**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

**FORM 10-K**

 

**(Mark one)**

| **x**      | **ANNUAL  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934**                                                                                                                                                                                                                                                                                                                                                                                                 |
|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| ** ** | **For the fiscal year ended  December 31, 2007**                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| **o**      | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934**                                                                                                                                                                                                                                                                                                                                                                                             |
| ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| ** ** | **For the transition period from                                                                              to** |
| ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| ** ** | **Commission file number 0-5576**                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |

 

**SPHERIX INCORPORATED**

(Exact name of Registrantas specified in its Charter)

 

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

 

**6430 Rockledge Drive, Bethesda,Maryland 20817**

(Address of principal executive offices)

 

Registrant’stelephone number, including area code: **301-897-2540**

 

Securities registeredpursuant to Section 12(b) of the Act:

 

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

 

Securities registeredpursuant to Section 12(g) of the Act: None.

 

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

 

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

 

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

 

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of Registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

 

Indicate by checkmark whether the Registrant is a large accelerated filer, an accelerated filer,or a non-accelerated filer(as defined in Rule 12b-2 of the Act).

Large AcceleratedFiler o Accelerated Filer o Non-accelerated Filer o Smaller Reporting Company x

(Do not check if a smaller reporting company)

 

Indicate by check markwhether the Registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).  Yes o  No x

 

State the aggregatemarket value of the voting and non-voting common equity held by non-affiliatescomputed by reference to the price at which the common equity was last sold, orthe average bid and asked price of such common equity, as of the last businessday of the registrant’s most recently completed second fiscal quarter (forpurposes of this determination, only our Directors and Executive Officers havebeen deemed affiliates):  Common Stock(Par Value $.005) — $27,519,874

 

There were 14,318,702shares of the Registrant’s Common Stock outstanding as of March 24, 2008.

 

**DocumentsIncorporated by Reference**

 

            Portions of the Spherix Incorporateddefinitive Proxy Statement, to be filed with the Securities and ExchangeCommission pursuant to Regulation 14A of the Securities Exchange Act of 1934not later than 120 days after the end of the fiscal year to which this reportrelates, are incorporated by reference into Part III of this Form 10-K.

 

 

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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 Section 27Aof 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 filed October 10, 2007, for a more detailedstatement concerning forward looking statements.

 

**Item1.  DESCRIPTION OF BUSINESS**

 

**General**

 

Spherix Incorporated (the“Company” or “Registrant”), a Delaware corporation, was founded in 1967.  The Company’s principal segments havehistorically been InfoSpherix, our information services business, andBioSpherix, our biotechnology research and development business.  On August 15, 2007, we sold ourInfoSpherix business to devote our resources and attention to BioSpherix.  In July 2007, we also launched HealthSciences, a technical and regulatory consulting business.

 

The principal executiveoffices of the Company are located at 6430 Rockledge Drive, Suite 503,Bethesda, Maryland 20817, and its telephone number is (301) 897-2540.

 

The Company’s CommonStock trades on the NASDAQ Global Market system under the symbol SPEX.

 

**Available Information**

 

Our principal Internetaddress is www.spherix.com.  We makeavailable free of charge on www.spherix.com our annual, quarterly and currentreports, and amendments to those reports, as soon as reasonably practicableafter we electronically file such material with, or furnish it to, theSecurities and Exchange Commission (“SEC”).

 

**BioSpherix**

** **

BioSpherix is dedicatedto developing proprietary products for commercial applications.

 

Tagatose, a naturallyoccurring sugar, is a low-calorie, full-bulk sweetener.  It is a true sugar that looks, feels, andtastes like table sugar.  The Company hasdiscovered and patented a number of health and medical uses for tagatose, whichit has branded “Naturlose®”.  BioSpherixis devoting all of its time, attention and resources to developing Naturlose asa treatment for Type 2 diabetes.  As setforth below, this product is in the development stage and will requiresubstantial additional investment to bring it to market.

 

*Treatmentfor Type 2 Diabetes.*  Trials at the University of Maryland Schoolof Medicine have found tagatose effective as a treatment of Type 2 diabetes inhumans.  In addition to alleviatingsymptoms of this major disease, over the one-year trial, all subjects lostweight at physician-approved rates and showed a significant increase in thedesirable type of cholesterol, HDL. Other than for initial laxation at high doses (45 to 75 grams per capitaper day), accommodated in about two weeks, no untoward effects were found inany of the research.  In addition, thestudies found that Naturlose produced no rise in blood glucose or insulinlevels in diabetic or normal subjects. Naturlose taken before the consumption of glucose produced a bluntingeffect on the otherwise normally expected rise in blood glucose.

 

In late 2005, the FDAgave BioSpherix permission to begin a Phase 3 clinical trial for Naturlose as astand-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, 

 

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before requesting drugapproval.  The trial is being conductedby a contract research organization (CRO) and is being guided by the Company’snew CEO, Claire Kruger, an experienced FDA regulatory consultant.

 

The Phase 3 clinicaltrial started April 2007, following the completion of a dose range-findingstudy.  More than 200 subjects,representing the demographic mix in the U.S., will receive liquid doses ofNaturlose, three times a day, to test its ability to treat Type 2 diabetes andan equal number of subjects will receive a placebo.  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 asuccessful outcome are enhanced by the widely demonstrated safety of theproduct.

 

The Phase 3 clinicaltrial was initially commenced in both Australia and in the United States.  In 2007, BioSpherix terminated the Australianoperations and expanded the United States trial so that the entire trial willbe conducted at multiple locations in the United States.

 

Also in late 2007,BioSpherix encountered a technical issue at one of its United States sites whenmold was discovered in certain bottles of the placebo used in the Phase 3 trialat this site.  To remedy the issue, theCompany is now using a preservative.

 

Patientrecruitment has been slower than expected. The Company is evaluating the reasons for the delays in recruitment andmay seek to modify arrangements with its CRO and other contractors with the aimof increasing site support and communication. One of the options being explored is for the Company to reclaim some orall of the oversight/coordination responsibilities currently being performed byour CRO.  This action would be taken withthe twin goals of avoiding further delays in the completion of the Phase 3trial and reducing the costs of the trial.

 

Due to the relocation ofthe entire trial to the United States and the issues described above, theCompany has encountered a delay in its Phase 3 trial.  Through the end of February 2008, 102participants have been enrolled in the trial. A minimum of 332 participants must complete the trial in accord with thecurrent protocol (166 using Naturlose and 166 using a placebo).  The Company anticipates that the earliest thePhase 3 trial could be completed is the end of 2009, but acknowledges that manyfactors could result in further delays. If successful, FDA approval would not likely be received before the endof 2010 at the earliest.

 

The Company does not havesufficient resources to complete all of the following activities: the Phase 3trial, prepare, submit and pursue the FDA application and, if approved, proceedto manufacture and market Naturlose as a Type 2 diabetes drug.  The Company is therefore attempting tocontinue to develop Naturlose as a drug and to market, sell and/or licenseNaturlose to a pharmaceutical or other company which would complete thedevelopment.  To date, the Company hasnot had, and does not expect to have, any meaningful offers until the efficacyof Naturlose has been established through the Phase 3 trial.  As the Phase 3 trial is a “blind” trial(i.e., the Company will not have access to any results until the trial iscompleted), the Company has commenced other initiatives to move the developmentforward, including:

 

*Dose-ranging study*

 

A six-month dose rangestudy to evaluate whether lower doses of Naturlose are effective in treatingType 2 diabetes.  The study will evaluatethree different daily doses which are lower than the daily dose currently inuse in the Phase 3 trial.

 

*Market Research*

 

Spherix has contractedwith two market consulting firms to analyze the competitive situation in thediabetes market, and generate forecasts to allow the Company to evaluate marketsegment opportunities and the impact of Medicaid, government initiatives, andthird party payers on the diabetes therapeutic category.  Primary market research is being conducted toevaluate the impact of formulation type, size and packaging on sales in thediabetes therapeutic category.

 

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*Manufacturing Studies*

 

Spherix continues toinvestigate options for manufacturing Naturlose.  While Spherix does not have sufficientresources to pursue such manufacturing, it is conducting this investigationwith a goal that it may further a potential sale/license of Naturlose.

 

The Company hopes thatthese efforts may provide additional information prior to the completion of thePhase 3 trial which could expedite a sale/license of Naturlose as a drug.

 

Continued progress on theclinical trial of Naturlose as a treatment of Type 2 diabetes and on the otherinitiatives described above is dependent upon many factors including, but notlimited to, the Company having sufficient funds and resources.  The total cost of completing the Phase 3trial is difficult to determine and can be affected by a number of factors,including successful restructuring of the oversight responsibilities andcompletion of the study in a timely manner. Although it cannot be certain, the Company’s current funds on hand maybe sufficient for it to complete the study and are believed to be sufficient tomeet all of the Company’s short-term obligations; as a result, management doesnot at present intend to raise additional funds through the capital marketsunless necessary.  The Company alsobelieves that, if raising additional funds at some point becomes desirable, theideal timing for this would be after the Company has obtained results from thedose range study or additional information from the market research.

 

*Food andBeverage Use*

 

In 1997, and through asubsequent amendment, the world-wide right to sell tagatose for food andbeverage uses and the right to manufacture tagatose for all uses was licensedto Arla Foods Ingredients amba (“Arla”) (formerly MD Foods Ingredients amba, “MDFI”)of Denmark.  Arla has not been successfulin generating any substantial market for tagatose and the Company has receivedno meaningful royalties from Arla under the license agreement.

 

BioSpherix revenue fromroyalties accounted for 7% of the Company’s total revenue from continuingoperations in 2007.

 

**HealthSciences**

 

In July 2007, theCompany entered into the Health Sciences consulting business to providetechnical and regulatory consulting services to biotechnology andpharmaceutical companies, as well as aiding the Company’s own R&Dactivities, when it hired Claire Kruger as its CEO.  The Company sought a revenue producingbusiness to operate while it is in the development phase of its biotechnologyefforts and a business to compliment such biotechnology efforts.  Health Sciences currently has 10 customers,many well known, including two Fortune 500 companies.  TheCompany generally provides its services on either a fixed-price basis or on a “timeand expenses” basis, charging hourly rates for each staff member involved in aproject, based on his or her skills and experience.  Our engagement agreements typically providefor monthly billing, and require payment of our invoices within thirty (30)days of receipt.

 

The projects range fromsafety analyses of food ingredients to safety analyses of pharmaceuticalmanufacturing and dispensing equipment. Many clients are large, well-known companies with a number of successfulproducts on the market.  Theproliferation of new products in the food and pharmaceutical areas creates agrowing need for the regulatory services of the Company.

 

Revenues are primarilyderived from services provided in response to client requests or events thatoccur without notice, and engagements, generally billed as services areperformed, are terminable or subject to postponement or delay at any time byclients.  As a result, backlog at anyparticular time is small in relation to our quarterly or annual revenues and isnot a reliable indicator of revenues for any future periods.  Revenues and operating margins for anyparticular quarter are generally affected by staffing mix, resourcerequirements and timing and size of engagements.

 

The Company is exploringprospects for growth of its Health Sciences consulting business, includingemploying additional professional personnel and/or acquiring a complimentaryconsulting business.

 

Health Sciences is alsomonitoring and directing the Phase 3 clinical trial of Naturlose forBioSpherix.  Previously, the Companycontracted with a third party for this service.

 

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Health Sciences revenueaccounted for 93% of the Company’s total revenue from continuing operations in2007.

 

**InfoSpherix Incorporated**

 

On August 15, 2007,the Company sold InfoSpherix. Accordingly, the operations of InfoSpherix are reported in theaccompanying financial statements as discontinued operations in theConsolidated Statement of Operations, and the assets held for sale of thediscontinued segment are separately identified in the Company’s ConsolidatedBalance Sheet.

 

InfoSpherix professionals designed and operatedcontact centers, websites, and field kiosks providing information managementand materials to the public on various socially beneficial subjects, as well asother information services, such as reservations and tourism.

 

**GovernmentContracts**

 

Following the sale ofInfoSpherix, the Company is no longer engaged in the performance of governmentcontracts.

 

**IndustrySegments**

 

See Note 11, “Informationby Business Segment,” of the Notes to the Financial Statements included hereinpursuant to Part II, Item 8 of this Form 10-K for industry segmentinformation of the Company, which information is incorporated herein byreference.

