlower of cost or market.

***DeferredRent***

The Companyentered into leases for its Beltsville, Cumberland, Annapolis and Indianapolisfacilities in 1997, 2003, 2004, and 2006, respectively.  The excess of the rent expense over the cashpayments for rent is recorded as deferred rent and is being amortized over thelife of the leases.

***Research and Development Costs***

Researchand development costs are charged to operations as incurred.

***PatentCosts***

Legal costsincurred in connection with patent applications and costs of acquiring patentsare capitalized when incurred.  Whenpatents are granted, costs are amortized over a term representing the lesser ofthe life of the patent or the projected sales period of the product or process.

***RevenueRecognition***

Revenue isrecognized using the following methods depending upon the terms of thecontracts:  time and materials or fixedprice.  Revenue under time and materialscontracts is recognized at contractually agreed-upon rates based upon directlabor hours expended and other direct costs incurred.  Revenue for fixed-price contracts isrecognized using unit-of-delivery methods. Losses, if any, on contracts are recorded during the period when firstdetermined.

***DirectContract and Operating Costs***

The Company’sdirect contract and operating costs consist primarily of labor and fringe costsfor contact center personnel, subcontractors, telephone related costs,depreciation on computer hardware and software and related facilities costs.

***Selling,General and Administrative Expense***

The Company’sselling, general and administrative expenses consist primarily of executivemanagement salaries and fringes, sales and marketing costs, finance and accounting,human resources, as well as general corporate costs and costs related to beinga public company.

***IncomeTaxes***

Deferred incometaxes are recognized for the tax consequences in future years of differencesbetween the tax bases of assets and liabilities and their financial reportingamounts at each year end, based on enacted tax laws and 

28

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**Spherix Incorporated****Notes to Financial Statements**

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statutory tax ratesapplicable to the periods in which the differences are expected to affecttaxable income.  A valuation allowance isestablished based upon periodic assessments made by management to reducedeferred tax assets to the amount expected to be realized.  Income tax expense is the tax payable for theperiod and the change during the period in deferred tax assets and liabilities.

***FairValue Information***

The estimated fairvalue of the Company’s financial instruments, which include cash, receivables,accounts payable, and bank line of credit reported in the Consolidated BalanceSheet, approximate their carrying value given their short maturities.

***Accounting for Stock-BasedCompensation***

Effective January1, 2006, the Company adopted Statement of Financial Accounting Standards No.123(R) “Share-Based Payment” (FAS 123R), which requires the measurement of allemployee share-based payments to employees, including grants of employee stockoptions, using a fair-value based method and the recording of such expense inthe consolidated statements of operations and comprehensive loss.  The Company uses a Black-Scholes optionpricing model and has elected to use the modified prospective transition methodand, therefore, has not restated results for prior periods.  At the time the Company adopted FAS 123R,there were no unvested options outstanding. For the year ended December 31, 2006, the Company realized $24,000 instock based compensation expense relating to 59,000 stock options awarded inFebruary 2006.  The effect of adoptingFAS 123R increased the loss from operations, and decreased the income beforetaxes and the net income by $24,000 for the year ended December 31, 2006, andhad no effect on basic and diluted earnings per share, net cash flow fromoperations, or net cash flow from financing activities.

For the yearsprior to January 1, 2006, the Company elected the “disclosure only”presentation under Statement of Financial Accounting Standards No. 123 “Accountingfor Stock Based Compensation” (FAS 123) and, consequently, did not recordcompensation expense relating to employee option grants provided the exerciseprices were at or above fair value of the Company’s common stock on the grantdate.

On November 4,2005, the Company had a total of 176,658 previously unvested stock optionsoutstanding.  The exercise prices of allof these options were greater than the fair value of the Company’s stock.  On this day, the Board of Directors voted tofully vest all of the then outstanding stock options.  The average weighted exercise price of theseoptions was $7.98.  The primary purposeof the accelerated vesting was to enable the Company to avoid recognizing thefuture compensation expense for these options upon adoption of “SFAS 123R.”  The related future stock-based employeecompensation expense that was eliminated as a result of the acceleration of thevesting of these options is approximately $562,000, and had the effect ofincreasing the 2005 proforma loss from $3,110,977 to $3,672,738 and theproforma loss per share from $(0.26) to $(0.31).

To measurestock-based compensation in accordance with SFAS 123, the fair value of eachoption grant was estimated on the date of grant using the Black-Scholesoption-pricing model.  The followingtable summarizes the pro-forma net loss and net loss per share resulting fromapplying SFAS 123.

The followingtable summarizes the pro-forma net loss and net loss per share resulting fromapplying FAS 123.

 
| ** **                                                                                                                        | ** ** | ** **   | ** ** | **2005**    | ** ** | **2004** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------|------------|--------------|------------|-------------|------------|----------|------------|
| Net loss, as  reported                                                                                                            |       |         |       | $           | (2,848,748 | )        | $          | (2,822,046 | ) |
| Add: stock-based  employee compensation expense included in reported net loss                                                     |       |         |       | 31,050      |       | 31,050   |       |
| (Deduct) add:  total stock-based employee compensation (expense) benefit determined under  fair-value based method for all awards |       |         |       | (855,040    | )          | (605,051 | )          |
| Pro forma net  loss                                                                                                               |       |         |       | ($3,672,738 | )          | $        | (3,396,046 | ) |
| Net loss per  share — basic                                                                                                  |       | As  reported |       | $           | (0.24      | )        | $          | (0.24 | ) |
|                                                                                                                              |       | Pro  forma   |       | $           | (0.31      | )        | $          | (0.29 | ) |
| Net loss per  share — diluted                                                                                                |       | As  reported |       | $           | (0.24      | )        | $          | (0.24 | ) |
|                                                                                                                              |       | Pro  forma   |       | $           | (0.31      | )        | $          | (0.29 | ) |

 

29

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**Spherix Incorporated****Notes to Financial Statements**

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***                Net income (Loss) Per Share***

Basic net income(loss) per common share has been computed by dividing net income (loss) by theweighted-average number of common shares outstanding during the year.  Diluted net income per common share iscomputed by dividing net income by the weighted-average number of common sharesoutstanding with an assumed increase in common shares outstanding for commonstock equivalents.  At December 31, 2006,the Company had outstanding 501,100 options, none of which were assumed likelyto be exercised.  Diluted net loss per commonshare has been computed by dividing net loss by the weighted-average number ofcommon shares outstanding without an assumed increase in common sharesoutstanding for common stock equivalents, as common stock equivalents areantidilutive.
| ** **                                          | ** ** | **2006**   | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|-----------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| Weighted average  shares outstanding, basic         |       | 13,578,363 |       | 12,037,479 |       | 11,890,470 |       |
| Weighted average  dilutive common stock equivalents |       | —     |       | —     |       | —     |       |
| Weighted average shares  outstanding, diluted       |       | 13,578,363 |       | 12,037,479 |       | 11,890,470 |       |

 

**New Accounting Pronouncements**

In June 2006, theFinancial Accounting Standards Board (“FASB”) issued FASB Interpretation No.48, “Accounting for Uncertainty in Income Taxes” (“FIN48”).  The Interpretation clarifies the accountingfor uncertainty in income taxes recognized in an enterprise’s financialstatements in accordance with FASB Statement No. 109, “Accounting for IncomeTaxes.”  We are required to adopt FIN 48effective January 1, 2007.   We arecurrently evaluating the impact this interpretation will have on our financialposition, results of operations, and cash flows.

In September 2006,the FASB issued Statement of Financial Accounting Standards No. 157, “FairValue Measurements” (“SFAS 157”).  SFAS157 defines fair value, establishes a framework for measuring fair, and expandsdisclosures about fair value measurements. We are required to adopt SFAS 157 effective January 1, 2008. We do notexpect the adoption of SFAS 157 to have a material affect on our financialposition, results of operations or cash flows.

In September 2006,the U.S. Securities and Exchange Commission (“SEC”) issued Staff AccountingBulletin No. 108 (“SAB 108”).  SAB 108addresses diversity in practice in quantifying financial statementmisstatements and the potential under current practice for the build up ofimproper amounts on the balance sheet. The bulletin requires companies to quantify misstatements based on theimpact on the financial statements and related disclosures.  We have adopted SAB 108 in connection withthe preparation of our financial statements for the year ended December 31,2006.  The adoption of SAB 108 did nothave a material impact on our financial position, results of operations or cashflows.

**2.             Restricted Investments**

At December 31, 2005, the Company held $2,000,000 ina restricted certificate of deposit as collateral on the Company’s bank line ofcredit.  The Company was released fromthe bank line of credit restriction when the line of credit matured on March31, 2006, (see Note 6 “Line of Credit”). The certificate of deposit matured on June 30, 2006.  A restricted certificate of deposit is notrequired as collateral on the new line of credit.

**3.             Allowance for Doubtful Accounts**

Managementregularly reviews the accounts receivables for uncollectible and potentiallyuncollectible accounts and when necessary establishes an allowance for doubtfulaccounts.

| Balance, December 31, 2003          |   | $      | 20,000 |   |
|-------------------------------------|--------|--------|--------|--------|
| Write-off of uncollectible accounts |   | (9,000 | )      |
| Valuation adjustment                |   | 4,000  |   |
| Balance,  December 31, 2004         |   | 15,000 |   |
| Write-off of uncollectible accounts |   | — |   |
| Valuation adjustment                |   | — |   |
| Balance,  December 31, 2005         |   | 15,000 |   |
| Write-off of uncollectible accounts |   | — |   |
| Valuation adjustment                |   | — |   |
| Balance, December 31,  2006         |   | $      | 15,000 |   |

 

30

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**Spherix Incorporated****Notes to Financial Statements**

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**4.             Property and Equipment**

The components ofproperty and equipment as of December 31, at cost are:

|                                                                                                                       | ** ** | **2006**   | ** ** | **2005**   | ** ** |
|-----------------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| Computer  software                                                                                                    |       | $          | 3,744,000  |       | $          | 4,222,000 |   |
| Computer  hardware                                                                                                    |       | 3,866,000  |       | 4,487,000  |       |
| Office furniture  and equipment                                                                                       |       | 666,000    |       | 627,000    |       |
| Leasehold  improvements                                                                                               |       | 1,275,000  |       | 1,272,000  |       |
| Capital leases                                                                                                        |       | 524,000    |       | 72,000     |       |
| Total cost                                                                                                            |       | 10,075,000 |       | 10,680,000 |       |
| Accumulated  depreciation and amortization (including capital lease accumulated amortization  of $172,000 and $47,000 |       | (6,161,000 | )          | (6,077,000 | )          |
| Property and equipment,  net                                                                                          |       | $          | 3,914,000  |       | $          | 4,603,000 |   |

 

The Company’s depreciation expense for the years endedDecember 31, 2006, 2005 and 2004 were $2,434,000, $2,413,000 and$2,138,000, respectively.

**5.             Intangible Assets**

On March 1, 2004,the Company purchased certain assets of Daksoft, Inc. related to itsreservation business, which operates under the name “ReserveIt.”  The purchase included the acquisition of sixadditional government reservation contracts and the intellectual propertyrights to the name “ReserveIt,” as well as other assets of the division.  Spherix purchased the assets for $700,000plus the issuance of 43,029 shares of common stock valued at $288,000 (subjectto certain restrictions).  The Companyassessed the value of the purchased contracts to be $976,000 and will amortizeit annually over seven years, the estimated contractual life.  In 2006, 2005 and 2004, the Companyrecognized $139,000, $139,000, and $116,000, respectively, in relatedamortization expense.

The Company’stotal amortization expense for the years ended December 31, 2006, 2005,and 2004 were $167,000, $161,000 and $140,000, respectively. The Company’sfuture amortization over the next five years based on its intangible assets atDecember 31, 2006, 2005, and 2004 are as follows:

| Year       | ** ** | **Amortization  Expense** | ** ** |
|------------|------------|---------------------------|------------|
| ** ** | ** ** | ** **                | ** ** |
| 2007       |       | $                         | 165,000    |   |
| 2008       |       | 157,000                   |       |
| 2009       |       | 154,000                   |       |
| 2010       |       | 154,000                   |       |
| 2011       |       | 38,000                    |       |
|            |            |                           |            |  |

 

**6.             Debt**

***Lineof Credit***

As a result of thecreation of InfoSpherix as a wholly-owned subsidiary, management no longerconsiders maintaining a bank line of credit for the parent company, Spherix,necessary, and, therefore decided not to renew the old credit agreement when itmatured on March 31, 2006.  The Companyentered into a new agreement on March 31, 2006 with Bank of America (“the Bank”)to establish a line-of-credit (“New Agreement”) for its subsidiary, InfoSpherixIncorporated, with the outstanding borrowings of approximately $1.5 millionunder the old line of credit transferred to the new agreement.  Management considers the establishment ofthis credit facility for the subsidiary necessary to ensure timely cash flowfor the subsidiary’s operations.  The NewAgreement, which matures June 30, 2008, provides for borrowings up to $1.5million, is collateralized by the subsidiary’s accounts receivables andequipment, and contains covenants on tangible net worth and funded debt toEBITDA ratios.  Such covenants could havea limiting effect on the amount of cash that the subsidiary can advance toSpherix.  The interest rate under theAgreement is based on the LIBOR daily floating rate plus 3% (approximately8.34% at December 31, 2006).  The Companyhad no outstanding borrowings under the Agreement at December 31, 2006, and thetotal amount available for future advance to the subsidiary was $1.5 millionunder the Agreement.