 

**MarketConcentration**

 

During 2007, 93% of theCompany’s revenue was generated from the Health Sciences consultingbusiness.  While the segment had threecustomers who accounted for 15% or more of the Company’s revenue, management doesnot believe the loss of one or more of these customers would have a materialimpact on the Company as a whole.

 

**Patents and Trademarks**

 

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

 
| **Patent No.**    | ** ** | **Patent Title**                                                      | ** ** | **Issue Date** | ** ** | **Expiration Date** | ** ** |
|-------------------|------------|-----------------------------------------------------------------------|------------|----------------|------------|---------------------|------------|
| Canada 2,077,257* |       | Process for Manufacturing D-Tagatose                                  |       | 2/19/02        |       | 1/7/11              |       |
| 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              |       |
| Korea 190671*     |       | Process for Manufacturing D-Tagatose                                  |       | 1/21/99        |       | 1/7/11              |       |
| 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              |       |
| 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. 5,078,796*   |       | 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             |       |

 

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*Licensed to Arla Foods.

 

Trademarks. The Company has trademarked its name, “Spherix,” “Naturlose” fornon-food uses of tagatose, and “BioSpherix.”

 

With respect to all ofits inventions, the Company has received approximately 130 patents, includingforeign issues.  It has several patentspending and many additional invention disclosures.  In addition to its strong patent 

 

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position, the Companyrelies on the common law protection of such information as trade secrets and onconfidentiality agreements to protect the value of these assets.

 

**Seasonality**

 

Following the sale ofInfoSpherix, the Company’s continuing business is not seasonal in nature.

 

**SalesBacklog**

 

The Company’s backlog asof December 31, 2007, from the new Health Sciences consulting business wasapproximately $230,000.

 

**Competition**

 

*BioSpherix*

 

Competitors of BioSpherixare numerous and include, among others, major pharmaceutical, chemical,consumer, and biotechnology companies, specialized firms, universities andother research institutions.  The Company’scompetitors may succeed in developing technologies and products that are moreeffective than any that are being developed by the Company, and that couldrender the Company’s technology and potential products obsolete andnoncompetitive.  Many of thesecompetitors have substantially greater financial and technical resources andproduction and marketing capabilities than the Company.

 

*HealthSciences*

 

Competitors of HealthSciences are numerous, including some that are much larger companies withgreater resources.

 

We believe that thebarriers to entry in particular areas of our consulting expertise are low andthat for many of our technical disciplines, competition is increasing.  In response to competitive forces in themarketplace, we continue to explore new markets for our various technicaldisciplines.

 

**Researchand Development**

 

BioSpherix expendituresfor research and development were approximately $5.9 million and $884,000 in2007 and 2006, respectively.  Theseexpenditures were incurred primarily in the ongoing efforts to commercialize Naturlose,including its development for drug uses and improved production processes.

 

**GovernmentalRegulation**

 

The business activitiesof the Company are subject to a variety of Federal and state compliance,licensing, and certification requirements. As previously noted, if the Phase 3 clinical trial is successful, theCompany will need FDA approval to market Naturlose as a drug to treat Type 2diabetes.  Management believes that theCompany is, and has been at all times, in full compliance with Federal andstate environmental protection and worker safety laws.

 

The Company is alsorequired to comply with the Sarbanes-Oxley Act of 2002.  Non-accelerated filers, such as Spherix, arerequired to comply with the internal control over financial reportingrequirements of section 404 beginning in 2007 with this Form 10-K.  The Company anticipates that the cost ofimplementing Section 404 over the next two years could have a significantimpact on the results of operations.

 

**Environment**

** **

Compliance with currentfederal, state and local provisions regulating the discharge of materials intothe environment, or otherwise relating to the protection of the environment,has not had, and in the opinion of management will not have, a material effecton the Company’s financial position, results of operations, capitalexpenditures, cash flows or competitive position.

 

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**Employees**

 

The Company employs 12individuals on a full- or part-time basis. Of this total, 10 are full-time employees.  The Company’s employees are not currentlyunionized, and management believes that its relations with the Company’semployees are harmonious.

 

**GeographicAreas**

 

Spherix’s business is,and has been, based in the United States. Accordingly, Spherix revenue is entirely from U.S.-based operations.

 

**Item 1A.  RISK FACTORS**

 

Any of the risk factorswe describe below could severely harm our business, financial condition andoperating results.  The market price ofour common stock could decline if one or more of these risks and uncertaintiesdevelop into actual events.

 

**RISKSRELATED TO OUR BUSINESS**

 

**WE DO NOTHAVE THE RESOURCES TO BECOME A FULL SCALE BIOTECHNOLOGY COMPANY AND WE MAY NOTBE ABLE TO ATTRACT A NECESSARY BUYER/LICENSEE/PARTNER. **We intend to continue to develop Naturlose as a viableType 2 diabetes treatment and to continuously seek a sale, license orpartner.  Our hope and expectation isthat as we proceed with the development, incremental successes may allow us tonegotiate a favorable transaction.  Therecan be no assurance, however, that we will have such incremental successes, orthat even if we achieve them, we will attract a buyer, licensee orpartner.  We have limited resources andwe may fully expend our funds before we are able to attract a purchaser/partner.

 

**WE HAVENOT YET SUCCESSFULLY COMMERCIALIZED NATURLOSE.**  We are in theprocess of attempting to develop the use of tagatose in non-food products,under the brand name Naturlose, as a treatment for diabetes.  Efforts are limited to the Type 2 diabetesclinical trial because of cash limitations. To date, we have yet to secure any substantial revenue from tagatose(Naturlose) sales.

 

**OUR SOLEDRUG CANDIDATE IS STILL IN THE EARLY STAGES OF DEVELOPMENT AND REMAINS SUBJECTTO CLINICAL TESTING AND REGULATORY APPROVAL. THIS PROCESS IS HIGHLY UNCERTAIN AND WE MAY NEVER BE ABLE TO OBTAINMARKETING APPROVAL FOR OUR DRUG CANDIDATE. **To date,we have not obtained approval from the FDA or any foreign regulatory authorityto market or sell Naturlose as a drug for Type 2 diabetes.

 

We have limitedexperience in conducting and managing the clinical trials necessary to obtainregulatory approvals, including approval by the FDA and/or comparable foreignregulatory agencies.  The time requiredto complete clinical trials and for regulatory review by the FDA and othercountries’ regulatory agencies is uncertain and typically takes several years.

 

**IFCLINICAL TRIALS OF NATURLOSE ARE PROLONGED, DELAYED OR SUSPENDED, IT MAY TAKESIGNIFICANTLY LONGER AND COST SUBSTANTIALLY MORE TO OBTAIN MARKETING APPROVALFOR OUR DRUG CANDIDATE AND ACHIEVE PROFITABILITY, IF AT ALL. **We have already encountered several challenges whichhave delayed our Phase 3 trial.  Eachdelay makes it more likely that we will need interim financing to complete thePhase 3 trial.  We cannot predict whetherwe will encounter additional problems with our trial that will cause us orregulatory authorities to delay or suspend the clinical trial, or delay theanalysis of data from ongoing trial.  Anyof the following could delay the clinical development of Naturlose as a drug:

 

·                  ongoing discussions with the FDA regarding the scopeor design of our trial;

·                  delays in receiving, or the inability to obtain,required approvals from reviewing entities at clinical sites selected forparticipation in our trial;

·                  delays in enrolling patients into the trial;

·                  a lower than anticipated retention rate of patients inthe trial;

 

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·                  the need to repeat the trial as a result ofinconclusive or negative results or unforeseen complications in testing;

·                  inadequate supply or deficient quality of materialsnecessary to conduct our trial;

·                  serious and unexpected drug-related side effectsexperienced by participants in our clinical trials;

·                  the placement by the FDA of a clinical hold on atrial;  or

·                  any restrictions on or post-approval commitments withregard to any regulatory approval we ultimately obtain that render the drugcandidate not commercially viable.

 

**WECURRENTLY RELY ON THIRD PARTIES TO CONDUCT OUR TRIAL, AND THOSE THIRD PARTIES MAY NOTPERFORM SATISFACTORILY. **We rely on third parties to enrollqualified patients, conduct our trial, provide services in connection with suchtrial, and coordinate and oversee all aspects of the trial.  Our reliance on these third parties for clinicaldevelopment activities reduces our control over these activities.  Accordingly, these third party contractorsmay not complete activities on schedule, or may not conduct our trial inaccordance with regulatory requirements or the trial design.  If these third parties do not successfullycarry out their contractual duties or meet expected deadlines, we may berequired to replace them or we may be required to provide these services withour own personnel.  Although we believethere are a number of third party contractors we could engage to continue theseactivities, replacing a third party contractor may result in a delay or affectthe trial.  If this were to occur, ourefforts to obtain regulatory approvals for and commercialize our drugcandidates may be delayed.

 

**EVEN IFOUR CLINICAL TRIALS ARE SUCCESSFUL, WE MAY NOT HAVE A COMMERCIALLY VIABLEDRUG OR PRODUCT. **We have a number of hurdles to overcometo have a commercially viable drug or product even assuming our clinical trialsare successful, including:

 

·                  We must secure a manufacturer of Naturlose.  Our food/beverage licensee, which also hasthe right to manufacture tagatose/Naturlose, has ceased its manufacturingefforts.  We have engaged in somepreliminary discussions with firms that have expressed some interest but wehave no firm commitment.

·                  We must demonstrate that the product will be acceptedin the market place.  Even if theclinical trial is successful, the market may not accept a drug which must beconsumed in liquid form, three times a day, and in the quantities used in ourtrial.

 

**IF PHYSICIANSAND PATIENTS DO NOT ACCEPT NATURLOSE, WE MAY NOT BE ABLE TO GENERATESIGNIFICANT REVENUES FROM PRODUCT SALES. **Even if weobtain regulatory approval for Naturlose, it may not gain market acceptanceamong physicians, patients and the medical community for a variety of reasonsincluding:

 

·                  timing of market introduction of competitive drugs;

·                  lower demonstrated clinical safety and efficacycompared to other drugs;

·                  lack of cost-effectiveness;

·                  lack of availability of reimbursement from managedcare plans and other third-party payors;

·                  inconvenient and/or difficult administration;

·                  prevalence and severity of adverse side effects;

·                  potential advantages of alternative treatment methods;

·                  safety concerns with similar drugs marketed by others;

·                  the reluctance of the target population to try newtherapies and of physicians to prescribe these therapies;  and

·                  ineffective sales, marketing and distribution support.

 

If Naturlose fails toachieve market acceptance, we would not be able to generate significant revenueor achieve profitability.

 

**BIOTECHNOLOGYBUSINESS HAS A SUBSTANTIAL RISK OF PRODUCT LIABILITY CLAIMS.  THE DEFENSE OF ANY PRODUCT LIABILITY CLAIMBROUGHT AGAINST US WILL DIVERT MANAGEMENT TIME AND REQUIRE SIGNIFICANT EXPENSE. **We could be exposed to significant potential productliability risks that are inherent in the development, manufacture, sales andmarketing of drugs and related products. Our insurance may not, however, provide adequate coverage againstpotential liabilities.  Furthermore,product liability insurance is becoming increasingly expensive.  As a result, we may be unable to maintaincurrent amounts of insurance coverage or obtain additional or sufficientinsurance at a reasonable cost to protect against losses

 

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that could have amaterial adverse effect on us.  If aclaim is brought against us, we might be required to pay legal and otherexpenses to defend the claim, as well as uncovered damage awards resulting froma claim brought successfully against us. Furthermore, whether or not we are ultimately successful in defendingany such claims, we might be required to redirect significant financial andmanagerial resources to such defense, and adverse publicity is likely toresult.

 

**OURPATENT PROTECTION MAY NOT BE SUFFICIENT TO PROTECT US. **Our current use patent for Naturlose as a treatmentfor Type 2 diabetes expires in 2012.  Weare exploring the prospects of extending the life of the patent and developinga new patentable production process of Naturlose.  There is no assurance, however, that eithereffort will be successful.