**7.             Accounts Payable and Accrued Expenses**

Accounts payableand accrued expenses consisted of the following at December 31:

|                        | ** ** | **2006** | ** ** | **2005** | ** ** |
|------------------------|------------|----------|------------|----------|------------|
| ** **             |       |     |       |     |       |
| Accounts payable       |       | $        | 690,000    |     | $          | 765,000 |   |
| Accrued expenses       |       | 566,000  |       | 542,000  |       |
| Book overdraft         |       | 174,000  |       | 644,000  |       |
| Accrued taxes  payable |       | 105,000  |       | —   |       |
|                   |       | $        | 1,535,000  |     | $          | 1,951,000 |   |

 

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**Spherix Incorporated****Notes to Financial Statements**

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**8.             Stockholder Equity**

***Private Placements***

The Companydetermined that, as of June 30, 2005, it was approximately $454,000 short ofmeeting NASDAQ’s Global Market listing requirement of maintaining a minimum of$10,000,000 in shareholders’ equity. NASDAQ gave the Company until September 1, 2005, to correct thissituation, which the Company achieved through its third quarter results.  However, in anticipation of incurring lossesdue to seasonal fluctuations in the InfoSpherix business segment that occur inthe first and fourth quarters of the year, the Company entered into a StandbyEquity Distribution Agreement (“SEDA”) with Cornell Capital Partners, L.P. (“Cornell”)on July 22, 2005.  Under the SEDA,Spherix can require Cornell to purchase up to $4,000,000 of the Company’scommon stock over a two-year period following the effective date, October 12,2005, of the registration covering the shares of our common stock to be sold toCornell.  The SEDA establishes what issometimes termed an “equity line of credit” or an “equity draw-down facility.”  The $4,000,000 facility may be drawn downupon by us in installments, the maximum amount of each draw down is limited to$350,000.  For each share of common stockpurchased under the SEDA, Cornell will pay 95% of the lowest volume weightedaverage price (“VWAP”) of the Company’s shares during the five trading daysfollowing the Company’s draw down notice to Cornell.  The VWAP used in the calculation is thatreported by Bloomberg, LLC, a third-party reporting service.  In general, the VWAP represents the sum ofthe value of all the sales of our common stock for a given day (the totalshares sold in each trade times the sales price per share of the common stockfor that trade), divided by the total number of our shares sold on thatday.  The Company is also committed topay to Cornell an amount equal to 5% of each purchase of common stock made byCornell under the SEDA.  Under the termsof the SEDA agreement, the Company is not obligated to draw down on the SEDAfacility, but once we satisfy normal conditions for this type of transaction,we have the right to require Cornell to purchase our common stock.  In connection with the SEDA, we have issuedto Cornell 95,000 shares of our common stock and paid a due diligence fee of$5,000.  We also paid Yorkville AdvisorsManagement, LLC, the investment manager for Cornell, a structuring fee of$15,000, and on each sale under the SEDA we will pay an additional structuringfee of $500.  Newbridge SecuritiesCorporation acted as our placement agent for the SEDA, and we paid that firm afee of 5,000 shares of our common stock valued at $10,000.  We also granted Newbridge SecuritiesCorporation piggy-back registration rights covering these shares.  Registration of our common shares coveredunder the SEDA was completed in October 2005. During the term of the SEDA, our Officers and Directors have agreed notto sell any of their shares of our common stock, except to the extent permittedunder Rule 144.  The number of shares ofour common stock issuable to Cornell under the SEDA is subject to a 9.99% capon the beneficial ownership that Cornell and its affiliates may have at thetime of each installment (beneficial ownership is to be calculated inaccordance with Section 13(d) of the Exchange Act).  Further, the Company may not issue more than19.99% of our currently outstanding shares under the SEDA unless shareholderapproval is received.  Fees paid throughcash and common stock to Cornell, Yorkville Advisors, and Newbridge Securitytotaling $220,000 were charged against the proceeds of the initial draw on thefacility.  In 2006, the Company sold819,453 shares under the SEDA agreement for total proceeds of $1,897,000, andin 2005, the Company sold 310,076 shares under the SEDA agreement for totalproceeds of $376,000.  At December 31,2006, the Company’s shareholder’s equity was $14.6 million.

On March 9, 2006,in exchange for the Company’s agreement to reduce the exercise price of 585,973in outstanding warrants to $2.04 per share, an Investor agreed to exercise thefull 585,973 shares for total proceeds of approximately $1.2 million.  In connection with these warrants, the newholder of the warrants agreed that it would not exercise any of the warrants tothe extent that it would acquire shares of Common Stock exceeding 9.9% of theoutstanding Common Stock, nor would it knowingly sell shares to anyone to theextent that their holdings in the Company would exceed 4.9% of the outstandingCommon Stock.  The warrants and shares ofCommon Stock were issued in transactions exempt from Registration pursuant toSection 4(2) of the Securities Act.  TheCompany has registered the shares issuable upon exercise of the warrants forresale by the institutional investor.

***StockOption Plan***

The Company has anEmployees’ Stock Option Plan (the “Plan”) which permits issuance of bothIncentive Stock Options (ISO) and Non-Qualified Stock Options, whereby optionsmay be granted to officers and Directors and other key employees to purchase upto 1,000,000 shares of common stock in amounts determined by the CompensationCommittee of the Board of Directors through December 31, 2007.  During 2006, 2005, and 2004, 59,000, 12,500,and 60,000 options were granted under the Plan, respectively.  At December 31, 2006, 403,100 options wereavailable for grant under the Plan.

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**Spherix Incorporated****Notes to Financial Statements**

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On November 4,2005, the Company had a total of 176,658 previously unvested stock optionsoutstanding.  The exercise prices of allof these options were greater than the fair value of the Company’s stock.  The Board of Directors approved theacceleration of vesting of all such outstanding stock options.  The average weighted exercise price of theseoptions was $7.98.  The primary purposeof the accelerated vesting was to enable the Company to avoid recognizing thefuture compensation expense for these options upon adoption of “SFAS 123R.”  The estimated stock-based employeecompensation expense that was eliminated as a result of this action wasapproximately $562,000, and had the effect of increasing the 2005 proforma lossfrom $3,110,977 to $3,672,738 and the proforma loss per share from $(0.24) to$(0.31).
| ** **                                                      | ** ** | **2006  Shares** | ** **  | **2006  Weighted  Average  Exercise  Price** | ** ** | **2005  Shares** | ** ** | **2005  Weighted  Average  Exercise  Price** | ** ** | **2004  Shares** | ** ** | **2004  Weighted  Average  Exercise  Price** | ** **  |
|-----------------------------------------------------------------|------------|------------------|-------------|----------------------------------------------|------------|------------------|------------|----------------------------------------------|------------|------------------|------------|----------------------------------------------|-------------|
| Outstanding at  beginning of year                               |       | 507,200          |        | $                                            | 7.73       |             | 677,800    |                                         | $          | 7.82             |       | 653,650                                      |        | $ | 7.97 |   |
|  Granted                                                   |       | 59,000           |        | $                                            | 2.20       |             | 12,500     |                                         | $          | 3.41             |       | 60,000                                       |        | $ | 5.98 |   |
|  Exercised                                                 |       | —           |        | $                                            | —     |             | —     |                                         | $          | —           |       | —                                       |        | $ | — |   |
|  Expired or  forfeited                                     |       | (65,100          | )           | $                                            | 7.51       |             | (183,100   | )                                            | $          | 7.79             |       | (35,850                                      | )           | $ | 7.36 |   |
| Outstanding at  end of year                                     |       | 501,100          |        | $                                            | 7.11       |             | 507,200    |                                         | $          | 7.73             |       | 677,800                                      |        | $ | 7.82 |   |
|                                                            |       |             |        |                                         |       |             |       |                                         |       |             |       |                                         |        |
| Options  exercisable at end of year                             |       | 467,100          |        |                                         |       | 507,200          |       |                                         |       | 345,822          |       |                                         |        |
|                                                            |       |             |        |                                         |       |             |       |                                         |       |             |       |                                         |        |
| Weighted-average  fair value of options granted during the year |       | $                | 1.88        |                                         |       |             | $          | 1.92                                         |       |             |       | $                                            | 3.22        |   |   |   |
|                                                            |       |             |        |                                         |       |             |       |                                         |       |             |       |                                         |        |
| Price range of  options                                         |       |             |        |                                         |       |             |       |                                         |       |             |       |                                         |        |
|  Outstanding                                               |       | $                | 2.25-$10.51 |                                         |       |             | $          | 2.25-$10.51                                  |       |             |       | $                                            | 2.25-$10.51 |   |   |   |
|  Exercised                                                 |       | $                | —      |                                         |       |             | $          | —                                       |       |             |       | $                                            | —      |   |   |   |
|  Expired or  forfeited                                     |       | $                | 4.99-$10.51 |                                         |       |             | $          | 6.35-$9.55                                   |       |             |       | $                                            | 6.00-$9.55  |   |   |   |
|                                                            |       |             |        |                                         |       |             |       |                                         |       |             |       |                                         |        |

 

Activity for thethree years ended December 31, 2006, for all option grants is shown below:

Thefollowing table summarizes information with respect to stock optionsoutstanding at December 31, 2006:

| Range of   Exercise Price | ** ** | ** ** | ** ** | **Number of   Options   Outstanding   at  12/31/06** | ** ** | **Weighted Average   Exercise Price** | ** ** | **Weighted Average   Remaining   Contractual Life** | ** ** |
|------------------------------------------|------------|------------|------------|------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|-------------------------------------------------------------------------|------------|
| $2.25-$4.99                              |       | 126,500    |       | $                                                                                  | 3.02       |                                                 | 2.4        |                                                                    |
| $6.35-$7.84                              |       | 83,850     |       | $                                                                                  | 6.73       |                                                 | 1.0        |                                                                    |
| $8.09-$10.51                             |       | 290,750    |       | $                                                                                  | 8.99       |                                                 | 2.8        |                                                                    |
|                                     |       | 501,100    |       |                                                                               |       |                                                 |       |

 

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**Spherix Incorporated****Notes to Financial Statements**

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The followingtable summarizes information with respect to stock options exercisable atDecember 31, 2006:

| Year of Option  Expiration | ** ** | ** ** | ** ** | **Number of   Options** | ** ** | **Weighted Average   Exercise Price** | ** ** | **Price Range** | ** ** |
|--------------------------------------|------------|------------|------------|-----------------------------------|------------|------------------------------------------------------|------------|----------------------|------------|
| 2007                                 |       | 137,550    |       | $                                 | 6.28       |                                                 | $          | 2.25-$10.51          |       |
| 2008                                 |       | 192,050    |       | $                                 | 8.28       |                                                 | $          | 6.35-$8.67           |       |
| 2010                                 |       | 12,500     |       | $                                 | 3.41       |                                                 | $          | 3.41                 |       |
| 2011                                 |       | 125,000    |       | $                                 | 7.91       |                                                 | $          | 2.20-$9.34           |       |
|                                 |       |       |       |                              |       |                                                 |       |
| All Years                            |       | 467,100    |       |                              |       |                                                 |       |

 

The Company usedthe following assumptions in the Black-Scholes calculation used to measure thefair value of stock-based compensation in accordance with SFAS 123R.

|                         | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------|------------|----------|------------|----------|------------|----------|------------|
| Risk-free interest rate |       | 4.59     | %          | 5.11     | %          | 4.28     | %          |
| Expected life (years)   |       | 4        |       | 4        |       | 4        |       |
| Volatility              |       | 140.9    | %          | 69.6     | %          | 66.8     | %          |
| Dividend yield          |       | 0        | %          | 0        | %          | 0        | %          |

 

**9.             Income Taxes**

Income tax expensefor 2006 was $105,000 and is attributed to the alternative minimum tax.  There was no income tax expense for the years2005 and 2004 as a result of net losses and the net operating losscarryforwards and increases in the valuation allowance.