 

**WE HAVESUSTAINED LOSSES IN THE PAST AND WE MAY SUSTAIN LOSSES IN THE FUTURE.** We have incurred losses from continuing operations in prior years,including 2007 and 2006. Our net losses from continuing operations before taxesfor the years ended December 31, 2007 and 2006 were $9.3 million and $3.1million, respectively.  We expect toincur substantial losses in 2008 and thereafter until we find apurchaser/licensee.  We may not return toprofitable operations.  See discussion onLiquidity and Capital Resources in Part II, Item 7.

 

**WE MAY NOTBE ABLE TO OBTAIN ADDITIONAL FINANCING IF NEEDED. **In recent years, we have funded our operations throughprivate placements of our common stock, through the exercise of warrants issuedin connection with such private placement transactions and through the sale ofthe InfoSpherix subsidiary.  We believethat if the Company experiences significant delays with the Phase 3 clinicaltrial or encounters significant and unexpected costs that the Company will needto 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 MAY NOTBE SUCCESSFUL IN OUR NEWLY-FORMED HEALTH SCIENCES CONSULTING BUSINESS.** In August 2007, we launched a new Health Sciences consultingbusiness when we hired Dr. Claire Kruger as our CEO.  Dr. Kruger is operating this businesswith a modest staff and is also directing our Phase 3 trial.  There can be no assurance that this venturewill be successful.

 

**WE MAY NOTBE ABLE TO RETAIN OUR KEY EXECUTIVES AND PERSONNEL.** Asa small company, our success depends on the services of key employees inexecutive and other positions.  The lossof the services of one or more of such employees could have a material adverseeffect on us.

 

**WE FACEINTENSE COMPETITION BY COMPETITORS.**  Ourcompetitors in the biotechnology products business are numerous.  Many of our competitors have significantlygreater financial, marketing and distribution resources than we do.  Our competitors may succeed in developing ormarketing biotechnology products that are more effective than ours.

 

**RISKSRELATED 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 commonstock has traded as low as $1.03 and as high as $3.15 between January 1,2007 and December 31, 2007. Some of the factors leading to this volatilityinclude:

 

·                  relatively small amounts of our stocktrading on any given day;

·                  fluctuations in our operating results;

·                  announcements of technological innovationsor new products which we or our competitors make;

·                  developments with respect to patents orproprietary rights.

 

**OURCOMMON STOCK WILL BE DELISTED FROM NASDAQ GLOBAL MARKET SYSTEM IF WE FAIL TOCOMPLY WITH CONTINUED LISTING STANDARDS.**  We werepreviously advised that we were in danger of our common stock being delistedfrom the NASDAQ Global Market due to our stockholders’ equity falling below the$10 million minimum requirement.  At December 31,2007, the Company’s shareholder’s equity was $14.5 million.  Further, we are in danger of failing to meetthe minimum $1 per share stock price requirement.  If at some point we are unable to meet thelisting standards, we will attempt to list our common stock on the NASDAQCapital Market, but we may not qualify for such listing.

 

9

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**DIVIDENDSON OUR COMMON STOCK ARE NOT LIKELY. **We intend to retain future earnings, ifany, in order to provide funds for use in the operation and expansion of ourbusiness and for further research and development.  Accordingly, we do not anticipate paying cashdividends on our common stock in the foreseeable future.  Investors must look solely to appreciation inthe market price of the shares of our common stock to obtain a return on theirinvestment.

 

**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 rights plan.  The effect of this rights plan and of certainprovisions of our Certificate of Incorporation, By-Laws, and the anti-takeoverprovisions of the Delaware General Corporation Law, could delay or prevent athird party from acquiring us or replacing members of our board of directors,even if the acquisition or the replacements would be beneficial to ourstockholders.  These factors could alsoreduce the price that certain investors might be willing to pay for shares ofthe 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, 2007, our officers and directors and their affiliatesowned approximately 18% of the outstanding shares of our common stock.  As a result, our officers and directors areable to exert considerable influence over the outcome of any matters submittedto a vote of the holders of our common stock, including the election of ourBoard of Directors.  The voting power ofthese stockholders could prevent or frustrate attempts to effect a transactionthat is in the best interests of the other stockholders and could also discourageothers from seeking to purchase our common stock, which might depress the priceof our common stock.

 

**Item 1B.  UNRESOLVED STAFF COMMENTS**

 

None.

 

**Item 2.  PROPERTIES**

 

Following the sale ofInfoSpherix, the Company has relocated its corporate headquarters to a smallerfacility in Bethesda, Maryland.  TheCompany signed a lease termination agreement on its 51,625 square footBeltsville, Maryland facility on August 1, 2007, and on October 4,2007, signed a lease for the 5,000 square foot Bethesda facility.  Management believes the new facility will bemore suitable to housing the Company’s administrative and Health Sciencesconsulting services, while allowing adequate room for growth of the consultingservices.

 

In 2004, the Companysigned an agreement to lease 5,000 square feet of office, research lab andwarehouse space for BioSpherix in Annapolis, Maryland.  The lease expires June 30, 2009.  The capacity of the Annapolis facility isadequate for the Company’s current needs.

 

**Item 3.  LEGAL PROCEEDINGS**

 

Information required bythis Item 3 is included in Note 9 “Commitments and Contingencies” of the Notesto Financial Statements, included herein pursuant to Part II of this Form 10-K.

 

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

 

There were no matterssubmitted by the Company during the fourth quarter of 2007 to a vote ofsecurity holders through solicitation of proxies or otherwise.

 

10

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**PART II**

 

**Item 5.****        ****MARKET FOR REGISTRANT’S COMMONEQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.**

 

The Company’s commonstock is traded in the over-the-counter market and is quoted in the NASDAQGlobal Market System under the symbol SPEX. No cash dividends have been paid.

 

As of March 14,2008, the number of shareholders of record of the Company’s common stock wasapproximately 833.  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, 2007, based on thedaily closing prices as reported on the NASDAQ Global Market System:

 

| ** **       | ** ** | **High** | ** ** | **Low** | ** ** |
|------------------|------------|----------|------------|---------|------------|
| 1st Quarter 2007 |       | $        | 2.46       |    | $          | 1.81 |   |
| 2nd Quarter 2007 |       | $        | 2.84       |    | $          | 2.15 |   |
| 3rd Quarter 2007 |       | $        | 2.43       |    | $          | 1.58 |   |
| 4th Quarter 2007 |       | $        | 1.88       |    | $          | 1.11 |   |
|             |       |     |       |    |       |
| 1st Quarter 2006 |       | $        | 3.55       |    | $          | 2.08 |   |
| 2nd Quarter 2006 |       | $        | 2.88       |    | $          | 1.52 |   |
| 3rd Quarter 2006 |       | $        | 1.55       |    | $          | 1.20 |   |
| 4th Quarter 2006 |       | $        | 2.44       |    | $          | 1.33 |   |

 

At December 31,2007, the Company’s shareholders’ equity was $14.5 million.  No dividends were paid in 2007 or 2006.

 

The Company has a sharerepurchase program in place that initially authorized the purchase of up to$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 2007or 2006, and none is expected in 2008.

 

**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, 2007, as well as rights to acquireshares of Company Common Stock granted to the independent members of the Boardof Directors 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       |       | 202,800                                                                                               |       | $                                                                                     | 7.43       |                                                                                                                                                 | 681,400    |   |
| Equity  compensation plans not approved by securities holders |       | Options(1): 14,000                                                                                    |       | $                                                                                     | 6.35       |                                                                                                                                                 | N/A        |   |
| Total                                                         |       | 216,800                                                                                               |       | $                                                                                     | 7.36       |                                                                                                                                                 | 681,400    |   |

 

----

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

 

11

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**Item 7.****        ****MANAGEMENT’S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

**Overview**

 

Prior to August 15,2007, the Company operated via two principal segments, InfoSpherix andBioSpherix.  BioSpherix developsproprietary products for commercial applications.  InfoSpherix provided contact centerinformation and reservations services for government and industry.  On August 15, 2007, the Company soldInfoSpherix.  The sale allows Spherix tofocus substantially all of its efforts on the BioSpherix Division’sbiotechnology products, with the principal focus on the commercialization ofNaturlose as a drug for Type 2 diabetes. The historical operations of InfoSpherix are reported in theaccompanying financial statements as discontinued operations.

 

BioSpherix engages inproduct development, notably tagatose. The Company’s current focus is on the non-food use of tagatose, which wewill market under the name “Naturlose”. Our principal efforts have been to explore whether Naturlose is aneffective treatment for Type 2 diabetes. In April 2007, the Company commenced a Phase 3 clinical trial underan FDA Investigational New Drug (IND) application process for thispurpose.  As a result, the Companyexpects to incur substantial development costs in the next few years, withoutany substantial corresponding revenue.

 

In July 2007, theCompany started a new business when it entered into the Health Sciencesconsulting business to provide technical and regulatory consulting services tobiotechnology and pharmaceutical companies, as well as aiding the Company’s ownR&D activities.

 

**Resultsof Operations****3⁄4****2007 Compared with 2006**

 

**Revenueand Direct Costs**

 

The2007 revenue and direct contract costs primarily relate to the new HealthSciences consulting business launched in July 2007.  We generally provide our services on either afixed-price basis or on a “time and expenses” basis, charging hourly rates foreach staff member involved in a project, based on his or her skills andexperience.  Our engagement agreementstypically provide for monthly billing, require payment of our invoices withinthirty (30) days of receipt, and permit clients to terminate engagements at anytime.

 

**Selling,General and Administrative**

** **

Selling, general andadministrative expenses for continuing operations for the year ended 2007increased $1.5 million over those of the same periods in 2006.  The increase between years is the result of anumber of factors including increased accounting costs, legal fees, executivebonus and consulting costs, as well as certain costs such as insurance thatwere previously allocated over both entities before the August 15thsale of InfoSpherix, and that are now charged fully to Spherix.  Excluded from the above are costs directlyrelated to the discontinued segment.

 

**Researchand Development**

 

The Company’s R&Dexpenditures have significantly increased between years as a direct result ofthe Company’s Phase 3 clinical trial inthe use of Naturlose for the treatment of Type 2 diabetes, which beganin 2007.  The Phase 3 trial has been the primary focus of BioSpherix’s R&Dactivities for the year ended December 31,2007.  The first participantsbegan the Phase 3 clinical trial in April 2007.  More than 200 subjects, representing thedemographic mix in the U.S., will receive oral doses of Naturlose to test itsability to treat Type 2 diabetes and an equal amount will receive aplacebo.  A Phase 3 clinical trial, whichgathers evidence regarding efficacy and safety, is needed to evaluate theoverall benefit-risk relationship of new drugs proposed to the FDA.  The Company believes its chances for asuccessful outcome are enhanced by the widely demonstrated safety of theproduct.  Testing is scheduled to finishnear the end of 2009 at the earliest.  Ifthe trial is successful, it will likely take several months to compile the dataand submit a new drug application (“NDA”) to the FDA.  The FDA will then likely take up to a year torespond to the NDA.  Accordingly, we donot expect FDA approval before the end of 2010 at the earliest.

 

A smaller trial,contracted with the University of Maryland School of Dentistry, to conduct ahuman clinical trial on the oral anti-plaque efficacy of Naturlose, was alsoundertaken earlier this year and completed in July.  Initial

 

12

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results of the Universityof Maryland trial indicated no statistical significance and the Company willnot pursue further anti-plaque efficacy research.

 

**InterestIncome**

 

The increase in interestincome is a direct result of the proceeds from the sale of InfoSpherix, whichincreased the Company’s cash and cash equivalents balances.

 

**Income tax**

 

The Company’s net taxexpense was $815,000 in 2007 and consisted of $3.4 million allocated tocontinuing operations as a tax benefit and $4.2 million charged to discontinuedoperations as a tax expense.  For 2006,the Company’s net tax expense was $105,000 and consisted of $2.4 millionallocated to continuing operations as a tax benefit and $2.5 million charged todiscontinued operations as a tax expense.

 

**Discontinued Operations**

 

On August 15, 2007,the Company completed the sale of InfoSpherix for $17 million ($15 million atclosing and $2 million following a 15-month escrow period), pursuant to theStock Purchase Agreement dated June 25, 2007.  The $15 million sale proceeds were includedin the gain on sale of the discontinued segment at the time of closing in August 2007.  The $2 million escrow balance, less anyconditional offsets, will be recorded as a gain on sale of the discontinuedsegment when and if realized in November 2008.  The InfoSpherix segment comprised themajority of the Company’s operations prior to the sale.  The sale will allow Spherix to focussubstantially all of its efforts on the BioSpherix Division’s biotechnologyproducts, with the principal focus on the commercialization of Naturlose.