The tax effect ofsignificant temporary differences representing deferred tax assets as ofDecember 31, 2006 and 2005, is as follows:
| ** **                       | ** ** | **2006**    | ** ** | **2005**        | ** ** |
|----------------------------------|------------|-------------|------------|-----------------|------------|
| ** **                       | ** ** | **Current** | ** ** | **Non-Current** | ** ** | **Current** | ** ** | **Non-Current** | ** ** |
| Property and equipment           |       | $           | —     |            | $          | (259,688 | ) | $ | — |   | $ | (762,137 | ) |
| Deferred rent                    |       | 109,023     |       | —          |       | 75,795 |   | — |   |
| Accrued vacation                 |       | 68,547      |       | —          |       | 70,218 |   | — |   |
| Allowance for doubtful  accounts |       | 5,758       |       | —          |       | 5,793 |   | — |   |
| Tax credit                       |       | —      |       | 90,000          |       | — |   | — |   |
| Deferred compensation            |       | 19,310      |       | 239,135         |       | — |   | 241,443 |   |
| Forward loss provision           |       | 25,911      |       | —          |       | 52,137 |   | — |   |
| Net operating loss  carryforward |       | —      |       | 5,632,054       |       | — |   | 7,353,528 |   |
| Accrued bonus                    |       | —      |       | —          |       | 32,055 |   | — |   |
| Other                            |       | (115        | )          | —          |       | (10,728 | ) | — |   |
|                             |       | 228,434     |       | 5,701,501       |       | 225,270 |   | 6,832,834 |   |
| Valuation allowance              |       | (228,434    | )          | (5,701,501      | )          | (225,270 | ) | (6,832,834 | ) |
|                             |       |        |       |            |       |   |   |   |   |
| Deferred tax asset               |       | $           | —     |            | $          | — |   | $ | — |   | $ | — |   |

 

Approximately $4.1million in U.S. tax net operating losses were utilized in 2006.  The Company has $14.6 million in netoperating loss carryforwards that will be available to offset regular taxableU.S. income during the carryforward period, which will expire from 2019 through2025.  Based on the Company’s historicallosses and its accumulated deficit, the Company has provided a full valuationallowance against the net deferred tax asset. 

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**Spherix Incorporated****Notes to Financial Statements**

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At December 31, 2006,approximately $388,000 of the valuation allowance, related to benefits fromstock compensation, will be credited to “paid in capital” when recognized infuture periods. 

Reconciliationbetween actual tax expenses and taxes computed at the statutory Federal rate of34 percent for 2006, 2005, and 2004 are as follows:
| ** **                                | ** ** | **2006**   | ** ** | **2005**  | ** ** | **2004**  | ** ** |
|-------------------------------------------|------------|------------|------------|-----------|------------|-----------|------------|
| U.S. Federal income tax  rate at 34%      |       | $          | 1,230,096  |      | $          | (968,575  | )          | $ | (959,495 | ) |
| State taxes, net of  federal tax benefit  |       | 154,418    |       | (131,612  | )          | (130,378  | )          |
| Change in valuation  allowance            |       | (1,128,170 | )          | 1,168,226 |       | 1,099,331 |       |
| Expenses not deductible  for tax purposes |       | 16,001     |       | 13,195    |       | 13,269    |       |
| Other                                     |       | (167,295   | )          | (81,234   | )          | (22,727   | )          |
|                                      |       |       |       |      |       |      |       |
| Income tax provision (benefit)            |       | $          | 105,050    |      | $          | —    |       | $ | — |   |

 

**10.          Commitments and Contingencies**

***GovernmentContracts***

The principalportion of the Company’s revenue has been generated under government contracts,by InfoSpherix.  These contracts areawarded pursuant to a competitive bidding process.  As of December 31, 2006, none of the Company’scontracts were under protest.  TheGovernment has the right to audit billings and Spherix does not expectadjustments to such billings.

***Leases***

The Company hasvarious commitments under capital and operating leases through 2011 relating tooffice equipment, its call center facility in Cumberland, Maryland, its callcenter facility in Carmel, Indiana, its call center and administrative offices inBeltsville, Maryland, and its research lab and administrative office inAnnapolis, Maryland.

Futureminimum rentals as of December 31, 2006, under noncancellable leases are asfollows:

| Year Ending December 31, | ** ** | ** ** | ** ** | **Capital  Leases** | ** ** | **Operating  Leases** | ** ** |
|-----------------------------------------|------------|------------|------------|---------------------|------------|-----------------------|------------|
|                                    |       |       |       |                |       |
| 2007                                    |       | $          | 265,000    |                | $          | 1,157,000             |       |
| 2008                                    |       | 140,000    |       | 972,000             |       |
| 2009                                    |       | 8,000      |       | 420,000             |       |
| 2010                                    |       | —     |       | 276,000             |       |
| 2011                                    |       | —     |       | 280,000             |       |
| Thereafter                              |       | —     |       | —              |       |
|                                    |       | 413,000    |       | $                   | 3,105,000  |                  |
| Less: executory costs                   |       | 9,000      |       |                |       |
| Less: amount  representing interest     |       | 40,000     |       |                |       |
| Capital lease  obligations              |       | 364,000    |       |                |       |
| Less current portion                    |       | 225,000    |       |                |       |
| Long-term obligations                   |       | $          | 139,000    |                |       |                  |

 

Some of theCompany’s building leases contain step rent provisions, capital improvementfunding, or other tenant allowances. Minimum rental payments including allowances on such leases isrecognized on a straight-line basis over the term of the leases.  The Company incurred rental expenses of$1,343,000, $942,000, and $860,000, under operating leases for years 2006,2005, and 2004, respectively.

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**Spherix Incorporated****Notes to Financial Statements**

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***RelatedParty Transactions***

Employment, DeferredCompensation, and Consulting Agreements for Principal Stockholders

Dr. Gilbert V.Levin, Company founder and former CEO, has served under an Employment Agreementsince March 3, 1969.  This Agreement wasamended and restated in 2004, and continued through December 31, 2004.  On February 17, 1993, the Company entered intoagreements with Dr. Levin and Mrs. M. Karen Levin to provide adequate retirementbenefits and to protect the Company’s stock from a precipitous sale to payestate taxes upon their deaths.  Theseagreements provided that, upon retirement, under a Supplemental ExecutiveRetirement Plan (SERP), these individuals would receive deferred compensationequal to 70% and 60%, respectively, of their average annual total compensationless the assumed returns from investment of their funded pension plans, andless their social security payments.  OnMarch 23, 2004, after lengthy consideration and consultation, the Board and theLevins approved new deferred compensation agreements.  At March 23, 2004, the deferred compensationplan for Dr. Levin was unfunded and the Company had no liability under theplan.  In the March 23, 2004 agreement,Dr. Levin voluntarily forgave the Company of its obligations under his SERPagreement.  The Company also has agreedto provide Dr. Levin with lifetime payments of $12,500 each quarter and to fundlong-term lifetime healthcare and health insurance policies following his fullretirement from the Company.  In 2004,Dr. and Mrs. Levin voluntarily forgave the Company its obligation to retain keyman life insurance on them and to buy back stock from the last to survive.  On November 29, 2005, the Board and Mrs.Levin approved a new agreement concerning her retirement benefits in connectionwith her January 4, 2006 retirement from the Company.  At November 29, 2005, the deferredcompensation plan for Mrs. Levin was unfunded and the Company had no liabilityunder the plan as actuarially determined. In the November 29, 2005 agreement, Mrs. Levin voluntarily forgave theCompany its obligations under her SERP agreement.  The Company also has agreed to provide Mrs.Levin lifetime payments of $12,500 each quarter and to fund long-term lifetimehealthcare and health insurance policies following her January 4, 2006,retirement from the Company.  At December31, 2006, the Company’s liability for both Dr. Levin and Mrs. Levin wasestimated to be $389,000 for the lifetime payments and $156,000 for funding thelong-term lifetime healthcare and health insurance policies.  The non-current portion of these amounts isreported on the accompanying balance sheet as deferred compensation.

Upon completion oftheir employment, the officer-stockholders agree to serve as consultants to theCompany on an as-needed basis, at a specified daily rate.

***Other***

In July 2005,Spherix filed an official protest of the U.S. Department of Agriculture’s awardof the National Recreation Reservation System (“NRRS”) contract toReserveAmerica, a TicketMaster subsidiary. The NRRS will provide reservation services for all Federal recreationfacilities, including the National Park sites serviced by Spherix under itsNational Park Reservation Service (“NPRS”) contract with the Department ofInterior.  On October 20, 2005, theGovernment Accountability Office (“GAO”) sustained Spherix’s challenge to theUSDA Forest Service award and recommended that the Department of Agriculturereopen the competition and make a new award decision.  This was the second time that GAO found theForest Service’s attempt to award the NRRS contract to ReserveAmerica to beflawed.  In October 2006, the Companyagreed to a $6 million settlement to end its longstanding legal dispute withthe U.S. Department of Agriculture over the government’s award of the NationalRecreation Reservation Service (NRRS) contract to ReserveAmerica, aTicketmaster subsidiary.  The Company’sNPRS contract concluded on January 23, 2007. The Company operated the NPRS contract for nine years; revenuerecognized was $4.0 million, $4.0 million and $3.9 million for the years endedDecember 31, 2006, 2005 and 2004, respectively, or 16%, 17% and 17% of totalrevenue for each year.

**11.          Employee Benefit Plans**

Effective January1, 1990, the Company established the Spherix Incorporated 401(k) RetirementPlan.  The Plan is a discretionarydefined contribution plan and covers substantially all employees who haveattained the age of 21, have completed one year of service, and have worked aminimum of 1,000 hours in the past Plan or anniversary year.

Under provisionsof the Plan, the Company, for any plan year, has contributed an amount equal to50% of the participant’s contribution or 21⁄2% of the participant’s eligiblecompensation, whichever is less.  TheCompany may, at 

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**Spherix Incorporated****Notes to Financial Statements**

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its own discretion, makeadditional matching contributions to participants.  Company contributions, net of forfeitures,amounted to $122,000, $113,000, and $105,000 in 2006, 2005, and 2004,respectively.

**12.          Employee Stock Purchase Plan**

On May 15, 2003, the Company approved an Employee Stock Purchase Planwhereby the employees could purchase shares of the Company’s stock.  Under the Plan, the Company was authorized toinitially issue up to 500,000 shares of common stock, with additional amountsdetermined annually based upon other provisions of the Plan.  The Plan became available to the employees onJanuary 1, 2004.  In 2005 and 2004, 6,985and 1,796 shares were issued under the plan, respectively.  The Board of Directors voted to discontinuethe plan effective June 30, 2005.

**13.          Information by Business Segment**

Operating segmentsare components of an enterprise about which separate financial information isavailable that is evaluated regularly by the chief operating decision maker, ordecision-making group, in deciding how to allocate resources and in assessingperformance.  The Company is managedalong two business segments, InfoSpherix and BioSpherix.

Financial informationby business segment for the years ended December 31, 2006, 2005, and 2004 issummarized below:
| ** **               | ** ** | ** **                          | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------|------------|-------------------------------------|------------|-----------------------------|------------|
| ** **               | ** ** | ** **                          | ** ** | **(Dollars in thousands)**  | ** ** |
| ** **               | ** ** | ** **                          | ** ** | **2006**                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Revenues**             |       | InfoSpherix                         |       | $24,831                     |       | $23,023 |   | $22,221 |   |
|                     |       | BioSpherix                          |       | 7                           |       | 23 |   | 127 |   |
|                     |       | Total revenues                      |       | $24,838                     |       | $23,046 |   | $22,348 |   |
|                     |       |                                |       |                        |       |   |   |   |   |
| **Operating Loss and**   |       | InfoSpherix                         |       | $723                        |       | $(1,853 | ) | $(2,051 | ) |
| **Loss Before Income**   |       | BioSpherix                          |       | (3,203                      | )          | (1,033 | ) | (794 | ) |
| **Taxes**                |       | Total operating loss                |       | (2,480                      | )          | (2,886 | ) | (2,845 | ) |
|                     |       | Interest income, net                |       | 98                          |       | 37 |   | 23 |   |
|                     |       | Other income                        |       | 6,000                       |       | — |   | — |   |
|                     |       | Income (loss) from operations       |       |                        |       |   |   |   |   |
|                     |       | before income taxes                 |       | $3,618                      |       | $(2,849 | ) | $(2,822 | ) |
|                     |       |                                |       |                        |       |   |   |   |   |
| **Identifiable Assets**  |       | InfoSpherix                         |       | $13,896                     |       | $7,887 |   | $8,012 |   |
|                     |       | BioSpherix                          |       | 308                         |       | 288 |   | 196 |   |
|                     |       | General corporate assets            |       | 4,172                       |       | 4,943 |   | 7,036 |   |
|                     |       | Total assets                        |       | $18,376                     |       | $13,118 |   | $15,244 |   |
|                     |       |                                |       |                        |       |   |   |   |   |
| **Capital Expenditures** |       | InfoSpherix                         |       | $1,753                      |       | $1,493 |   | $2,941 |   |
| ** **               |       | BioSpherix                          |       | —                      |       | 13 |   | 44 |   |
|                     |       | General corporate assets            |       | 3                           |       | 2 |   | 17 |   |
|                     |       | Total capital expenditures          |       | $1,756                      |       | $1,508 |   | $3,002 |   |
|                     |       |                                |       |                        |       |   |   |   |   |
| **Depreciation**         |       | InfoSpherix                         |       | $2,433                      |       | $2,401 |   | $2,101 |   |
| **and Amortization**     |       | BioSpherix                          |       | 46                          |       | 41 |   | 24 |   |
|                     |       | General corporate assets            |       | 122                         |       | 132 |   | 153 |   |
|                     |       | Total depreciation and amortization |       | $2,601                      |       | $2,574 |   | $2,278 |   |

 

During 2006,InfoSpherix recognized revenue from three of its customers, all of which weregovernment agencies, representing 16%, 15% and 11% of the total Companyrevenue.  During 2005, InfoSpherixrecognized revenue from four of its customers, all of which were government agencies,representing 17%, 16%, 12% and 12% of 

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**Spherix Incorporated****Notes to Financial Statements**

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the total Companyrevenue.  During 2004, InfoSpherixrecognized revenue from three of its customers, all of which were governmentagencies, representing 21%, 17%, and 13% of the total Company revenue.  Government contracts accounted forapproximately 99%, 100%, and 99% of the InfoSpherix revenue in 2006, 2005, and2004, respectively.

BioSpherix hasinvented and patented for the Company the use of tagatose as a low-caloriesweetener.  In 1996, the Company signedan exclusive, worldwide licensing agreement with Arla Foods Ingredients amba ofDenmark (formerly MD Foods Ingredients) for the use and sale of Spherix’slow-calorie sugar, tagatose, as a sweetener in foods and beverages (see**Note 10 “Commitments and Contingencies”).  The License Agreement and an amendmentthereto provide Arla the world-wide right to manufacture and sell tagatose forfood uses, and the right to manufacture tagatose for all uses.  In 2000, MDFI was merged into Arla Foods.

Operating lossconsists of revenue less operating expenses. In computing operating profit, interest expense and income taxes werenot considered.  Operating loss forInfoSpherix was 8% and 9% of InfoSpherix revenue for 2005 and 2004.

Identifiableassets by business segment are those assets used in the Company’s operations ineach segment, such as accounts receivable, inventories, fixed assets, andpatent costs.  Corporate assets areprincipally cash and certain other assets not related to a particular segment’soperations.

**14.          Selected Quarterly Information (in thousands, except pershare data), unaudited**

The table belowsets forth selected unaudited financial information for each quarter of thelast two years.
| ** **                            | ** ** | **Quarter Ended** | ** ** |
|---------------------------------------|------------|------------------------|------------|
| ** **                            | ** ** | **March 31,**     | ** ** | **June 30,** | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
| 2006                                  |       |                   |       |   |   |   |   |   |   |
| Revenue                               |       | $                      | 5,922      |   | $ | 7,582 |   | $ | 7,253 |   | $ | 4,081 |   |
| Gross profit                          |       | $                      | 1,004      |   | $ | 1,898 |   | $ | 1,722 |   | $ | (580 | ) |
| Net (loss) income                     |       | $                      | (533       | ) | $ | 239 |   | $ | (10 | ) | $ | 3,817 |   |
| Net (loss) income                     |       |                   |       |   |   |   |   |   |   |
| per share, basic                      |       | $                      | (0.04      | ) | $ | 0.02 |   | $ | — |   | $ | 0.28 |   |
| Net (loss) income per  share, diluted |       | $                      | (0.04      | ) | $ | 0.02 |   | $ | — |   | $ | 0.28 |   |
|                                  |       |                   |       |   |   |   |   |   |   |
| 2005                                  |       |                   |       |   |   |   |   |   |   |
| Revenue                               |       | $                      | 5,435      |   | $ | 7,064 |   | $ | 6,705 |   | $ | 3,842 |   |
| Gross profit                          |       | $                      | 989        |   | $ | 2,111 |   | $ | 2,170 |   | $ | (152 | ) |
| Net (loss) income                     |       | $                      | (1,073     | ) | $ | 228 |   | $ | 285 |   | $ | (2,288 | ) |
| Net (loss) income per  share, basic   |       | $                      | (0.09      | ) | $ | 0.02 |   | $ | 0.02 |   | $ | (0.19 | ) |
| Net (loss) income per share, diluted  |       | $                      | (0.09      | ) | $ | 0.02 |   | $ | 0.02 |   | $ | (0.19 | ) |

 

**Item 9.****           CHANGESIN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE**

None.

**Item9A.  CONTROLS AND PROCEDURES**

*DisclosureControls and Procedures.*  We maintain disclosurecontrols and procedures that are designed to ensure that information requiredto be disclosed in our Exchange Act reports, such as this report on Form 10-K,is recorded, processed, summarized and reported within the time periodsspecified in the SEC’s rules and forms, and that such information isaccumulated and communicated to our management, including our Chief ExecutiveOfficer/Chief 

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**Spherix Incorporated****Notes to Financial Statements**

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Financial Officer, asappropriate, to allow timely decisions regarding required disclosure. Thesecontrols and procedures are based closely on the definition of “disclosurecontrols and procedures” in Rule 13a-15(e) promulgated under the ExchangeAct.  Rules adopted by the SEC require that we present the conclusions ofthe Chief Executive Officer/Chief Financial Officer about the effectiveness ofour disclosure controls and procedures as of the end of the period covered bythis annual report.

*Limitationson the Effectiveness of Controls.*  Management, includingour Chief Executive Officer/Chief Financial Officer, do not expect that ourdisclosure controls and procedures will prevent all errors and fraud.  Indesigning and evaluating the disclosure controls and procedures, managementrecognized that any controls and procedures, no matter how well designed andoperated, can provide only reasonable, not absolute, assurance of achieving thedesired control objectives.  Further, the design of a control system mustreflect the fact that there are resource constraints, and managementnecessarily was required to apply its judgment in evaluating the cost-benefitrelationship of possible controls and procedures.  Because of the inherentlimitations in all control systems, no evaluation of controls can provideabsolute assurance that all control issues and instances of fraud, if any,within the Company have been detected. These inherent limitations include the realities that judgments indecision-making can be faulty, and that breakdowns can occur because of simpleerror or mistake.  Additionally, controlscan be circumvented by the individual acts of some persons, by collusion of twoor more people, or by management’s override of the control.  The design of any system of controls also isbased in part upon certain assumptions about the likelihood of future events,and there can be no assurance that any design will succeed in achieving itsstated goals under all potential future conditions.  Over time, controls may become inadequatebecause of changes in conditions, or the degree of compliance with the policiesor procedures may deteriorate.  Becauseof the inherent limitations in a cost-effective control system, misstatementsdue to error or fraud may occur and not be detected.

*PeriodicEvaluation and Conclusion. *  The Company carried out an evaluation, underthe supervision and with the participation of the Company’s management,including the Company’s Chief Executive Officer/Chief Financial Officer, of theeffectiveness of the design and operation of the Company’s disclosure controlsand procedures to provide reasonable assurance of achieving their objectivepursuant to Exchange Act Rule 13a-14. Based upon that evaluation, the ChiefExecutive Officer/Chief Financial Officer concluded that the Company’sdisclosure controls and procedures are effective at that reasonable assurancelevel.  There were no significant changesin internal controls during the latest quarter over financial reporting thatmaterially affected, or is reasonably likely to materially affect, internalcontrols over financial reporting.

**Item9B.  OTHER INFORMATION**

There was noinformation required to be disclosed on Form 8-K during the fourth quarter of2006, which was not so disclosed.

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**PART III**

**Item10.  DIRECTORS, EXECUTIVE OFFICERS ANDCORPORATE GOVERNANCE**

The followingtable sets forth information concerning the Spherix Board of Directors.

**Nomineesfor Election to Board of Directors**
| ** **              | ** ** | ** ** | ** ** | ** **                               | ** ** | **Director** |
|-------------------------|------------|------------|------------|------------------------------------------|------------|--------------|
| **Name**                | ** ** | ** ** | ** ** | **Age**                                  | ** ** | **Position** | ** ** | **Since** |
| Douglas T. Brown        |       | 53         |       | Director                                 |       | 2004         |
| A. Paul Cox, Jr.        |       | 69         |       | Director                                 |       | 2004         |
| George C. Creel         |       | 73         |       | Director                                 |       | 2004         |
| Gilbert V. Levin        |       | 83         |       | Chair and Executive  Officer for Science |       | 1967         |
| M. Karen Levin          |       | 87         |       | Director                                 |       | 1968         |
| Richard C. Levin        |       | 54         |       | Director, CEO and  President, and CFO    |       | 2005         |
| Robert A. Lodder, Jr.   |       | 47         |       | Director                                 |       | 2005         |
| Robert J. Vander Zanden |       | 61         |       | Director                                 |       | 2004         |
|                         |            |            |            |                                          |            |              |  |  |

 

Mr. Douglas T. Brown, Spherix Incorporated Board Member since 2004, isSenior Vice President and Manager of the Corporate Banking GovernmentContracting Group for PNC Bank N.A., Washington, DC.  Mr. Brown has been with PNC and itspredecessor bank, Riggs Bank, since 2001 and previously worked for Bank ofAmerica, N.A. and its predecessor banks for 16 years as a Loan Officer, as wellas a manager of Loan Officers throughout the Mid-Atlantic and New England.  Subsequent to 1990, the majority of Mr. Brown’scustomers were companies that provided services to the Federal Government andState governments.  Mr. Brown holds aB.A. degree in Political Science from American University and a graduate degreefrom The Stonier Graduate School of Banking at the University of Delaware.  He is not now, nor has he been for the pastfive years, a director of a public, for-profit company other than Spherix.

Mr. A. Paul Cox,Jr. , Spherix Incorporated Board Member since 2004, brings both informationtechnology and general corporate management experience to Spherix.  He holds a B.E.S. in Electrical Engineeringand an M.S. in Management Science, both from The Johns Hopkins University.  Mr. Cox began his career designing specialpurpose digital computers for the Westinghouse Underseas Division, where heremained for seven years.  Advancingthrough technical assignments, he achieved increasing management responsibilityin information systems, technical services and sales promotion, serving 13years at IBM, nine years at Data Systems Corporation, and then as Chairman andCEO of the Codema Corporation.  He wasthen recruited by Standard Register as its Vice President and GeneralManager.  Now Principal of his own AssetProtection Company, Mr. Cox has served on various educational, industrial,civic and charitable boards.  He is notnow, nor has he been for the past five years, a director of a public, for-profitcompany other than Spherix.

Mr. George C.Creel, Spherix Incorporated Board Member since 2004, received his Bachelor ofEngineering degree in Mechanical Engineering from The Johns Hopkins Universityin Baltimore, Maryland, in 1955.  Exceptfor a brief tour on active duty in the U.S. Army Corps of Engineers, he spenthis full-time working career with the Baltimore Gas and Electric Company(BGE).  There, Mr. Creel rose from JuniorEngineer to Chief Mechanical Engineer, to Executive Vice President and ActingChief Operating Officer until his retirement from BGE in 1997.  His general management experience, includingstrategic planning and focusing on performance management, brings addedstrength to Spherix.  He specializes inleadership development, executive coaching, strategic planning, and performancemanagement.  Mr. Creel serves as anindependent director for Storeroom Solutions, Inc., a privately heldcorporation.  He is not now, nor has hebeen for the past five years, a director of a public, for-profit company otherthan Spherix.