 

In October 2006, theCompany agreed to a $6 million settlement to end its longstanding legal disputewith the U.S. Department of Agriculture over the government’s award of theNational Recreation Reservation Service (NRRS) contract to a competitor ofInfoSpherix.  This amount is reported asother income of the discontinued segment.

 

The results of operationsof the discontinued InfoSpherix segment, including the costs to sell thesegment, are as follows:

** **

| ** **                                            | ** ** | **2007**    | ** ** | **2006**    | ** ** |
|-------------------------------------------------------|------------|-------------|------------|-------------|------------|
| Revenue                                               |       | $           | 15,371,000 |        | $          | 24,831,000 |   |
|                                                  |       |        |       |        |       |
| Direct cost and  operating expense                    |       | (13,202,000 | )          | (20,795,000 | )          |
| Selling, general  and administrative expense          |       | (1,749,000  | )          | (3,313,000  | )          |
| Interest revenue                                      |       | 170,000     |       | —      |       |
| Interest expense                                      |       | (21,000     | )          | (26,000     | )          |
| Other income                                          |       | —      |       | 6,000,000   |       |
| Gain on sale of  segment                              |       | 8,567,000   |       | —      |       |
| **Income  from discontinued operations before taxes** |       | $           | 9,136,000  |        | $          | 6,697,000 |   |

 

**Sales Backlog**

 

The Company’s backlog asof December 31, 2007, from the new Health Sciences consulting business wasapproximately $230,000.

 

**Critical Accounting Estimates**

** **

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States of America requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities andthe disclosure 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

 

13

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form the basis for makingjudgments regarding the carrying values of assets and liabilities and thereported amount of revenue and expenses. Actual results may differ substantially from these estimates.

 

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.

 

***Accounting for 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 to continue tomaintain a full valuation allowance on future tax benefits until an appropriatelevel of profitability is sustained, or we are able to develop tax strategiesthat would enable us to conclude that it is more likely than not that a portionof our deferred tax assets would be realizable.

 

***Long-Lived Assets and Other Intangible Assets***

*** ***

Long-lived assets andother 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 eventual disposition.

 

**NewAccounting Pronouncements**

** **

The Company adoptedFinancial Accounting Standards Board Interpretation No. 48, “Accountingfor Uncertainty in Income Taxes” (“FIN 48”) on January 1, 2007.  The Company recognized no adjustments relatedto the implementation FIN 48.  TheCompany’s policy is to recognize interest and penalties on tax liabilities asinterest expense.  At January 1,2007 and December 31, 2007, the Company had no unrecognized income taxbenefits and recognized no interest or penalties on income tax liabilities.

 

In September 2006,the Financial Accounting Standards Board (‘FASB”) issued Statement of FinancialAccounting Standards No. 157, “Fair Value Measurements” (“SFAS 157”).  SFAS 157 defines fair value, establishes aframework for measuring fair value, and expands disclosures about fair valuemeasurements.  We are required to adoptSFAS 157 effective January 1, 2008, with the exception of nonfinancialassets and nonfinancial liabilities.  Theeffective date of these items has been deferred to fiscal years beginning afterNovember 15, 2008.  We do not expectthe adoption of SFAS 157 to have a material affect on our financial position,results of operations or cash flows.

 

In February 2007,the FASB issued Statement of Financial Accounting Standards No. 159, “TheFair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”).  SFAS 159 permits entities to choose tomeasure many financial assets and liabilities at fair value. The fair valueoption may be applied, subject to certain exceptions, on an instrument byinstrument basis; is irrevocable; and is applied only to entire instruments andnot to portions of instruments.  SFAS 159is effective for our fiscal year beginning January 1, 2008.

 

In December 2007,the FASB issued Statement of Financial Accounting Standards No. 141(revised 2007) “Business Combinations” (“SFAS 141R”).    SFAS 141R establishes principles andrequirements in accounting for business combinations.   This Statement applies prospectively tobusiness combinations for which the acquisition date is on or after thebeginning of the first annual reporting period beginning on or after December 15,2008.

 

In March 2008, theFASB issued Statement of Financial Accounting Standards No. 161, “Disclosuresabout Derivative Instruments and Hedging Activities - an amendment of FASBStatement No. 133” (“SFAS 161). SFAS 161 requires enhanced disclosures about an entity’s derivative andhedging activities.  This Statement iseffective for financial statements issued for fiscal years and interim periodsbeginning after November 15, 2008. We do not expect the adoption of SFAS 161 to have a material affect onour financial position, results of operations or cash flows.

 

14

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**Liquidityand Capital Resources**

 

On June 25, 2007, aspart of the sale of InfoSpherix, the Company closed its line-of-credit with theBank.  Accordingly, we are operating ourBioSpherix efforts solely from the net proceeds we received from the sale ofInfoSpherix.  The newly launched HealthSciences business is not expected to generate any substantial positive cashflow in the next twelve (12) months.

 

Working capital as of December 31,2007, was $14.9 million, which represents a $4.1 million increase from workingcapital at December 31, 2006.  Theincrease in working capital is directly related to the $15 million proceedsfrom the sale of InfoSpherix less the Company’s operating costs, which includedapproximately $5.9 million for the Company’s R&D activities.

 

Spherix expects to expendapproximately $5 million over the next year in costs related to the Phase 3clinical trial and other R&D activity. The clinical trial is expected to be completed near the end of 2009 atthe earliest.  The Company intends to financethe BioSpherix activities through proceeds from the sale of InfoSpherix.  While the Company completes its Phase 3trial, it will be taking other steps to prepare for commercialization ofNaturlose as a treatment for Type 2 diabetes on the assumption that the trialswill be successful.  These steps includeadditional dose range testing, exploring manufacturing alternatives and seekingmarketing assistance.  The Company’s goalremains to attempt to attract a pharmaceutical company to purchase or licensethe technology at the earliest practicable stage.

 

In the event the Companyneeds additional funds, it may seek other financing, including possible sale ofadditional shares of its common stock.

 

The Company isinvestigating growing its Health Sciences Consulting business by addingprofessional personnel and/or acquiring another consulting business.  Given the limited resources available to theCompany, and the expected costs of the ongoing biotechnology efforts, theCompany will likely explore debt financing for any such expansion efforts.

 

Cash flow for the yearended December 31, 2007, reflects a net cash inflow of $6.0 million,consisting of $8.6 million used in operating activities, $13.9 million providedby investing activities, and $655,000 provided by financing activities.  The increase in cash used by operatingactivities of the continuing operations in 2007 from that of the prior year isprimarily related to the cost of the Phase 3 clinical trial.  The change in cash provided by investingactivities is directly related to the proceeds from the sale ofInfoSpherix.  Cash flows from financingactivities in 2007 reflect proceeds from an a Standby Equity DistributionAgreement (SEDA) which has been terminated and is no longer available.

 

Continued progress on theclinical trial of Naturlose as a treatment of Type 2 diabetes and on the otherinitiatives described above is dependent upon many factors including, but notlimited to, the Company having sufficient funds and resources.  The total cost of completing the Phase 3trial is difficult to determine and can be affected by a number of factors,including successful restructuring of the oversight responsibilities andcompletion of the study in a timely manner. Although it cannot be certain, the Company’s current funds on hand maybe sufficient for it to complete the study and are believed to be sufficient tomeet all of the Company’s short-term obligations; as a result, management doesnot at present intend to raise additional funds through the capital marketsunless necessary.  The Company alsobelieves that, if raising additional funds at some point becomes desirable, theideal timing for this would be after the Company has obtained results from thedose range study or additional information from the market research.

 

**Trendsand Outlooks**

 

·                  Costs of conducting the Phase 3 trialhave substantially increased as we have obtained further direction from the FDAconcerning the processes to be employed in the trial.  We have undertaken certain dose range, marketingand manufacturing studies/analyses to increase our chances of attracting apurchaser/licensee.  The Company expectsto spend approximately $5 million in R&D costs over the next year.

 

·                  The Company is currently evaluating theperformance of certain contractors performing our Phase 3 clinical trial.  We are attempting to minimize further delaysin the Phase 3 trial and to further reduce the cost of the Phase 3 trial.

 

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·                  On August 15, 2007, the Companyclosed on the sale of InfoSpherix for $17 million.  The Company received $15 million at closingand will receive $2 million following a 15-month escrow period, assuming noindemnification claims.

 

·                  In conjunction with the August 15,2007 closing, noted above, Richard C. Levin, Chief Executive Officer, Presidentand Chief Financial Officer resigned from the Company, and Claire L. Kruger waselected as the new Chief Executive Officer and Chief Operating Officer.

 

·                  With the addition of Claire L. Kruger tothe Company, Spherix has launched a Health Sciences consulting business line toprovide technical and regulatory consulting services to biotechnology andpharmaceutical companies, as well as aiding the Company’s own R&Dactivities.

 

·                  The Company has relocated its corporateheadquarters to a smaller facility in Bethesda, Maryland.

 

·                  We will continue to search for apurchaser/licensee of Naturlose as a prospective Type 2 diabetes drug.

 

**Item8.  FINANCIAL STATEMENTS ANDSUPPLEMENTARY DATA**

 

Financial statements andsupplementary data required by this Item 8 follow.

** **

**Index toFinancial Statements**
| ** **                                                                                                            | **Page** |
|-----------------------------------------------------------------------------------------------------------------------|----------|
|                                                                                                                  |     |
| Report of Independent  Registered Public Accounting Firm                                                              | 17       |
| Consolidated  Statements of Operations for the years ended December 31, 2007 and 2006                            | 18       |
| Consolidated Balance  Sheets as of December 31, 2007 and 2006                                                    | 19       |
| Consolidated  Statements of Changes in Stockholders’ Equity for the years ended  December 31, 2007 and 2006 | 20       |
| Consolidated  Statements of Cash Flows for the years ended December 31, 2007 and 2006                            | 21       |
| Notes to Consolidated  Financial Statements                                                                           | 22       |

 

16

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**REPORT OF INDEPENDENT REGISTEREDPUBLIC ACCOUNTING FIRM**

 

Board of Directors and Shareholders

Spherix Incorporated

 

We have audited the accompanying consolidatedbalance sheets of Spherix Incorporated (a Delaware corporation) and subsidiary(the Company) as of December 31, 2007 and 2006, and the relatedconsolidated statements of operations, changes in stockholders’ equity, andcash flows for each of the two years in the period ended December 31,2007.**These financial statements are theresponsibility of the Company’s management.**Ourresponsibility is to express an opinion on these financial statements based onour audits.

 

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States).**Those standards require that we plan and perform the auditto obtain reasonable assurance about whether the financial statements are freeof material misstatement.**The Company isnot required to have, nor were we engaged to perform an audit of its internalcontrol over financial reporting.**Our auditincluded consideration of internal control over financial reporting as a basisfor designing audit procedures that are appropriate in the circumstances, butnot for 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 alsoincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements, assessing the accounting principles usedand significant estimates made by management, as well as evaluating the overallfinancial statement presentation.**We believethat our audits provide a reasonable basis for our opinion.

 

In our opinion, the financial statementsreferred to above present fairly, in all material respects, the financialposition of Spherix Incorporated as of December 31, 2007 and 2006, and theresults of its operations and its cash flows for each of the two years in theperiod ended December 31, 2007 in conformity with accounting principlesgenerally accepted in the United States of America.

 

/s/ GRANT THORNTON LLP

 

Baltimore, Maryland

April 3, 2008

 

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** **

**SpherixIncorporated**

**Consolidated Statements of Operations**

**For theyears ended December 31, 2007 and 2006**

 
| ** **                                   | ** ** | **2007**   | ** ** | **2006**   | ** ** |
|----------------------------------------------|------------|------------|------------|------------|------------|
|                                         |       |       |       |       |       |
| **Revenue**                                  |       | $          | 154,698    |       | $          | 6,935 |   |
|                                         |       |       |       |       |       |
| Operating expense                            |       |       |       |       |       |
| Direct costs                                 |       | 54,292     |       | —     |       |
| Selling, general  and administrative expense |       | 3,872,041  |       | 2,326,235  |       |
| Research and  development expense            |       | 5,865,426  |       | 883,608    |       |
|                                         |       |       |       |       |       |
| Total operating  expense                     |       | 9,791,759  |       | 3,209,843  |       |
|                                         |       |       |       |       |       |
| Loss from operations                         |       | (9,637,061 | )          | (3,202,908 | )          |
|                                         |       |       |       |       |       |
| Interest income                              |       | 378,055    |       | 160,803    |       |
| Interest expense                             |       | (77        | )          | (37,172    | )          |
|                                         |       |       |       |       |       |
| Loss from continuing operations before taxes |       | (9,259,083 | )          | (3,079,277 | )          |
| Income tax  benefit                          |       | 3,408,015  |       | 2,379,273  |       |
|                                         |       |       |       |       |       |
| **Loss from continuing operations**          |       | (5,851,068 | )          | (700,004   | )          |
|                                         |       |       |       |       |       |
| Discontinued operations                      |       |       |       |       |       |
| Income from discontinued  operations         |       | 9,136,047  |       | 6,697,208  |       |
| Income tax  expense                          |       | (4,223,353 | )          | (2,484,323 | )          |
| Income from discontinued operations          |       | 4,912,694  |       | 4,212,885  |       |
|                                         |       |       |       |       |       |
| **Net (loss) income**                        |       | $          | (938,374   | )          | $          | 3,512,881 |   |
|                                         |       |       |       |       |       |
| Net (loss) income per share, basic           |       |       |       |       |       |
| Continuing  operations                       |       | $          | (0.41      | )          | $          | (0.05 | ) |
| Discontinued  operations                     |       | $          | 0.35       |       | $          | 0.31 |   |
| Net (loss)  income per share, basic          |       | $          | (0.07      | )          | $          | 0.26 |   |
|                                         |       |       |       |       |       |
| Net (loss) income per share, diluted         |       |       |       |       |       |
| Continuing  operations                       |       | $          | (0.41      | )          | $          | (0.05 | ) |
| Discontinued  operations                     |       | $          | 0.35       |       | $          | 0.31 |   |
| Net (loss)  income per share, basic          |       | $          | (0.07      | )          | $          | 0.26 |   |
|                                         |       |       |       |       |       |
| Weighted average shares outstanding, basic   |       | 14,215,289 |       | 13,578,363 |       |
| Weighted average shares outstanding, diluted |       | 14,215,289 |       | 13,578,363 |       |

 

The accompanyingnotes to financial statements are an integral part of these financialstatements.

 

18

----

 

**SpherixIncorporated**

**Consolidated Balance Sheets**

**As of December 31,2007 and 2006**

 
| ** **                                                                                                                                                                                | ** ** | **2007**    | ** ** | **2006**    | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------|------------|-------------|------------|
| **ASSETS**                                                                                                                                                                                |       |        |       |        |       |
| Current assets                                                                                                                                                                            |       |        |       |        |       |
| Cash and cash  equivalents                                                                                                                                                                |       | $           | 15,839,959 |        | $          | 9,863,771 |   |
| Trade accounts  receivable                                                                                                                                                                |       | 38,581      |       | —      |       |
| Other  receivables                                                                                                                                                                        |       | 167,229     |       | 479         |       |
| Deferred tax  asset                                                                                                                                                                       |       | —      |       | 231,876     |       |
| Prepaid expenses  and other assets                                                                                                                                                        |       | 372,242     |       | 366,147     |       |
| Assets of  segment held for sale, current                                                                                                                                                 |       | —      |       | 3,543,703   |       |
| Total current  assets                                                                                                                                                                     |       | 16,418,011  |       | 14,005,976  |       |
|                                                                                                                                                                                      |       |        |       |        |       |
| Property and  equipment, net                                                                                                                                                              |       | 55,088      |       | 217,143     |       |
| Patents, net of  accumulated amortization of $110,599 and $134,962                                                                                                                        |       | 32,371      |       | 106,633     |       |
| Deposit                                                                                                                                                                                   |       | 35,625      |       | —      |       |
| Assets of  segment held for sale, non-current                                                                                                                                             |       | —      |       | 4,278,050   |       |
| Total assets                                                                                                                                                                              |       | $           | 16,541,095 |        | $          | 18,607,802 |   |
|                                                                                                                                                                                      |       |        |       |        |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                                            | ** ** | ** **  | ** ** | ** **  | ** ** |
| Current  liabilities                                                                                                                                                                      |       |        |       |        |       |
| Accounts payable  and accrued expenses                                                                                                                                                    |       | $           | 1,046,537  |        | $          | 230,432 |   |
| Accrued salaries  and benefits                                                                                                                                                            |       | 362,334     |       | 275,984     |       |
| Income taxes  payable                                                                                                                                                                     |       | 50,738      |       | —      |       |
| Deferred revenue                                                                                                                                                                          |       | 15,165      |       | —      |       |
| Liabilities of  segment held for sale, current                                                                                                                                            |       | —      |       | 2,633,977   |       |
| Total current  liabilities                                                                                                                                                                |       | 1,474,774   |       | 3,140,393   |       |
|                                                                                                                                                                                      |       |        |       |        |       |
| Deferred  compensation                                                                                                                                                                    |       | 609,000     |       | 495,000     |       |
| Deferred rent                                                                                                                                                                             |       | 6,531       |       | 156,306     |       |
| Liabilities of  segment held for sale, non-current                                                                                                                                        |       | —      |       | 265,506     |       |
| Total  liabilities                                                                                                                                                                        |       | 2,090,305   |       | 4,057,205   |       |
|                                                                                                                                                                                      |       |        |       |        |       |
| 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; 14,399,140 and 13,892,642  issued, 14,318,702 and 13,812,204 outstanding at December 31, 2007 and  2006, respectively |       | 71,996      |       | 69,463      |       |
| Paid-in capital  in excess of par value                                                                                                                                                   |       | 27,508,418  |       | 26,672,384  |       |
| Treasury stock,  80,438 shares, at cost at December 31, 2007 and 2006, respectively                                                                                                  |       | (464,786    | )          | (464,786    | )          |
| Accumulated  deficit                                                                                                                                                                      |       | (12,664,838 | )          | (11,726,464 | )          |
| Total  stockholders’ equity                                                                                                                                                          |       | 14,450,790  |       | 14,550,597  |       |
| Total liabilities  and stockholders’ equity                                                                                                                                          |       | $           | 16,541,095 |        | $          | 18,607,802 |   |

 

The accompanyingnotes to financial statements are an integral part of these financialstatements.

 

19

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** **

**SpherixIncorporated**

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

**For theyears ended December 31, 2007 and 2006**

 
| ** **                                      | ** ** | **Common Stock** | ** ** | **Paid-in** | ** ** | **Treasury Stock**           | ** ** | **Retained Earnings** | ** ** | ** ** | ** ** |
|-------------------------------------------------|------------|------------------|------------|-------------|------------|------------------------------|------------|-----------------------|------------|------------|------------|
| ** **                                      | ** ** | **Shares**       | ** ** | **Amount**  | ** ** | **Capital in Excess of Par** | ** ** | **Shares**            | ** ** | **Amount** | ** ** | **(Accumulated Deficit)** | ** ** | **Stockholders’ Equity** | ** ** |
| 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 |   |
| ** **                                      | ** ** | ** **       | ** ** | ** **  | ** ** | ** **                   | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Issuance of  common stock                       |       |             |       |        |       |                         |       |                  |       |       |       |   |   |   |   |
| Sale of common  stock in private placement, net |       | 442,358          |       | 2,212       |       | 755,288                      |       | —                |       | —     |       | — |   | 757,500 |   |
| Stock-based  compensation                       |       | 64,140           |       | 321         |       | 80,746                       |       | —                |       | —     |       | — |   | 81,067 |   |
| Net loss                                        |       | —           |       | —      |       | —                       |       | —                |       | —     |       | (938,374 | ) | (938,374 | ) |
| ** **                                      | ** ** | ** **       | ** ** | ** **  | ** ** | ** **                   | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Balance,  December 31, 2007                |       | 14,399,140       |       | $           | 71,996     |                         | $          | 27,508,418            |       | 80,438     |       | $ | (464,786 | ) | $ | (12,664,838 | ) | $ | 14,450,790 |   |

 

The accompanyingnotes to financial statements are an integral part of these financialstatements.

 

20

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** **

**SpherixIncorporated**

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

**For the years ended December 31,2007 and 2006**

 
| ** **                                                                                           | ** ** | **2007**   | ** ** | **2006**   | ** ** |
|------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| **Cash flows from operating activities**                                                             | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net (loss) income                                                                                    |       | $          | (938,374   | )          | $          | 3,512,881 |   |
| Adjustments to  reconcile net (loss) income to net cash (used) provided by in operating  activities: |       |       |       |       |       |
| Income from  discontinued operations                                                                 |       | (4,912,694 | )          | (4,212,885 | )          |
| Income tax  benefit                                                                                  |       | (3,408,015 | )          | (2,379,273 | )          |
| Depreciation and  amortization                                                                       |       | 210,417    |       | 128,231    |       |
| Patent write-off                                                                                     |       | 51,158     |       | —     |       |
| Stock-based  compensation                                                                            |       | 81,067     |       | 84,616     |       |
| Changes in  assets and liabilities:                                                                  |       |       |       |       |       |
| Receivables                                                                                          |       | (205,331   | )          | (308       | )          |
| Prepaid expenses  and other assets                                                                   |       | (41,720    | )          | (99,214    | )          |
| Accounts payable  and accrued expenses                                                               |       | 924,221    |       | 144,747    |       |
| Deferred rent                                                                                        |       | (149,775   | )          | (39,953    | )          |
| Deferred  compensation                                                                               |       | 114,000    |       | (16,325    | )          |
| Deferred revenue                                                                                     |       | 15,165     |       | —     |       |
| Net cash used in  activities of continuing operations                                                |       | (8,259,881 | )          | (2,877,483 | )          |
| Net cash (used  in) provided by activities of discontinued operations                                |       | (368,733   | )          | 8,986,154  |       |
| Net cash (used in) provided by operating activities                                                  |       | (8,628,614 | )          | 6,108,671  |       |
|                                                                                                 |       |       |       |       |       |
| **Cash flows from investing activities**                                                             | ** ** | ** ** | ** ** | ** ** | ** ** |
| Proceeds from  the sale of subsidiary                                                                |       | 15,291,000 |       | —     |       |
| Purchase of  property and equipment                                                                  |       | (25,258    | )          | (3,465     | )          |
| Proceeds from  maturity of certificate of deposit                                                    |       | —     |       | 2,000,000  |       |
| Net cash  provided by investing activities of continuing operations                                  |       | 15,265,742 |       | 1,996,535  |       |
| Net cash used in  investing activities of discontinued operations                                    |       | (1,316,588 | )          | (1,410,316 | )          |
| Net cash provided by investing activities                                                            |       | 13,949,154 |       | 586,219    |       |
|                                                                                                 |       |       |       |       |       |
| **Cash flows from financing activities**                                                             | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net change on  bank line of credit                                                                   |       | —     |       | (1,449,318 | )          |
| Net change in  book overdraft                                                                        |       | 28,972     |       | (43,753    | )          |
| Proceeds from  issuance of common stock, net                                                         |       | 757,500    |       | 3,091,584  |       |
| Cost of issuance  of common stock                                                                    |       | —     |       | (17,704    | )          |
| Net cash  provided by financial activities of continuing operations                                  |       | 786,472    |       | 1,580,809  |       |
| Net cash used in  financing activities of discontinued operations                                    |       | (130,824   | )          | (541,144   | )          |
| Net cash provided by financing activities                                                            |       | 655,648    |       | 1,039,665  |       |
|                                                                                                 |       |       |       |       |       |
| **Net increase in cash and cash equivalents**                                                        |       | 5,976,188  |       | 7,734,555  |       |
| **Cash and cash equivalents, beginning of year**                                                     |       | 9,863,771  |       | 2,129,216  |       |
| ** **                                                                                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Cash and cash equivalents, end of year**                                                           |       | $          | 15,839,959 |       | $          | 9,863,771 |   |
|                                                                                                 |       |       |       |       |       |
| **Supplemental cash flow information**                                                               | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest paid                                                                                        |       | $          | 77         |       | $          | 37,172 |   |

 

The accompanyingnotes to financial statements are an integral part of these financialstatements.