Dr. Gilbert V.Levin founded Spherix Incorporated in 1967 and has been Chair, President and/orChief Executive Officer since incorporation. He currently serves as Chairman of the Board and Executive Officer forScience.  Dr. Levin previously served inthe public health departments of Maryland, California, and the District ofColumbia and, subsequently, as a research scientist and corporateofficial.  Among his inventions arelow-caloric sweeteners; biological nutrient removal (BNR) for municipalwastewater, rapid detection and identification of microorganisms; and theLabeled Release life detection experiment that landed on Mars in 1976 aboardNASA’s Viking Mission.  He holds aBachelor’s, Master’s, and a Ph.D., all from The Johns Hopkins University, wherehe also served on its Board of Trustees and presently serves on its NationalAdvisory Councils for the Whiting School of Engineering.  He is not now, nor has he ever been, adirector of a public company other than Spherix.  Dr. Levin is the husband of Mrs. Levin andthe 

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uncle of Mr. Levin.  He has not worked for any company other thanSpherix since 1967, nor has he been a director of any public company other thanSpherix.

Mrs. Levin servedas Spherix Incorporated’s Vice President of Corporate Communications until herretirement in January 2006.  She is anoriginal member of the Board of Directors. Mrs. Levin lead Spherix’s public relations information efforts andcoordinated proposals for government and commercial business development.  She served as Director of the Company’sInformation Services Division for 25 years, while it grew into a major sectorspawning the Government and Commercial Information Divisions.  Previously, Mrs. Levin was science andmedical reporter and writer for the Washington bureau of *Newsweek* magazine.  She also served as writer and publicinformation consultant to the National Institute of Mental Health.  She joined the Company in 1968, a year afterits founding.  Mrs. Levin holds a B.A. inEnglish from Vassar College.  Mrs. Levinis the wife of Dr. Levin and the aunt of Mr. Levin.  She has worked for no other company since1968, nor has she been a director of any public company other than Spherix.

Mr. Richard C.Levin joined the Company in 1991 as Business Manager.  Mr. Levin progressed through variousexecutive positions within the Company and served as the CFO and Vice Presidentfor Administration during 2002.  InFebruary 2003, Mr. Levin was promoted to the position of Interim President ofthe InfoSpherix Division.  In September2004, Mr. Levin was appointed Acting CEO and President and, in February 2005was elected CEO and President. Prior to joining Spherix, he was the GeneralManager of the Catalyst Research Division of the Mine Safety AppliancesCompany.  Mr. Levin holds a B.S. inbusiness administration from the University of Baltimore and is a C.P.A. in theState of Maryland.  Mr. Levin is thenephew of Dr. and Mrs. Levin.  He waselected to the Board of Spherix in May 2005. Mr. Levin is not now, nor has he been for the past five years, adirector of a public company other than Spherix.

Dr. Robert A.Lodder, Spherix Incorporated Board Member since 2005, is the Director of theAnalytical Spectroscopy Research Group of the Advanced Science and TechnologyCenter at the University of Kentucky.  Heis currently Professor of Pharmaceutical Sciences at the College of Pharmacy,University of Kentucky Medical Center, and holds joint appointments in theDepartment of Electrical and Computer Engineering, and the Division ofAnalytical Chemistry of the Department of Chemistry at Kentucky.  Dr. Lodder received his B.S. degree cum laudein Natural Science and his M.S. in Chemistry in 1983 from Xavier University,Cincinnati, Ohio in 1981.  He receivedhis Ph.D. in Analytical Chemistry in 1988 from Indiana University.  He was a founder of InfraReDx, Inc. in 1998and Prescient Medical, Inc. in 2004. Neither of these companies are public, and they do not engage inbusiness with Spherix.  He is not now,nor has he been for the past five years, a director of a public, for-profitcompany other than Spherix.

Dr. Robert J.Vander Zanden, , Spherix Incorporated Board Member since 2004, having served intwo Vice President positions with Kraft Foods International, brings a long anddistinguished career in technical and business aspects of the food scienceindustry to Spherix.  Dr. Vander Zandenholds a Ph.D. in Food Science from Kansas State University, and an M.S. andB.S. in Chemistry, the latter from the University of Wisconsin — Platteville,where he was named a Distinguished Alumnus in 2002.  In his 30-year career, he has been with ITTBaking Company as a Product Development Scientist, with Ralston Purina asManager Dietary Foods R&D, with Keebler as Group Director, Product andProcess Development, with Grupo Gamesa, a Frito-Lay Company, as Vice President,Technology, with Nabisco, as Vice President of R&D for their InternationalDivision and with the acquisition of Nabisco by Kraft Foods, he became the VicePresident of R&D for Kraft’s Latin American Division.  Dr. Vander Zanden retired from Kraft Foods in2004.  He currently holds the titleAdjunct Professor and Lecturer, in the Department of Food Science and HumanNutrition, where he teaches a course in New Product Development.  His focus on achieving product and processinnovation through training, team building and creating positive workingenvironments has resulted in his being recognized with many awards for productand packaging innovation.  He is not now,nor has he been, for the past five years, a director of a public, for-profitcompany other than Spherix.

**CorporateGovernance**

TheAudit Committee members during 2006 were Mr. Brown, Chair; Mr. Cox, and Mr.Creel.  The Audit Committee Charter isavailable on the Company’s website at www.spherix.com.  Each member of the Audit Committee satisfiesthe independence requirements and other established criteria of the NASD andthe Securities and Exchange Commission. The Board of Directors believes that, while the members of its AuditCommittee have substantial financial and management experience and are fullyqualified to carry out the functions of the Audit Committee, none of itsmembers meets the requirements of an audit committee financial expert asdefined in the Securities and Exchange Commission rules.

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**ExecutiveOfficers**

The ExecutiveOfficers of the Company are elected annually by the Board of Directors and arelisted in the following table.
| **Name**           | ** ** | ** ** | ** ** | **Age**                                                             | ** ** | **Position** |
|--------------------|------------|------------|------------|---------------------------------------------------------------------|------------|--------------|
| Robert L.  Clayton |       | 44         |       | Director of Finance,  and Treasurer                                 |
| Roger A. Downs     |       | 60         |       | Vice President,  Operations, InfoSpherix                            |
| Gilbert V. Levin   |       | 83         |       | Chairman, and Executive  Officer for Science                        |
| Richard C. Levin   |       | 54         |       | Chief Executive Officer  and President, and Chief Financial Officer |
| Jeffrey T. Lowe    |       | 50         |       | Vice President,  Corporate Communications                           |
| Steven M. Wade     |       | 51         |       | Vice President, Information Technology, InfoSpherix                 |

 

Dr. Levin’s andRichard Levin’s professional experience are discussed above.

Mr.Robert L. Clayton was elected to the Office of Director of Finance andTreasurer in May 2005.  Mr. Claytonpreviously served as Controller.  Priorto joining Spherix, he was a Senior Auditor for the Public Accounting FirmRubino & McGeehin Chartered.  Mr.Clayton holds a B.S. in business and management from the University of Marylandand a C.P.A. from the District of Columbia. He is not now, nor has he been for the past five years, a director of apublic, for-profit company.

Mr.Roger A. Downs was elected to the Office of Vice President of Operations,InfoSpherix Incorporated, in February 2005. Mr. Downs previously served as Vice President of ReserveWorld and asDirector of Business Development and Director of the Commercial InformationServices Division, where he grew a strong health-related pharmaceutical programfor the Firm.  Prior to joining Spherix,he served as Senior Vice President-Quality Service at Standard Federal SavingsBank in Frederick, Maryland, Vice President-Sales at Dynatech Packet Technologyin  Springfield, Virginia, and SeniorVice President-Retail Banking at Bankers Trust Company in Des Moines,Iowa.  Mr. Downs holds a M.P.A. fromDrake University School of Public Administration in Des Moines, Iowa and a B.S.from Upper Iowa University in Fayette, Iowa.  He is not now, nor has he been for the pastfive years, a director of a public, for-profit company.

Mr.Jeffrey T. Lowe was elected to the Office of Vice President of CorporateCommunications in May 2005.  Mr. Lowepreviously served as Director of Communications, and prior to that (in reversechronological order): Director of Proposals and Publications, Proposal Manager,and Proposal Writer.  During hisemployment, Mr. Lowe has been principally responsible for the production,quality, and output of the Company’s proposals, to which virtually all of theCompany’s current revenue-generating contracts owe their existence.  Prior to joining Spherix, Mr. Lowe hadcareers as a journalist and a marine engineer. Mr. Lowe holds a B.A. in Journalism from the University of Maryland anda dual B.S. in Marine Engineering and Nautical Science from the United StatesMerchant Marine Academy.  He is not now,nor has he been for the past five years, a director of a public, for-profit company.

Mr.Steven M. Wade was elected to the Office of Vice President, InformationTechnology, InfoSpherix Incorporated, in May 2005.  Mr. Wade previously served as SeniorDirector, Information Technology.  Beforejoining Spherix, Mr. Wade served in senior information technology positions atADP; Teleglobe, a division of Bell Canada Enterprises; Verizon; and FairchildSpace and Defense.  He was born in theUnited Kingdom where he obtained a BSEE in 1973 and an MBA in 1975 at HarlowTechnical College in Harlow, Essex, England. ** **He is not now, nor has he been forthe past five years, a director of a public, for-profit company.

**Compliance with Section 16(a) of theExchange Act**

**Section16(a) Beneficial Ownership Regarding Compliance**

Section 16(a) ofthe Securities Exchange Act of 1934, as amended (the “Exchange Act”), requiresthe Company’s Directors and Executive Officers, and anyone who beneficiallyowns ten percent (10%) or more of the Company’s common stock, to file with theSecurities and Exchange Commission initial reports of beneficial ownership andreports of changes in beneficial ownership of common stock.  Such persons are required by regulations ofthe Securities and Exchange Commission to furnish the Company with copies ofall Section 16(a) forms they file.

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Based solely upona review of (i) copies of the Section 16(a) filings received by the Companyduring or with respect to 2006 and (ii) certain written representations of itsOfficers and Directors, the Company believes that each filing required to bemade pursuant to Section 16(a) of the Exchange Act during and with respect to2006 was filed in a timely manner except for the Form 4’s filed April 7, 2006,related to stock options issued to the independent Board Members, and the Form4’s filed April 10, 2006, related to stock options issued to ExecutiveOfficers.  All of these transactions weresubsequently reported on Form 4 and all transactions are reflective in this10-K.

**Code ofEthics**

The Company has adopted a worldwide Code of Ethics, which is availableon the Company’s website at www.spherix.com.

**Item11.  EXECUTIVE COMPENSATION**

**CompensationDiscussion and Analysis**

**Objectives of CompensationProgram and What Our Compensation Program is Designed to Reward**

Our executivecompensation program is designed to create strong financial incentive for ourofficers to increase revenue, profit, operating efficiency and returns, whichwe expect to lead to an increase in shareholder value.  The primary objective of our compensationprogram is to attract and retain qualified, energetic employees who areenthusiastic about the Company’s mission. A further objective of our compensation program is to provide incentivesand reward employees for their contribution to the Company.  In addition, we strive to promote anownership mentality among key leadership and the Board of Directors.  Finally, we endeavor to ensure that ourcompensation program is perceived as fundamentally fair to all stakeholders.

The CompensationCommittee of the Board of Directors (the “Committee”) evaluates bothperformance and compensation to ensure that the Company maintains its abilityto attract and retain superior employees in key positions and that compensationprovided to key employees remains competitive relative to the compensation paidto similarly situated executives of other companies.  To that end, the Committee believes executivecompensation packages provided by the Company to its executives, including thenamed executive officers, should include both cash and stock-based componentsthat reward performance as measured against established goals.

Our compensationprogram is designed to reward each employee’s contribution to the Company.  In measuring the named executive officers’contribution to the Company, the Committee considers numerous factors includingthe Company’s growth and financial performance.

Throughout thisForm 10-K, the individual who served as the Company’s Chief Executive Officerand Chief Financial Officer during 2006, as well as the other individualsincluded in the Summary Compensation Table on page 46, are referred to as the “namedexecutive officers”.  Immediatelyfollowing this Compensation Discussion and Analysis you will find a series oftables containing specific information about the compensation earned in 2006 bythe named executive officers.

**Roles and Responsibilities forOur Compensation Program**

*Role of the CompensationCommittee*

The Committee hasresponsibility for establishing, implementing and monitoring adherence with theCompany’s compensation philosophy.

*Role of our Chief ExecutiveOfficer*

Our ChiefExecutive Officer provides recommendations to the Committee in its evaluationof our executive officers, including recommendations of individual cash andequity compensation levels for executive officers.  Mr. Levin relies on his personal experienceserving in the capacity of Chief Executive Officer with respect to evaluatingthe contribution of our other executive officers as well as publicly availableinformation for comparable compensation guidance as the basis for his recommendationsto the Committee.  Mr. Levin was notpresent during Committee deliberations and voting pertaining to thedetermination of his own compensation.