 

21

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**SpherixIncorporated**

**Notes to Financial Statements**

 

----

 

**1.****                                     ****Summary of Significant AccountingPolicies**

 

***Natureof Business***

*** ***

Prior to August 15,2007, the Company operated via two principal segments, InfoSpherix andBioSpherix.  BioSpherix developsproprietary products for commercial applications.  InfoSpherix provided contact centerinformation and reservations services for government and industry.  On August 15, 2007, the Company soldInfoSpherix.  The sale will allow Spherixto focus substantially all of its efforts on the BioSpherix Division’sbiotechnology products, with the principal focus on the commercialization ofNaturlose.  The operations of InfoSpherixare reported in the accompanying financial statements as discontinuedoperations.

 

BioSpherix engages inproduct development, notably tagatose. The Company’s current focus is on the non-food use of tagatose, which weplan to market under the name “Naturlose”. Our principal efforts have been to explore whether Naturlose is aneffective treatment for Type 2 diabetes. In April 2007, the Company commenced a Phase 3 trial for thispurpose.

 

In July 2007, theCompany entered into the Health Sciences consulting business to providetechnical and regulatory consulting services to biotechnology andpharmaceutical companies, as well as aiding the Company’s own R&Dactivities.

 

***Basis of Presentation***

 

The consolidatedfinancial statements have historically included the accounts of both SpherixIncorporated and InfoSpherix Incorporated (collectively, the “Company”).  All intercompany balances and transactionshave been eliminated.

 

On August 15, 2007,the Company sold InfoSpherix. Accordingly, the operations of InfoSpherix are reported in theaccompanying financial statements as discontinued operations in theConsolidated Statement of Operations, and the assets and liabilities of thediscontinued segment held for sale are separately identified in the Company’sConsolidated Balance Sheet.  Theactivities of the “BioSpherix” Division continue to operate through SpherixIncorporated.  In July 2007, Spherixentered into the Health Sciences consulting business to provide technical andregulatory consulting services to biotechnology and pharmaceutical companies,as well as aiding the Company’s own R&D activities.

 

***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.

 

***Cash Equivalents***

 

The Company considers allhighly liquid investments with original maturities of three months or less tobe cash equivalents.  At December 31,2007, the Company had approximately $15.8 million invested in funds with a maturityof three months or less, which are included as cash and cash equivalents.  The Company maintains cash balances atseveral banks.  Accounts at eachinstitution are insured by the Federal Deposit Insurance Corporation up to$100,000.  At December 31, 2007, theCompany’s cash and cash equivalent in excess of the FDIC limits was $15.7million.

 

22

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**SpherixIncorporated**

**Notes toFinancial Statements**

 

----

 

***Concentrations***

 

During 2007, revenue fromfour Health Sciences clients accounted for 86% of the Company’s total revenue.

 

***Property and Equipment and Depreciation***

 

Property and equipmentare stated at cost and consist of office furniture and equipment, computerhardware and software, and leasehold improvements.  The Company computes depreciation andamortization under the straight-line method and typically over the followingestimated useful lives of the related assets:

 

Office furniture andequipment                             3 to 10 years

Computer hardware andsoftware                3 to 5 years

 

Leasehold improvementsare depreciated or amortized over the lesser of the term of the related leaseor the estimated useful lives of the assets (generally 5 to 10 years).  Major additions, improvements and renewals arecapitalized and ordinary repairs, maintenance, and renewals are expensed in theyear incurred.  Gains or losses from the saleor retirement of property and equipment result from the difference betweensales proceeds (if any) and the assets’ net book value, and are recorded in theconsolidated Statement of Operations.

 

***Patent Costs***

 

Legal costs incurred inconnection with patent applications and costs of acquiring patents arecapitalized when incurred.  When patentsare granted, costs are amortized over a term representing the lesser of thelife of the patent or the projected sales period of the product or process.

 

***Revenue Recognition***

 

Revenue is recognizedwhen services have been rendered and collectability is reasonably assured.  On time and expense contracts revenue isrecognized at contractually agreed-upon rates based upon direct labor hoursexpended and other direct costs incurred. Revenue for fixed-price contracts is recognized as deliverables ormilestones are completed.  Losses, ifany, on contracts are recorded during the period when first determined.

 

***Direct Costs***

 

The Company’s directcosts consist primarily of labor costs.

 

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

 

                The Company’s selling, general and administrativeexpenses consist primarily of executive management salaries and fringebenefits, sales and marketing costs, finance and accounting, human resources,as well as general corporate costs and costs related to being a public company.

 

***Researchand Development Costs***

 

Research and developmentcosts are charged to operations as incurred.

 

***Income Taxes***

 

Deferred income taxes arerecognized for the tax consequences in future years of differences between thetax bases of assets and liabilities and their financial reporting amounts ateach year end, based on enacted tax laws and statutory tax rates applicable tothe periods in which the differences are expected to affect taxableincome.  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 current taxprovision for the period and the change during the period in deferred taxassets and liabilities.

 

The Company’s policy isto recognize interest and penalties on tax liabilities as interestexpense.  At January 1, 2007 and December 31,2007, the Company had no unrecognized income tax benefits and recognized nointerest or penalties on income tax liabilities.

 

23

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**SpherixIncorporated**

**Notes toFinancial Statements**

 

----

 

***Discontinued operations***

 

On August 15, 2007,the Company completed the sale of InfoSpherix for $17 million ($15 million atclosing and $2 million following a 15-month escrow period), pursuant to theStock Purchase Agreement dated June 25, 2007.  The $15 million sale proceeds were includedin the gain on sale of the discontinued segment at the time of closing in August 2007.  The $2 million escrow balance, less anyconditional offsets, will be recorded as a gain on sale of the discontinuedsegment when and if realized in November 2008.  The InfoSpherix segment comprised themajority of the Company’s operations prior to the sale.  The sale will allow Spherix to focussubstantially all of its efforts on the BioSpherix Division’s biotechnologyproducts, with the principal focus on the commercialization of Naturlose.

 

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 a competitor ofInfoSpherix.  This amount is reported asother income of the discontinued segment.

 

The results of operationsof the discontinued InfoSpherix segment, including the costs to sell thesegment, are as follows:

 

| ** **                                            | ** ** | **2007**    | ** ** | **2006**    | ** ** |
|-------------------------------------------------------|------------|-------------|------------|-------------|------------|
| Revenue                                               |       | $           | 15,371,000 |        | $          | 24,831,000 |   |
|                                                  |       |        |       |        |       |
| Direct cost and  operating expense                    |       | (13,202,000 | )          | (20,795,000 | )          |
| Selling, general  and administrative expense          |       | (1,749,000  | )          | (3,313,000  | )          |
| Interest revenue                                      |       | 170,000     |       | —      |       |
| Interest expense                                      |       | (21,000     | )          | (26,000     | )          |
| Other income                                          |       | —      |       | 6,000,000   |       |
| Gain on sale of  segment                              |       | 8,567,000   |       | —      |       |
| **Income  from discontinued operations before taxes** | ** ** | $           | 9,136,000  | ** **  | $          | 6,697,000 | ** ** |

 

***Fair Value Information***

 

The estimated fair valueof the Company’s financial instruments, which include cash, receivables, andaccounts payable reported in the Consolidated Balance Sheet, approximate theircarrying value given their short maturities.

 

***Accounting for Stock-Based Compensation***

 

Effective January 1,2006, the Company adopted Statement of Financial Accounting Standards No. 123(R) “Share-BasedPayment” (FAS 123R), which requires the measurement of all employee share-basedpayments to employees, including grants of employee stock options, using afair-value based method and the recording of such expense in the consolidatedstatement of operations.  The Companyuses a Black-Scholes option pricing model and upon adoption there were nounvested options outstanding.  For eachof the years ended December 31, 2007 and 2006, the Company recognized$24,000 in stock based compensation expense relating to 59,000 stock optionsawarded in February 2006.  Theeffect of adopting FAS 123R increased the loss from operations, the loss fromcontinuing operations before taxes, the loss from continuing operations, andthe net loss by $24,000 for each of the years ended December 31, 2007 and2006, respectively, and had no effect on basic and diluted loss per share, netcash flow from operations or net cash flow from financing activities for 2007and 2006.

 

***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 31,2007, the Company had outstanding 216,800 options, none of which were assumedlikely to be exercised because the fair market price is below the exercise

 

24

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**SpherixIncorporated**

**Notes toFinancial Statements**

 

----

 

price.  Diluted net loss per common share has beencomputed by dividing net loss by the weighted-average number of common sharesoutstanding without an assumed increase in common shares outstanding for commonstock equivalents, as common stock equivalents are antidilutive.

 

**New Accounting Pronouncements**

** **

The Company adoptedFinancial Accounting Standards Board Interpretation No. 48, “Accountingfor Uncertainty in Income Taxes” (“FIN 48”) on January 1, 2007.  The Company recognized no adjustments relatedto the implementation FIN 48.  TheCompany’s policy is to recognize interest and penalties on tax liabilities asinterest expense.  At January 1,2007 and December 31, 2007, the Company had no unrecognized income taxbenefits and recognized no interest or penalties on income taxliabilities.  See Note 8 “Income Taxes”.

 

In September 2006, theFinancial Accounting Standards Board (‘FASB”) issued Statement of FinancialAccounting Standards No. 157, “Fair Value Measurements” (“SFAS 157”).  SFAS 157 defines fair value, establishes aframework for measuring fair value, and expands disclosures about fair valuemeasurements.  We are required to adoptSFAS 157 effective January 1, 2008, with the exception of nonfinancialassets and nonfinancial liabilities.  Theeffective date of these items has been deferred to fiscal years beginning afterNovember 15, 2008.  We do not expectthe adoption of SFAS 157 to have a material affect on our financial position,results of operations or cash flows.

 

In February 2007,the FASB issued Statement of Financial Accounting Standards No. 159, “TheFair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”).  SFAS 159 permits entities to choose tomeasure many financial assets and liabilities at fair value. The fair valueoption may be applied, subject to certain exceptions, on an instrument by instrumentbasis; is irrevocable; and is applied only to entire instruments and not toportions of instruments.  SFAS 159 iseffective for our fiscal year beginning January 1, 2008.  We do not expect the adoption of SFAS 159 tohave a material affect on our financial position, results of operations or cashflows.

 

In December 2007,the FASB issued Statement of Financial Accounting Standards No. 141(revised 2007) “Business Combinations” (“SFAS 141R”).    SFAS 141R establishes principles andrequirements in accounting for business combinations.   This Statement applies prospectively tobusiness combinations for which the acquisition date is on or after thebeginning of the first annual reporting period beginning on or after December 15,2008. We do not expect the adoption of SFAS 141R to have a material affect onour financial position, results of operations or cash flows.

 

In March 2008, theFASB issued Statement of Financial Accounting Standards No. 161, “Disclosuresabout Derivative Instruments and Hedging Activities - an amendment of FASBStatement No. 133” (“SFAS 161). SFAS 161 requires enhanced disclosures about an entity’s derivative andhedging activities.  This Statement iseffective for financial statements issued for fiscal years and interim periodsbeginning after November 15, 2008. We do not expect the adoption of SFAS 161 to have a material affect onour financial position, results of operations or cash flows.

 

**2.****                                     ****Allowance for Doubtful Accounts**

 

Management regularlyreviews accounts receivables for uncollectible and potentially uncollectibleaccounts, and when necessary establishes an allowance for doubtfulaccounts.  An allowance for doubtfulaccounts from continuing operations was not deemed necessary at December 31,2007 and 2006.

 

**3.****                                     ****Property and Equipment**

 

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

 

| ** **                                | ** ** | **2007** | ** ** | **2006** | ** ** |
|-------------------------------------------|------------|----------|------------|----------|------------|
| Computers                                 |       | $        | 12,000     |     | $          | 3,000 |   |
| Office furniture and equipment            |       | 94,000   |       | 84,000   |       |
| Leasehold improvements                    |       | 549,000  |       | 545,000  |       |
| Total cost                                |       | 654,000  |       | 632,000  |       |
| Accumulated depreciation and amortization |       | (599,000 | )          | (415,000 | )          |
| Property and equipment, net               |       | $        | 55,000     |     | $          | 217,000 |   |

 

25

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**SpherixIncorporated**

**Notes toFinancial Statements**

 

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The Company’sdepreciation expense for the years ended December 31, 2007 and 2006 was$187,000 and $100,000, respectively.