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* *

*Role of the CompensationConsultant*

The Committeeperiodically retains a consultant to provide independent advice on executivecompensation matters and to perform specific project-related work.

**Elements of Company’sCompensation Plan**

The Company’scompensation program consists of base salary, an annual incentive bonus, stockincentives/awards, health and welfare benefits and a 401(k) plan.  The Company strives to be market competitivein setting salary ranges and designing benefits programs, while recognizing theexperience and performance levels of individual employees.

*Base Salary*

The Companyprovides named executive officers and other employees with base salary tocompensate them for services rendered during the fiscal year.  Base salary is the fixed annual compensationwe pay to an executive for performing specific job responsibilities.  It represents the minimum income an executivemay receive in any given year.  Basesalaries for named executive officers are determined for each executive basedon position and responsibility.  Basesalaries for each of the Company’s executives are determined by the executive’sresponsibilities and performance as well as comparative compensation levels forthe executive’s peers.  The base salaryfor the Company’s Chief Executive Officer, including periodic changes thereto,is determined by the Committee.  The basesalaries for the Company’s other executive officers, including periodic changesthereto, are determined by the Committee following recommendations by the ChiefExecutive Officer.

During its reviewof base salaries for executives, the Committee primarily considers:

·                  marketdata;

·                  internalreview of the executive’s compensation, both individually and relative to otherofficers;

·                  individualperformance of the executive;  and

·                  ourfinancial and operating results.

Base salary levelsare typically reviewed annually as part of the Company’s performance reviewprocess as well as upon a promotion or other change in job responsibility.

*Annual Bonus*

The Compensation Committee believes that a Pay-For-Performance Bonussystem must be the process to provide additional compensation for all SpherixExecutives and that this Bonus system must be based upon performance objectivesdeveloped from the Long Range Business Plan. The President and ChiefExecutive Officer of Spherix, working with the Executive Staff, set the performance bonus objectives.  The Board’s function was to review, torecommend modifications, and to approve the objectives and the financialbonuses associated with those objectives.

*Stock Incentives/Awards*

We currentlyadminister long-term incentive compensation awards through our stock incentiveplan.  We believe that widespread commonshare ownership by key employees is an important means of encouraging superiorperformance and employee retention.

In recent years,this component of the Company’s executive compensation program has been via theperiodic grant of stock options.  TheCompany generally has issued stock options to its executive officers when theyjoined the Company, in connection with a significant promotion within theCompany and/or as a reward following excellent performance.  The number of options granted has been basedon the level of responsibility, Company performance and individualperformance.  Stock option grants havealso been structured to induce the executive to remain in the employment of theCompany by including incremental vesting provisions which permit exercise onlyafter satisfaction of minimum tenure requirements.  Options are forfeited upon termination.

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* *

*Healthand Welfare Benefits*

We offer astandard range of health and welfare benefits to all employees, including ourexecutive officers.  These benefitsinclude medical, prescription drug, and dental coverages, life insurance,accidental death and dismemberment and long-term disability insurance.  Our plans do not discriminate in favor of ourexecutive officers.

*401(k)*

We offer a definedcontribution 401(k) plan to substantially all of our employees.  We provide this plan to assist our employeesin saving some amount of their cash compensation for retirement in a taxefficient manner.

*OtherPerquisites and Personal Benefits*

We do not offerany perquisites or other personal benefits to any executive with a value over$10,000.

**How Compensation Amounts AreDetermined**

We strive to payour named executive officers at or near the median paid by comparablecompanies.  The Compensation Committeehired an outside company, Equilar, Inc., to compare the total compensation ofthe Spherix Executives to the total compensation of fourteen (14) companiesidentified by Equilar, Inc. to be peer companies to Spherix.  The Equilar Report on Executive Compensationshowed that Spherix Executives are not compensated at the same level ascolleagues in peer companies.  Based uponthe fiscal health of Spherix however, it was determined by the CompensationCommittee that no special efforts should be made to bring Executive totalcompensation to equivalent levels of those in peer companies.  All 2007 base salary increases (with fewexceptions) should be kept in line with inflation. The Compensation Committeerequested that the President and Chief Executive Officer of Spherix propose allExecutive salary increases, but the overall Spherix company-wide increaseshould not be above inflation.  Withminor adjustments, these recommendations were accepted by the full Board.  The Compensation Committee recommended to theBoard the salary adjustment for the President and Chief Executive Officer ofSpherix.

The followingsummary of compensation table sets forth the compensation paid by the Companyduring the three years ended December 31, 2006, to all Executive Officersearning in excess of $100,000 during any year.

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**Summaryof Compensation(Dollars in 000’s)**
| Name and  Principal Position | ** ** | **Year** | ** ** | **Salary ($)** | ** ** | **Option   Awards ($)   (1)** | ** ** | **Non-Equity   Incentive   Plan   Compensation  ($) (2)** | ** ** | **Change in   Pension   Value and   Non-Qualified   Deferred   Compensation  Earnings ($)** | ** ** | **All Other  Compensation ($)** | ** ** | **Total ($)** | ** ** |
|----------------------------------------|------------|----------|------------|---------------------|------------|----------------------------------------------|------------|-------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|--------------------|------------|
| Richard C. Levin                       |       | 2006     |       | 190                 |       | 15                                           |       | 35                                                                            |       | —                                                                                                                              |       | 7                                         |       | 247                |       |
| CEO & President, and CFO           |       | 2005     |       | 184                 |       | —                                       |       | 10                                                                            |       | —                                                                                                                              |       | 7                                         |       | 201                |       |
|                                        |       | 2004     |       | 170                 |       | —                                       |       | —                                                                        |       | —                                                                                                                              |       | 7                                         |       | 177                |       |
|                                   |       |     |       |                |       |                                         |       |                                                                          |       |                                                                                                                                |       |                                      |       |               |       |
| Steven M. Wade                         |       | 2006     |       | 172                 |       | 4                                            |       | 20                                                                            |       | —                                                                                                                              |       | 7                                         |       | 203                |       |
| VP, Information                        |       | 2005     |       | 168                 |       | —                                       |       | 7                                                                             |       | —                                                                                                                              |       | 7                                         |       | 182                |       |
| Technology                             |       |     |       |                |       |                                         |       |                                                                          |       |                                                                                                                                |       |                                      |       |               |       |
|                                   |       |     |       |                |       |                                         |       |                                                                          |       |                                                                                                                                |       |                                      |       |               |       |
| Roger A. Downs                         |       | 2006     |       | 155                 |       | 4                                            |       | 15                                                                            |       | —                                                                                                                              |       | 7                                         |       | 181                |       |
| VP, Operations                         |       | 2005     |       | 150                 |       | —                                       |       | 7                                                                             |       | —                                                                                                                              |       | 7                                         |       | 164                |       |
|                                        |       | 2004     |       | 146                 |       | —                                       |       | —                                                                        |       | —                                                                                                                              |       | 7                                         |       | 153                |       |
|                                   |       |     |       |                |       |                                         |       |                                                                          |       |                                                                                                                                |       |                                      |       |               |       |
| Jeffrey T. Lowe                        |       | 2006     |       | 130                 |       | 4                                            |       | 10                                                                            |       | —                                                                                                                              |       | —                                    |       | 144                |       |
| VP, Corp. Comm.                        |       | 2005     |       | 126                 |       | —                                       |       | 6                                                                             |       | —                                                                                                                              |       | —                                    |       | 132                |       |
|                                        |       | 2004     |       | 114                 |       | —                                       |       | —                                                                        |       | —                                                                                                                              |       | —                                    |       | 114                |       |
|                                   |       |     |       |                |       |                                         |       |                                                                          |       |                                                                                                                                |       |                                      |       |               |       |
| Gilbert V. Levin                       |       | 2006     |       | 118                 |       | —                                       |       | —                                                                        |       | (22                                                                                                                                 | )          | 7                                         |       | 103                |       |
| Executive Officer                      |       | 2005     |       | 118                 |       | —                                       |       | —                                                                        |       | 15                                                                                                                                  |       | 7                                         |       | 140                |       |
| for Science                            |       | 2004     |       | 118                 |       | —                                       |       | —                                                                        |       | 218                                                                                                                                 |       | 7                                         |       | 343                |       |
|                                   |       |     |       |                |       |                                         |       |                                                                          |       |                                                                                                                                |       |                                      |       |               |       |
| Robert L. Clayton                      |       | 2006     |       | 118                 |       | 4                                            |       | 10                                                                            |       | —                                                                                                                              |       | 2                                         |       | 134                |       |
| Director of Finance and                |       | 2005     |       | 114                 |       | —                                       |       | 5                                                                             |       | —                                                                                                                              |       | —                                    |       | 119                |       |
| Treasurer                              |       | 2004     |       | 107                 |       | —                                       |       | —                                                                        |       | —                                                                                                                              |       | —                                    |       | 107                |       |

 

46

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**SpherixIncorporated**

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** **

**Grants of Plan-Based Awards**

 
| **Name**          | ** ** | ** ** | ** ** | **Grant Date** | ** ** | **Threshold ($ in   000’s)** | ** ** | **Target  ($ in 000’s))** | ** ** | **Maximum   ($ in 000’s))** | ** ** | **All Other  Option  Awards:  Number of  Securities  Underlying  Options  (#) (1)** | ** ** | **Exercise or   Base Price   of Option  Awards ($/Sh)** | ** ** | **Grant Date   Fair Value   of Stock and   Option  Awards** | ** ** |
|-------------------|------------|------------|------------|---------------------|------------|--------------------------------------------------|------------|------------------------------------------|------------|-------------------------------------------------|------------|----------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------|------------|
| Richard C. Levin  |       | 2/17/2006  |       |                |       |                                             |       |                                     |       | 8,000                                           |       | $                                                                                                  | 2.20       |                                                                                  | 15,054     |                                                                                           |
| Steven M. Wade    |       | 2/17/2006  |       |                |       |                                             |       |                                     |       | 2,000                                           |       | $                                                                                                  | 2.20       |                                                                                  | 3,764      |                                                                                           |
| Roger A. Downs    |       | 2/17/2006  |       |                |       |                                             |       |                                     |       | 2,000                                           |       | $                                                                                                  | 2.20       |                                                                                  | 3,764      |                                                                                           |
| Jeffrey T. Lowe   |       | 2/17/2006  |       |                |       |                                             |       |                                     |       | 2,000                                           |       | $                                                                                                  | 2.20       |                                                                                  | 3,764      |                                                                                           |
| Robert L. Clayton |       | 2/17/2006  |       |                |       |                                             |       |                                     |       | 2,000                                           |       | $                                                                                                  | 2.20       |                                                                                  | 3,764      |                                                                                           |
| Richard C. Levin  |       | 11/26/2006 |       | —              |       | 92                                               |       | 120                                      |       |                                            |       |                                                                                               |       |                                                                                  |       |
| Steven M. Wade    |       | 11/26/2006 |       | —              |       | 64                                               |       | 84                                       |       |                                            |       |                                                                                               |       |                                                                                  |       |
| Roger A. Downs    |       | 11/26/2006 |       | —              |       | 56                                               |       | 73                                       |       |                                            |       |                                                                                               |       |                                                                                  |       |
| Jeffrey T. Lowe   |       | 11/26/2006 |       | —              |       | 47                                               |       | 61                                       |       |                                            |       |                                                                                               |       |                                                                                  |       |
| Robert L. Clayton |       | 11/26/2006 |       | —              |       | 32                                               |       | 41                                       |       |                                            |       |                                                                                               |       |                                                                                  |       |

 

**NarrativeDisclosure to Summary Compensation Table and Grants of Plan-Based Awards**

(1)          TheSpherix Incorporated 1997 Stock Option Plan (the “Plan”) was approved by theCompany’s Stockholders on May 15, 1998. The Plan was revised and re-approved by the Stockholders on May 12,2005.  The Plan provides for the grant ofincentive stock options and non-qualified stock options to select employees andDirectors of the Company.  The Planprovides for the issuance of up to 1,000,000 shares of Common Stock.  As of December 31, 2006, there were 481,100outstanding options granted to individuals including the above-named ExecutiveOfficers, and 447,100 were exercisable as of such date; 403,100 options remainavailable for grant at the discretion of the Board of Directors.

(2)          Awardspursuant to the May 12, 2005 Spherix Incorporated Incentive Compensation Plan.