 

**4.****                                     ****Intangible Assets**

 

The Company’samortization expense for the years ended December 31, 2007 and 2006 was$23,000 and $28,000, respectively.  TheCompany’s future amortization over the next five years based on its intangibleassets at December 31, 2007 are as follows:

 

| **Year** | ** ** | **Amortization Expense** | ** ** |
|----------|------------|--------------------------|------------|
| 2008     |       | $                        | 8,000      |   |
| 2009     |       | $                        | 5,000      |   |
| 2010     |       | $                        | 5,000      |   |
| 2011     |       | $                        | 5,000      |   |
| 2012     |       | $                        | 1,000      |   |

 

**5.****                                     ****Line of Credit**

 

On June 25, 2007, aspart of the Stock Purchase Agreement to sell InfoSpherix, the Company agreed toterminate the InfoSpherix line-of-credit with Bank of America (“the Bank”).  Accordingly, the Company has closed theline-of-credit with the Bank.

 

**6.****                                     ****Accounts Payable and AccruedExpenses**

 

Accounts payable andaccrued expenses consisted of the following at December 31:

 

| ** **       | ** ** | **2007**   | ** ** | **2006**   | ** ** |
|------------------|------------|------------|------------|------------|------------|
| ** **       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Accounts payable |       | $          | 232,000    |       | $          | 131,000 |   |
| Accrued expenses |       | 780,000    |       | 93,000     |       |
| Book overdraft   |       | 35,000     |       | 6,000      |       |
|             |       | $          | 1,047,000  |       | $          | 230,000 |   |

 

**7.**                                      Stockholders’ Equity

** **

***PrivatePlacements***

** **

During 2007 and 2006, theCompany sold 442,358 and 819,453 shares of common stock for an additional$758,000 and $1.9 million in proceeds under the July 22, 2005, StandbyEquity Distribution Agreement (“SEDA”).  The SEDA ended on October 12, 2007.

 

On March 9, 2006, inexchange for the Company’s agreement to reduce the exercise price to $2.04 pershare, an institutional investor (“the Investor”) agreed to exercise theremainder of its warrants for the purchase of 585,973 shares of common stockfor total proceeds of approximately $1.2 million.  In connection with these warrants, theInvestor agreed that it would not exercise any of the warrants to the extentthat it would acquire shares of Common Stock exceeding 9.9% of the outstandingCommon Stock, nor would it knowingly sell shares to anyone to the extent thattheir holdings in the Company would exceed 4.9% of the outstanding CommonStock.  The warrants and shares of CommonStock were issued in transactions exempt from Registration pursuant to Section 4(2) ofthe Securities Act.  The Company hasregistered the shares issuable upon exercise of the warrants for resale by theinstitutional Investor.

 

***RestrictedStock***

 

In August 2007, theCompany granted 30,000 and 15,000 shares in restricted stock as part of theemployment agreements for the Company’s Chief Executive Officer andPresident.  The fair value of the stockwas $55,800 and $30,000, which will be recognized as compensation expense overthe respective vesting periods of two and one years.  During the same month the Company also issuedto its independent board of directors 19,140 shares of restricted stock

 

26

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**SpherixIncorporated**

**Notes toFinancial Statements**

 

----

 

with a fair value of$40,000, which was recognized as compensation expense in August 2007.  The fair value of the above stock awards wasbased on the closing market price on the date of grant.

 

***Stock Option 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, 59,000 non-qualified stockoptions were granted under the Plan, none in 2007.  At December 31, 2007, 681,400 optionswere available for grant under the Plan.

 

Activity for the twoyears ended December 31, 2007, for all option grants is shown below:

 

| ** **                                                      | ** ** | **2007  Shares** | ** **  | **2007  Weighted  Average  Exercise  Price** | ** ** | **2006  Shares** | ** ** | **2006  Weighted  Average  Exercise  Price** | ** ** |
|-----------------------------------------------------------------|------------|------------------|-------------|----------------------------------------------|------------|------------------|------------|----------------------------------------------|------------|
| Outstanding at beginning of year                                |       | 501,100          |        | $                                            | 7.11       |             | 507,200    |                                         | $          | 7.73 |   |
| Granted                                                         |       | —           |        | $                                            | —     |             | 59,000     |                                         | $          | 2.20 |   |
| Exercised                                                       |       | —           |        | $                                            | —     |             | —     |                                         | $          | — |   |
| Expired or  forfeited                                           |       | (284,300         | )           | $                                            | 6.91       |             | (65,100    | )                                            | $          | 7.51 |   |
| Outstanding at end of year                                      |       | 216,800          |        | $                                            | 7.36       |             | 501,100    |                                         | $          | 7.11 |   |
|                                                            |       |             |        |                                         |       |             |       |                                         |       |
| Options exercisable at end of year                              |       | 214,550          |        |                                         |       | 467,100          |       |                                         |       |
| Weighted-average  fair value of options granted during the year |       | $                | —      |                                         |       |             | $          | 1.88                                         |       |   |   |
|                                                            |       |             |        |                                         |       |             |       |                                         |       |
| Price range of options                                          |       |             |        |                                         |       |             |       |                                         |       |
| Outstanding                                                     |       | $                | 2.20-$8.67  |                                         |       |             | $          | 2.20-$10.51                                  |       |   |   |
| Exercised                                                       |       | $                | —      |                                         |       |             | $          | —                                       |       |   |   |
| Expired or  forfeited                                           |       | $                | 2.20-$10.51 |                                         |       |             | $          | 4.99-$10.51                                  |       |   |   |

 

The following tablesummarizes information with respect to stock options outstanding at December 31,2007:

 

| **Range of Exercise Price** | ** **  | **Number of Options Outstanding at 12/31/07** | ** ** | **Weighted Average Exercise Price** | ** ** | **Weighted Average Remaining Contractual Life** | ** ** |
|-----------------------------|-------------|-----------------------------------------------|------------|-------------------------------------|------------|-------------------------------------------------|------------|
| $                           | 2.20-$4.99  |                                          | 40,500     |                                | $          | 2.57                                            |       | 2.8 |   |
| $                           | 6.35-$7.84  |                                          | 16,300     |                                | $          | 6.35                                            |       | 0.9 |   |
| $                           | 8.09-$10.51 |                                          | 160,000    |                                | $          | 8.67                                            |       | 0.9 |   |
|                        |        | 216,800                                       |       |                                |       |                                            |       |

 

27

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**SpherixIncorporated**

**Notes toFinancial Statements**

 

----

 

The followingtable summarizes information with respect to stock options exercisable at December 31,2007:

 

| **Year of Option Expiration** | ** ** | **Number of Options** | ** ** | **Weighted Average Exercise Price** | ** ** | **Price Range** | ** ** |
|-------------------------------|------------|-----------------------|------------|-------------------------------------|------------|-----------------|------------|
| 2008                          |       | 176,300               |       | $                                   | 8.46       |            | $          | 6.35-$8.67 |   |
| 2010                          |       | 12,500                |       | $                                   | 3.41       |            | $          | 3.41 |   |
| 2011                          |       | 25,750                |       | $                                   | 2.20       |            | $          | 2.20 |   |
| All Years                     |       | 214,550               |       |                                |       |            |       |

 

The Company usedthe following assumptions in the Black-Scholes calculation used to measure thefair value of stock-based compensation in accordance with SFAS 123R for stockoptions granted in 2006.  No stockoptions were granted in 2007.

 

| ** **              | ** ** | **2006** | ** ** |
|-------------------------|------------|----------|------------|
| Risk-free interest rate |       | 4.59     | %          |
| Expected life (years)   |       | 4        |       |
| Volatility              |       | 140.9    | %          |
| Dividend yield          |       | 0        | %          |

** **

**8.****                                     ****Income Taxes**

 

Income tax from continuingoperations for 2007 and 2006 was as follows:

 

| ** **                                   | ** ** | **2007** | ** ** | **2006** | ** ** |
|----------------------------------------------|------------|----------|------------|----------|------------|
| U.S. Federal income tax benefit              |       | $        | 3,434,000  |     | $          | 2,357,000 |   |
| State and local income tax (expense) benefit |       | (26,000  | )          | 22,000   |       |
| Total income tax benefit                     |       | $        | 3,408,000  |     | $          | 2,379,000 |   |

 

|                                  | ** ** | **2007** | ** ** | **2006**  | ** ** |
|---------------------------------------|------------|----------|------------|-----------|------------|
| Current income tax benefit            |       | $        | 3,437,000  |      | $          | 912,000 |   |
| Deferred income tax (expense) benefit |       | (29,000  | )          | 1,467,000 |       |
| Total income tax benefit              |       | $        | 3,408,000  |      | $          | 2,379,000 |   |

 

The tax effects ofsignificant temporary differences representing deferred tax assets as of December 31,2007 and 2006 are as follows:

 

| ** **                      | ** ** | **2007**   | ** ** | **2006**   | ** ** |
|---------------------------------|------------|------------|------------|------------|------------|
| Property and equipment          |       | $          | 140,000    |       | $          | 88,000 |   |
| Deferred rent                   |       | 2,000      |       | 60,000     |       |
| Accrued vacation                |       | 4,000      |       | 28,000     |       |
| Tax credit                      |       | 90,000     |       | 90,000     |       |
| Deferred compensation           |       | 260,000    |       | 211,000    |       |
| Net operating loss carryforward |       | 5,908,000  |       | 5,632,000  |       |
| Accrued bonus                   |       | 45,000     |       | —     |       |
| Stock based compensation        |       | 42,000     |       | 57,000     |       |
| Other                           |       | (1,000     | )          | (4,000     | )          |
|                            |       | 6,490,000  |       | 6,162,000  |       |
| Valuation allowance             |       | (6,490,000 | )          | (5,930,000 | )          |
| Deferred tax asset              |       | $          | —     |       | $          | 232,000 |   |

 

The Company has$14.0 million in federal net operating loss carryforwards and $24.7 million instate net operating loss carryforwards that will be available to offset regulartaxable income during the carryforward period,

 

28

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**SpherixIncorporated**

**Notes toFinancial Statements**

 

----

 

which will expire from2019 through 2025.  Based on the Company’shistorical losses and its accumulated deficit, the Company has provided a fullvaluation allowance against the net deferred tax asset.  At December 31, 2007, approximately$436,000 of the valuation allowance, related to benefits from stockcompensation, will be credited to “paid in capital” when recognized in futureperiods.

 

Reconciliationbetween actual tax expenses and taxes computed at the statutory Federal rate of34 percent for 2007 and 2006 are as follows:

 
| ** **                                                        | ** ** | **2007** | ** ** | **2006**  | ** ** |
|-------------------------------------------------------------------|------------|----------|------------|-----------|------------|
| U.S. Federal income tax benefit at the statutory  rate of 34%     |       | $        | 3,148,000  |      | $          | 1,047,000 |   |
| Effect of permanent differences                                   |       | 370,000  |       | (4,000    | )          |
| State income taxes benefit (expense), net of federal  tax benefit |       | 434,000  |       | 136,000   |       |
| Other                                                             |       | 16,000   |       | (160,000  | )          |
| Change in valuation allowance                                     |       | (560,000 | )          | 1,360,000 |       |
| Income tax benefit (provision)                                    |       | $        | 3,408,000  |      | $          | 2,379,000 |   |

 

***Tax Uncertainties***

 

Effective January 1,2007, the Company adopted the provisions of FASB Interpretation No. 48 (“FIN48”), Accounting for Uncertainty in Income Taxes, an interpretation of FASBStatement No. 109 (“SFAS”).  Theinterpretation prescribes recognition and measurement parameters for thefinancial statement recognition and measurement of tax positions taken orexpected to be taken in the Company’s tax return.  For those benefits to be recognized, a taxposition must be more-likely-than-not to be sustained upon examination bytaxing authorities.  The amountrecognized is measured as the largest amount of benefit that has a greater than50 percent likelihood of being realized upon ultimate settlement.  The Company recognized no adjustments relatedto the implementation FIN 48.  At January 1,2007 and December 31, 2007, the Company had no unrecognized income taxbenefits and recognized no interest or penalties on income tax liabilities.

 

The Company’spolicy is to recognize interest and penalties on tax liabilities as interestexpense.