**Outstanding Equity Awards at Fiscal Year-End**

 
| **Name**          | ** ** | ** ** | ** ** | **Number of   Securities Underlying   Unexercised Options (#)   Exercisable** | ** ** | **Number of   Securities Underlying   Unexercised   Options (#)   Unexercisable** | ** ** | **Option Exercise   Price ($)** | ** ** | **Option   Expiration   Date** | ** ** |
|-------------------|------------|------------|------------|------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------|------------|------------------------------------------|------------|
| Richard C. Levin  |       | 100,000    |       | —                                                                                                           |       | 9.3400                                                                                                               |       | 12/13/2011                                     |       |
| Richard C. Levin  |       | 10,000     |       | —                                                                                                           |       | 6.3500                                                                                                               |       | 11/24/2008                                     |       |
| Richard C. Levin  |       | —     |       | 8,000                                                                                                            | (1)        | 2.2000                                                                                                               |       | 2/15/2011                                      |       |
| Steven M. Wade    |       | —     |       | 2,000                                                                                                            | (1)        | 2.2000                                                                                                               |       | 2/15/2011                                      |       |
| Roger A. Downs    |       | 1,500      |       | —                                                                                                           |       | 6.3500                                                                                                               |       | 11/24/2008                                     |       |
| Roger A. Downs    |       | —     |       | 2,000                                                                                                            | (1)        | 2.2000                                                                                                               |       | 2/15/2011                                      |       |
| Jeffrey T. Lowe   |       | 750        |       | —                                                                                                           |       | 7.3500                                                                                                               |       | 11/21/2007                                     |       |
| Jeffrey T. Lowe   |       | 1,000      |       | —                                                                                                           |       | 6.3500                                                                                                               |       | 11/24/2008                                     |       |
| Jeffrey T. Lowe   |       | —     |       | 2,000                                                                                                            | (1)        | 2.2000                                                                                                               |       | 2/15/2011                                      |       |
| Gilbert V. Levin  |       | 10,000     |       | —                                                                                                           |       | 4.0000                                                                                                               |       | 5/15/2007                                      |       |
| Gilbert V. Levin  |       | 10,000     |       | —                                                                                                           |       | 4.8750                                                                                                               |       | 5/15/2007                                      |       |
| Gilbert V. Levin  |       | 10,000     |       | —                                                                                                           |       | 2.2500                                                                                                               |       | 5/15/2007                                      |       |
| Gilbert V. Levin  |       | 20,000     |       | —                                                                                                           |       | 9.0750                                                                                                               |       | 5/15/2007                                      |       |
| Gilbert V. Levin  |       | 20,000     |       | —                                                                                                           |       | 3.8500                                                                                                               |       | 5/15/2007                                      |       |
| Gilbert V. Levin  |       | 10,000     |       | —                                                                                                           |       | 7.8375                                                                                                               |       | 5/15/2007                                      |       |
| Gilbert V. Levin  |       | 22,000     |       | —                                                                                                           |       | 6.3594                                                                                                               |       | 5/15/2007                                      |       |
| Gilbert V. Levin  |       | 10,000     |       | —                                                                                                           |       | 7.0818                                                                                                               |       | 5/15/2007                                      |       |
| Gilbert V. Levin  |       | 10,000     |       | —                                                                                                           |       | 10.5050                                                                                                              |       | 5/15/2007                                      |       |
| Gilbert V. Levin  |       | 750        |       | —                                                                                                           |       | 8.0850                                                                                                               |       | 11/21/2007                                     |       |
| Gilbert V. Levin  |       | 100,000    |       | —                                                                                                           |       | 8.6700                                                                                                               |       | 11/12/2008                                     |       |
| Robert L. Clayton |       | 500        |       | —                                                                                                           |       | 7.3500                                                                                                               |       | 11/21/2007                                     |       |
| Robert L. Clayton |       | 500        |       | —                                                                                                           |       | 6.3500                                                                                                               |       | 11/24/2008                                     |       |
| Robert L. Clayton |       | —     |       | 2,000                                                                                                            | (1)        | 2.2000                                                                                                               |       | 2/15/2011                                      |       |

----

(1)          Will vest in four equal installments on2/16/2007, 2/16/2008, 2/16/2009, and 2/16/2010.

47

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**SpherixIncorporated**

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** **

**Option Exercises and Vested**

None.

**Pension Benefits(Dollars in 000’s)**
| **Name**         | ** ** | ** **                | ** ** | **Plan Name** | ** ** | **Number of Years   Credited Service (#)** | ** ** | **Present Value of   Accumulated Benefit ($)** | ** ** |
|------------------|------------|---------------------------|------------|--------------------|------------|---------------------------------------------------------------------|------------|-------------------------------------------------------------------------|------------|
| Gilbert V. Levin |       | Employment  Agreement (1) |       | 40                 |       | 200                                                                 |       |
| Gilbert V. Levin |       | Exit  Agreement (2)       |       | 40                 |       | 60                                                                  |       |
| Gilbert V. Levin |       | Consulting Agreement  (3) |       | 40                 |       | —                                                              |       |

----

(1)             OnMarch 23, 2004, Dr. Levin’s Employment Agreement was amended and restated.  It provides lifetime payments of $12,500 eachquarter following his full retirement from the Company.  This Restated Agreement supersedes andreplaces all previous agreements concerning Spherix’s obligations for Dr. Levin’sretirement benefits.

(2)             TheCompany agreed to fund long-term, continuous lifetime long-term care andhealthcare policies per the G.V. Levin Exit Agreement dated march 23, 2004.

(3)             Toensure the availability of their services to the Company after their respectiveretirements, Dr. and Mrs. Levin each have entered into Consulting Agreementswith the Company.  On March 23, 2004, the Board approved aRestated Consulting Agreement for Dr. Levin, which limits his post-retirementconsultation to any Company requests that may be issued to him from timeto time.  No minimum amount of consultingtime is required.  For any consultingtime so requested and provided, Dr. Levin will be compensated at the rate of$2,000 per day, subject to the Federal CIP, plus related expenses.  OnNovember 16, 2005, the Board approved a Consulting Agreement for Mrs. Levin,which limits her post-retirement consultation to any Company requeststhat may be issued to her from time to time. No minimum amount of consulting time is required.  For any consulting time so requested andprovided, Mrs. Levin will be compensated at the rate of $1,000 per day, subjectto the Federal CIP, plus related expenses.

**Non-Qualified Defined Contribution and OtherNon-Qualified Deferred Compensation Plans**

No options were exercised in 2006 by the namedExecutive Officers.

48

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**SpherixIncorporated**

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** **

**Potential Payment Upon Termination or Change inControl**

The onlycommitment we have to make any payments upon termination of employment to anynamed Executive Officer is a commitment to Dr. Levin.  On March 23, 2004, the Board approved revisedagreements with Dr. Levin.  Theseagreements provide the following post-employment benefits:

·                  Lifetimequarterly payments of $12,500;

·                  $2,000per day for any consulting services requested by the Company;

·                  Officespace and secretarial support at the Company’s headquarters and at theBioSpherix office location for a period of three (3) years;

·                  Freeuse of his computer Internet hook-up to the Company for a period of three (3)years;

·                  Freestorage at the Company’s headquarters of all Mars-related files for a period offive (5) years;

·                  Lifetimelong-term care and health insurance for Dr. Levin and his wife.

Unless otherwiseagreed by the Board of Directors, the other named Executive Officers would beentitled to severance upon termination of employment pursuant to the Company’sseverance policy.  The policy provides:

| Completed Service Years  | ** ** | **Severance Pay** |
|--------------------------|------------|-------------------|
| >  1 year             |       | 10  days          |
| 1  but less than 2 years |       | 15  days          |
| 2  but less than 3 years |       | 20  days          |
| 3  but less than 4 years |       | 25  days          |
| 4 or more years          |       | 30 days           |

 

No named ExecutiveOfficer has any commitment for payments upon a change of control of theCompany.

**Compensation of Directors(Dollars in 000’s)**

 
| **Name**                | ** ** | ** ** | ** ** | **Fees Earned of Paid   in Cash ($)** | ** ** | **Stock   Awards ($)** | ** ** | **All Other  Compensation ($) (1)** | ** ** | **Total  ($)** | ** ** |
|-------------------------|------------|------------|------------|---------------------------------------------------------------------|------------|----------------------------------|------------|----------------------------------------------------|------------|----------------|------------|
| Douglas T. Brown        |       | 19         |       | 10                                                                  |       | —                           |       | 29                                                 |       |
| A. Paul Cox, Jr.        |       | 21         |       | 10                                                                  |       | —                           |       | 31                                                 |       |
| George C. Creel         |       | 20         |       | 10                                                                  |       | —                           |       | 30                                                 |       |
| M. Karen Levin          |       | —     |       | —                                                              |       | 50                               |       | 50                                                 |       |
| Robert A. Lodder, Jr.   |       | 17         |       | 10                                                                  |       | —                           |       | 27                                                 |       |
| Robert J. Vander Zanden |       | 20         |       | 10                                                                  |       | —                           |       | 30                                                 |       |

----

(1)             OnNovember 16, 2005, Mrs. Levin’s Exit Agreement was approved by the Board.  It provides lifetime payments of $12,500 eachquarter following her full retirement from the Company, which occurred onJanuary 4, 2006.  This Exit Agreementsupersedes and replaces all previous agreements concerning Spherix’sobligations for Mrs. Levin’s retirement benefits.

Non-employeedirectors of Spherix Incorporated (“Spherix”) receive the following annualcompensation for service as a member of Spherix:

49

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**SpherixIncorporated**

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** **
| Annual Retainer        |   | $ | 5,000  |   | To be paid in cash at the first meeting of the term.                                                                                                                                                                                                                                                                                                                                           |
|------------------------|--------|---|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Stock Awards           |   | $ | 10,000 |   | To be calculated by dividing $10,000 by the closing  stock price the day the Stock Awards are granted. The shares will be granted  upon approval of the Board; however, the shares will be restricted and  instructions will be given to the stock transfer agent that the shares may  not be transferred until the one year anniversary of the Board Member’s  departure from the Board. |
| Board Meeting Fees     |   | $ | 2,500  |   | To be paid for all in-person Board Meetings. Members  must be present to be paid.                                                                                                                                                                                                                                                                                                              |
| Committee Meeting Fees |   | $ | 800    |   | To be paid for all in-person Committee Meetings.  Members must be present to be paid.                                                                                                                                                                                                                                                                                                          |
| Teleconference Fees    |   | $ | 300    |   | To be paid for all teleconferences called by either  the Chairman of the Board, the President, or by the Chairman of the relevant  Committee. Members must be on-line to be paid.                                                                                                                                                                                                              |
| Additional Retainer    |   | $ | 1,000  |   | To be paid to the Chairman of the Audit Committee.                                                                                                                                                                                                                                                                                                                                             |

** **

**CompensationCommittee Report**

The CompensationCommittee of the Board of Directors oversees the compensation program of theCompany on behalf of the Board.  Infulfilling its oversight responsibilities, the Compensation Committee reviewedand discussed with management the Compensation Discussion and Analysis includedin this Form 10-K beginning on page 43.

Inreliance on the review and discussion referred to above, the CompensationCommittee recommended to the Board of Directors that the CompensationDiscussion and Analysis be included in the Company’s Annual Report on Form 10-Kfor the year ended December 31, 2006, which will be filed with the SEC.
|        |   | Members of the Compensation Committee: |
|--------|--------|----------------------------------------|
|   |   |                                   |
|   |   |                                   |
|   |   | Robert J. Vander Zanden, Chairman      |
|   |   | A. Paul Cox, Jr.                       |
|   |   | George C. Creel                        |

 

**Item 12.****           SECURITY OWNERSHIP OFCERTAIN BENEFICIAL OWNERS AND MANAGEMENT, AND RELATED STOCKHOLDERS**

**SecurityOwnership Of Certain Beneficial Owners And Management**

The followingtable sets forth the shares of Common Stock beneficially owned by all ExecutiveOfficers and Directors as a group as of December 31, 2006.  Except for Dr. Levin, Chairman of the Boardand Executive Officer for Science, and Mrs. Levin, Director and former VicePresident, no person is known by the Company to own beneficially more than 5%of the outstanding Common Stock.  Theownership of Dr. and Mrs. Levin is detailed below.

50

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**SpherixIncorporated**

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** **

**BeneficialOwnership of Common Stock by Executive Officers and Directors**

| Title of Class | ** ** | **Name of Beneficial Owner**     | ** ** | **Amount and  Nature of   Ownership s** | ** ** | **Percent   Of Clas** | ** ** |
|--------------------------|------------|-------------------------------------------------|------------|-------------------------------------------------------------|------------|---------------------------------|------------|
| Common                   |       | Gilbert V. Levin                                |       | 1,388,348                                                   | (1)(2)     | 9.7                             | %          |
| Common                   |       | M. Karen Levin                                  |       | 1,340,109                                                   | (2)        | 9.4                             | %          |
| Common                   |       | Richard C. Levin                                |       | 112,798                                                     | (2)        | *                               |       |
| Common                   |       | Douglas T. Brown                                |       | 25,252                                                      | (2)        | *                               |       |
| Common                   |       | A. Paul Cox, Jr.                                |       | 16,252                                                      | (2)        | *                               |       |
| Common                   |       | George C. Creel                                 |       | 16,252                                                      | (2)        | *                               |       |
| Common                   |       | Robert J. Vander Zanden                         |       | 16,252                                                      | (2)        | *                               |       |
| Common                   |       | Robert A. Lodder, Jr.                           |       | 12,852                                                      | (2)        | *                               |       |
| Common                   |       | Jeffrey T. Lowe                                 |       | 2,250                                                       | (2)        | *                               |       |
| Common                   |       | Roger A. Downs                                  |       | 2,000                                                       | (2)        | *                               |       |
| Common                   |       | Robert L. Clayton                               |       | 1,500                                                       | (2)        | *                               |       |
| Common                   |       | Steven M. Wade                                  |       | 1,067                                                       | (2)        | *                               |       |
| Common                   |       | All Executive Officers and Directors as a Group |       | 2,934,932                                                   | (2)        | 20.5                            | %          |

----

*                    Lessthan 1% of the outstanding shares of Common Stock of the Company.

(1)             Includes1,600 shares held jointly with M. Karen Levin.

(2)             Includedin the number of shares beneficially owned by G.V. Levin, M.K. Levin, R.C.Levin, D.T. Brown, A.P. Cox, G.C. Creel, R.J. Vander Zanden, R.A. Lodder, J.T.Lowe, R.A. Downs, R.L. Clayton,  S.M.Wade, and All Executive Officers and Directors as a Group are 227,750, 60,000,112,000, 7,500, 7,500, 7,500, 7,500, 5,000, 2,250, 2,000, 1,500, 500, and436,000 shares, respectively, which such persons have a right to acquire within60 days pursuant to stock options.

As of December 31,2006, Dr. Levin, Chairman of the Board and Executive Officer for Science, andMrs. Levin, Director and former Vice President, 3180 Harness Creek Road,Annapolis, Maryland, beneficially owned in the aggregate 2,728,457 shares ofCommon Stock (19.1% of the 14,287,804 outstanding shares(1).  Dr. Levin and Mrs. Levin are husband andwife.  As principal Stockholders of theCompany, they are considered control persons with respect to the Company.

All Directors andExecutive Officers as a group, as beneficial owners of 2,934,932 shares ofCommon Stock, owned 20.5% of the 14,287,804 outstanding shares1. With the exception of Cede& Co., the holder of record for certain brokerage firms and banks, no otherperson is known by the Company to own beneficially more than 5% of theoutstanding Common Stock of the Company.

In February 2001,the Board of Directors adopted the Rights Agreement (the “Agreement”).  The Agreement provides each Stockholder ofrecord a dividend distribution of one “right” for each outstanding share of theCompany’s Common Stock.  Rights becomeexercisable at the earlier of ten days following:  (1) a public announcement that anacquirer has purchased or has the right to acquire 10% or more of the Company’sCommon Stock, or (2) the commencement of a tender offer which would resultin an offeror beneficially owning 10% or more of the outstanding Common Stockof the Company.  All rights held by an acquireror offeror expire on the announced acquisition date, and all rights expire atthe close of business on December 31, 2010. Each right entitles a Stockholder to acquire, at a stated purchaseprice, 1/100 of a share of the Company’s preferred stock, which carries votingand dividend rights similar to one share of its Common Stock.  Alternatively, a right holder may elect topurchase for the stated price an equivalent number of shares of the Company’sCommon Stock at a price per share equal to one-half of the average market pricefor a specified period.  In lieu of thestated purchase price, a right holder may elect to acquire one-half of theCommon Stock available under the second option. The purchase price of the preferred stock fractional amount is subjectto adjustment for certain events as described in the Agreement.  At the discretion of a majority of the Boardand within a specified time period, the Company may redeem all of the rights ata price of $0.001 per right.  The Boardmay also amend any provisions of the Agreement prior to exercise.

**Item13.  CERTAIN RELATIONSHIPS AND RELATEDTRANSACTIONS, AND DIRECTOR INDEPENDENCE**

Thecurrent Board of Directors consists of Mr. Douglas T. Brown, Mr. A. Paul Cox,Jr., Mr. George C. Creel, Dr. Gilbert V. Levin, Mrs. M. Karen Levin, Mr.Richard C. Levin, Dr. Robert A. Lodder, Jr., and Dr. Robert J. VanderZanden.  The Board of Directors hasdetermined that a majority of its members, being Messrs. Brown, Cox, Creel,Lodder, and Vander Zanden, are independent Directors within the meaning of theapplicable NASD rules.  The Company’sAudit, Compensation, and Nominating Committees consist solely of independentDirectors.

----

(1)             Includes475,600 shares which could be acquired pursuant to stock options or warrantswithin 60 days.

51

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**SpherixIncorporated**

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** **

**Item14.  PRINCIPAL ACCOUNTING FEES ANDSERVICES**

**Grant Thornton LLP Fees ForFiscal 2006**

The followingtable sets forth the fees paid by the Company to Grant Thornton LLP for auditand other services provided in 2006 and 2005:

|            | ** ** | **2006** | ** ** | **2005** | ** ** |
|------------|------------|----------|------------|----------|------------|
|       |       |     |       |     |       |
| Audit fees |       | $        | 100,000    |     | $          | 109,000 |   |
| Tax fees   |       | 17,000   |       | 14,000   |       |
| Total      |       | $        | 117,000    |     | $          | 123,000 |   |

 

The Audit Committeeconsidered whether the provision of services referenced above is compatiblewith maintaining Grant Thornton’s independence. The Audit Committee’s policy isto pre-approve all audit and permissible non-audit services provided by theindependent auditors.  These services mayinclude audit services, audit-related services, tax services and otherservices.  Pre-approval is generallyprovided for up to one year.  The AuditCommittee may also pre-approve particular services on a case-by-case basis.

52

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**SpherixIncorporated**

**Notes to Financial Statements**

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**PART IV**

**Item15.  EXHIBITS, FINANCIAL STATEMENTS,SCHEDULES**

**(a)         Exhibits**
| (3)     |   | Certificate of Incorporation and Bylaws of the  Company (incorporated by reference to the Company’s Annual Proxy Statement  for meeting held on May 15, 1992, as filed with the Commission)                                    |
|---------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (3.1)   |   | Articles of Amendment of the Company (incorporated  by reference to the Company’s Proxy Statement for its May 1996, May 2000, and  May 2001 annual meetings, as filed with the Commission)                                     |
| (10.1)  |   | Summary of Annual Compensation of Members of the  Board of Directors of Spherix Incorporated                                                                                                                                        |
| (10.2)  |   | Restated Consulting Agreement dated as of March 23,  2004, by and between Gilbert V. Levin and the Company (incorporated by  reference to Form 10-K filed March 30, 2004)                                                           |
| (10.3)  |   | Restated Consulting Agreement dated as of November  29, 2005, by and between M. Karen Levin and the Company (incorporated by  reference to Form 8-K filed December 1, 2005)                                                         |
| (10.4)  |   | Amended and Restated Employment Agreement dated as  of March 23, 2004, by and between Gilbert V. Levin and the Company  (incorporated by reference to Form 10-K filed March 30, 2004)                                               |
| (10.5)  |   | Stock Purchase Warrant dated as of February 24, 2000  (incorporated by reference to Form 8-K filed March 3, 2000)                                                                                                                   |
| (10.6)  |   | Agreement and License between the Company and MD  Foods Ingredients Amba (incorporated by reference to Form 8-K filed October  22, 1996 and Form 10-KSB filed March 31, 1997)                                                       |
| (10.7)  |   | Securities Purchase Agreement dated as of February  24, 2000, by and between the Company and RGC International Investors, LDC,  c/o Rose Glen Capital Management, L.P. (incorporated by reference to Form 8-K  filed March 3, 2000) |
| (10.8)  |   | Standby Equity Distribution Agreement dated July 22,  2005, by and between the Company and Cornell Capital Partners, L.P.  (incorporated by reference to Form 8-K filed July 25, 2005)                                              |
| (10.9)  |   | 1997 Stock Option Plan (incorporated by reference  from the Company’s Proxy Statements for its May 1998, May 2001 and May 2005  annual meetings, as filed with the Commission)                                                 |
| (10.10) |   | Rights Agreement dated as of February 16, 2001,  between Spherix Incorporated and American Stock Transfer and Trust Company  (incorporated by reference to Form 8-K filed in March 2001)                                            |
| (10.11) |   | Amendment to the September 27, 1996 Agreement and  License between the Company and Arla Foods Ingredients amba (formerly MD  Foods Ingredients amba (incorporated by reference to Form 8-K filed November  17, 2003)                |
| (10.12) |   | G.V. Levin Exit Agreement Resolution approved by the  Board of Directors on March 23, 2004 (incorporated by reference to Form 10-K  filed March 30, 2004)                                                                           |
| (10.13) |   | Exit Agreement dated November 29, 2005, by and  between M. Karen Levin and the Company (incorporated by reference to Form 8-K  filed December 1, 2005)                                                                              |
| (10.14) |   | Lease Agreement dated February 6, 2007, between the  Company and Allegany Research Properties, LLC (incorporated by reference to  Form 8-K filed April 2, 2007)                                                                     |
| (23)    |   | Consent of Independent Registered Public Accounting  Firm                                                                                                                                                                           |
| (31)    |   | Certification of Chief Executive Officer/Chief  Financial Officer of Spherix Incorporated pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002                                                                                |
| (32)    |   | Certification of Chief Executive Officer/Chief  Financial Officer of Spherix Incorporated pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002                                                                                |

 

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**SIGNATURES**

Pursuant to the requirements of Section 13 or 15(d) of the Exchange Actof 1934, the Registrant has duly caused this report to be signed on its behalfby the undersigned, thereunto duly authorized.
|                 |   |   |   | Spherix Incorporated                                                          |
|----------------------|--------|--------|--------|-------------------------------------------------------------------------------|
|                 |   |   |   | (Registrant)                                                                  |
|                 |   |   |   |                                                                          |
|                 |   |   |   |                                                                          |
| Date: March 6,  2007 |   | By:    |   | /s/ Richard C. Levin                                                          |
|                 |   |   |   | Chief Executive Officer and President, Director, and  Chief Financial Officer |

 

Pursuant to the requirements of the Securities ExchangeAct of 1934, this report has been signed below by the following persons onbehalf of the Registrant and in the capacities and on the dates indicated.
| /s/ Douglas T. Brown         |   | Director                             |   | March 6, 2007 |
|------------------------------|--------|--------------------------------------|--------|---------------|
| Douglas T. Brown             |   |                                 |   |          |
|                         |   |                                 |   |          |
| /s/ A. Paul Cox,  Jr.        |   | Director                             |   | March 6, 2007 |
| A. Paul Cox, Jr.             |   |                                 |   |          |
|                         |   |                                 |   |          |
| /s/ George C.  Creel         |   | Director                             |   | March 6, 2007 |
| George C. Creel              |   |                                 |   |          |
|                         |   |                                 |   |          |
| /s/ Gilbert V.  Levin        |   | Chair, Executive Officer for Science |   | March 6, 2007 |
| Gilbert V. Levin             |   |                                 |   |          |
|                         |   |                                 |   |          |
| /s/ M. Karen  Levin          |   | Director                             |   | March 6, 2007 |
| M. Karen Levin               |   |                                 |   |          |
|                         |   |                                 |   |          |
| /s/ Richard C.  Levin        |   | CEO and President, Director,         |   | March 6, 2007 |
| Richard C. Levin             |   | and Chief Financial Officer          |   |          |
|                         |   |                                 |   |          |
| /s/ Robert A.  Lodder, Jr.   |   | Director                             |   | March 6, 2007 |
| Robert A. Lodder,  Jr.       |   |                                 |   |          |
|                         |   |                                 |   |          |
| /s/ Robert J.  Vander Zanden |   | Director                             |   | March 6, 2007 |
| Robert J. Vander  Zanden     |   |                                 |   |          |

 

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