 

The Company issubject to U.S. federal income tax and state and local income tax in multiplejurisdictions.  The statute oflimitations for the consolidated U.S. federal income tax return is closed forall tax years up to and including 2003.   Currently, no federal or state and localincome tax returns are under examination by the respective taxing authorities.

 

**9.****                                     ****Commitments and Contingencies**

 

***Government Contracts***

 

Following the saleof InfoSpherix, the Company is no longer engaged in the performance ofgovernment contracts.

 

***Leases***

 

Related to thesale of InfoSpherix, Spherix signed a lease termination agreement for theBeltsville office and subsequently signed a lease agreement for office space inBethesda, Maryland.  A terminationexpense of $475,000 less $105,000 from the elimination of deferred rent wasrecorded as a cost of discontinued operations. The Company also adjusted the estimated useful life on leaseholdimprovements to reflect the shorter lease period.

 

The Company hascommitments under operating leases through 2013 relating to its administrativeoffices in Bethesda, Maryland and its research lab and administrative office inAnnapolis, Maryland.

 

Future minimumrentals as of December 31, 2007, under non-cancelable leases are as follows:

 

29

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**SpherixIncorporated**

**Notes toFinancial Statements**

 

----

 

| **Year Ending December 31,** | ** ** | **Operating  Leases** | ** ** |
|-----------------------------------|------------|-----------------------|------------|
|                              |       |                  |       |
| 2008                              |       | $                     | 198,000    |   |
| 2009                              |       | 192,000               |       |
| 2010                              |       | 150,000               |       |
| 2011                              |       | 155,000               |       |
| 2012                              |       | 159,000               |       |
| Thereafter                        |       | 40,000                |       |
|                              |       | $                     | 894,000    |   |

 

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 net operating leaserental expenses of approximately $455,000 and $443,000 for the years 2007 and2006, respectively.

 

***RelatedParty Transactions***

 

*Employment,Deferred Compensation, and Consulting Agreements for Principal Stockholders*

 

Dr. GilbertV. Levin, Company founder and former CEO, has served under an EmploymentAgreement since March 3, 1969.  ThisAgreement was amended and restated in 2004, and continued through December 31,2004.  On February 17, 1993, theCompany entered into agreements with Dr. Levin and Mrs. M. KarenLevin to provide adequate retirement benefits and to protect the Company’sstock from a precipitous sale to pay estate taxes upon their deaths.  These agreements provided that, upon retirement,under a Supplemental Executive Retirement Plan (SERP), these individuals wouldreceive deferred compensation equal to 70% and 60%, respectively, of theiraverage annual total compensation less the assumed returns from investment oftheir funded pension plans, and less their social security payments.  On March 23, 2004, after lengthyconsideration and consultation, the Board and the Levins approved new deferredcompensation agreements.  At March 23,2004, the deferred compensation plan for Dr. Levin was unfunded and theCompany had no liability under the plan. In the March 23, 2004 agreement, Dr. Levin voluntarily forgavethe Company of its obligations under his SERP agreement.  The Company also has agreed to provide Dr. Levinwith lifetime payments of $12,500 each quarter and to fund long-term lifetimehealthcare and health insurance policies following his full retirement from theCompany.  In 2004, Dr. and Mrs. Levinvoluntarily forgave the Company its obligation to retain key man life insuranceon them and to buy back stock from the last to survive.  On November 29, 2005, the Board and Mrs. Levinapproved a new agreement concerning her retirement benefits in connection withher January 4, 2006 retirement from the Company.  At November 29, 2005, the deferredcompensation plan for Mrs. Levin was unfunded and the Company had noliability under the plan as actuarially determined.  In the November 29, 2005 agreement, Mrs. Levinvoluntarily forgave the Company its obligations under her SERP agreement.  The Company also has agreed to provide Mrs. Levinlifetime 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 December 31,2007, the Company’s liability for both Dr. Levin and Mrs. Levin wasestimated to be $410,000 for the lifetime payments and $200,000 for funding thelong-term lifetime healthcare and health insurance policies based onactuarially determined amounts.  Thenon-current portion of these amounts is reported on the accompanying balancesheet as deferred compensation.

 

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

 

***Other***

 

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 contract to a competitor. The $6million received from the settlement is recorded as other income indiscontinued operations for 2006.

 

30

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**SpherixIncorporated**

**Notes toFinancial Statements**

 

----

 

**10.****                              ****Employee Benefit Plans**

 

Effective January 1,1990, 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 a minimumof 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 its own discretion, make additional matching contributions toparticipants.  Company contributions, netof forfeitures, amounted to $110,000 and $122,000 in 2007 and 2006,respectively.

 

**11.****                              ****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 assessing performance.  Following the sale of the InfoSpherixsubsidiary on August 15, 2007, the Company operated via two principalsegments, BioSpherix and Health Sciences. BioSpherix develops proprietary products for commercialapplications.  Health Sciences consultingbusiness provides technical and regulatory consulting services to biotechnologyand pharmaceutical companies, as well as aiding the Company’s own R&Dactivities.

 

Financialinformation by business segment for the years ended December 31, 2007 and2006 is summarized below:

 

| ** **                                                | ** ** | ** **                                | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------------------------------------------|------------|-------------------------------------------|------------|----------------------------------|------------|
| ** **                                                | ** ** | ** **                                | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| **Revenues**                                              |       | Health Sciences                           |       | $                                | 144,000    |   | $ | — |   |
|                                                      |       | BioSpherix                                |       | 11,000                           |       | 7,000 |   |
|                                                      |       | Total revenues                            |       | $                                | 155,000    |   | $ | 7,000 |   |
|                                                      |       |                                      |       |                             |       |   |   |
| **Operating  Income (Loss) and Loss Before Income Taxes** |       | Health Sciences                           |       | $                                | 34,000     |   | $ | — |   |
| ** **                                                |       | BioSpherix                                |       | (5,898,000                       | )          | (877,000 | ) |
| ** **                                                |       | Total operating loss                      |       | (5,864,000                       | )          | (877,000 | ) |
| ** **                                                |       | General and  administration               |       | (3,773,000                       | )          | (2,326,000 | ) |
|                                                      |       | Interest income                           |       | 378,000                          |       | 161,000 |   |
|                                                      |       | Interest expense                          |       | —                           |       | (37,000 | ) |
|                                                      |       | Loss from operations  before income taxes |       | $                                | (9,259,000 | ) | $ | (3,079,000 | ) |
|                                                      |       |                                      |       |                             |       |   |   |
| **Identifiable  Assets**                                  |       | Health Sciences                           |       | $                                | 85,000     |   | $ | — |   |
|                                                      |       | BioSpherix                                |       | 89,000                           |       | 168,000 |   |
|                                                      |       | General  corporate assets                 |       | 16,367,000                       |       | 16,640,000 |   |
|                                                      |       | Total assets                              |       | $                                | 16,541,000 |   | $ | 16,808,000 |   |
|                                                      |       |                                      |       |                             |       |   |   |
| **Capital  Expenditures**                                 |       | Health Sciences                           |       | $                                | —     |   | $ | — |   |
| ** **                                                |       | BioSpherix                                |       | 10,000                           |       | — |   |
|                                                      |       | General  corporate assets                 |       | 15,000                           |       | 3,000 |   |
|                                                      |       | Total capital  expenditures               |       | $                                | 25,000     |   | $ | 3,000 |   |
|                                                      |       |                                      |       |                             |       |   |   |
| **Depreciation  and Amortization**                        |       | Health Sciences                           |       | $                                | —     |   | $ | — |   |
| ** **                                                |       | BioSpherix                                |       | 19,000                           |       | 27,000 |   |
|                                                      |       | General  corporate assets                 |       | 191,000                          |       | 149,000 |   |
|                                                      |       | Total  depreciation and amortization      |       | $                                | 210,000    |   | $ | 176,000 |   |

 

31

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** **

**SpherixIncorporated**

**Notes toFinancial Statements**

 

----

 

Operating income(loss) from continuing operations consists of revenue less operatingexpenses.  In computing operating profit,interest expense and income taxes were not considered.  Operating income for Health Sciences was 24%of Health Sciences revenue for 2007.

 

BioSpherix isconcentrating all of its efforts on the Phase 3 clinical trial of its mostpromising product, “Tagatose” (also known as “Naturlose”) as a treatment ofType 2 diabetes in humans.  This productis in the development stage and will require substantial additional investmentto bring to market.

 

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.

 

32

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**SpherixIncorporated**

**Notes toFinancial Statements**

 

----

 

**12.****                              ****Selected Quarterly FinancialInformation, unaudited**

 

The tables belowset forth unaudited financial information for each quarter of the last twoyears.

 
| ** **                                   | ** ** | **2007 Quarter Ended** | ** ** |
|----------------------------------------------|------------|------------------------|------------|
| ** **                                   | ** ** | **March 31,**     | ** ** | **June 30,** | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
| ** **                                   | ** ** | ** **             | ** ** | **(Restated)** | ** ** | **(Restated)** | ** ** | ** ** | ** ** |
| **Revenue**                                  |       | $                      | 250        |   | $ | 3,769 |   | $ | 58,500 |   | $ | 92,179 |   |
|                                         |       |                   |       |   |   |   |   |   |   |
| Operating expense                            |       |                   |       |   |   |   |   |   |   |
| Direct costs                                 |       | —                 |       | — |   | 13,400 |   | 40,892 |   |
| Selling, general  and administrative expense |       | 677,218                |       | 959,854 |   | 1,173,271 |   | 1,061,698 |   |
| Research and  development expense            |       | 1,399,603              |       | 985,937 |   | 2,091,738 |   | 1,388,148 |   |
|                                         |       |                   |       |   |   |   |   |   |   |
| Total operating  expense                     |       | 2,076,821              |       | 1,945,791 |   | 3,278,409 |   | 2,490,738 |   |
|                                         |       |                   |       |   |   |   |   |   |   |
| Loss from operations                         |       | (2,076,571             | )          | (1,942,022 | ) | (3,219,909 | ) | (2,398,559 | ) |
|                                         |       |                   |       |   |   |   |   |   |   |
| Interest income                              |       | 36,593                 |       | 21,131 |   | 117,921 |   | 202,410 |   |
| Interest expense                             |       | —                 |       | (29 | ) | (48 | ) | — |   |
|                                         |       |                   |       |   |   |   |   |   |   |
| Loss from continuing operations before taxes |       | (2,039,978             | )          | (1,920,920 | ) | (3,102,036 | ) | (2,196,149 | ) |
| Income tax  benefit                          |       | —                 |       | (21,043 | ) | 3,429,058 |   | — |   |
|                                         |       |                   |       |   |   |   |   |   |   |
| **Income (loss) from continuing operations** |       | (2,039,978             | )          | (1,941,963 | ) | 327,022 |   | (2,196,149 | ) |
|                                         |       |                   |       |   |   |   |   |   |   |
| Discontinued operations                      |       |                   |       |   |   |   |   |   |   |
| (Loss) income  from discontinued operations  |       | (238,043               | )          | 240,261 |   | 9,133,829 |   | — |   |
| Income tax  expense                          |       | (12,500                | )          | (43,957 | ) | (4,166,896 | ) | — |   |
| (Loss) income from discontinued operations   |       | (250,543               | )          | 196,304 |   | 4,966,933 |   | — |   |
|                                         |       |                   |       |   |   |   |   |   |   |
| **Net (loss) income**                        |       | $                      | (2,290,521 | ) | $ | (1,745,659 | ) | $ | 5,293,955 |   | $ | (2,196,149 | ) |
|                                         |       |                   |       |   |   |   |   |   |   |
| Net (loss) income per share, basic           |       |                   |       |   |   |   |   |   |   |
| Continuing  operations                       |       | $                      | (0.15      | ) | $ | (0.14 | ) | $ | 0.02 |   | $ | (0.15 | ) |
| Discontinued  operations                     |       | $                      | (0.02      | ) | $ | 0.01 |   | $ | 0.35 |   | $ | — |   |
| Net (loss)  income per share, basic          |       | $                      | (0.16      | ) | $ | (0.12 | ) | $ | 0.37 |   | $ | (0.15 | ) |
|                                         |       |                   |       |   |   |   |   |   |   |
| Net (loss) income per share, diluted         |       |                   |       |   |   |   |   |   |   |
| Continuing  operations                       |       | $                      | (0.15      | ) | $ | (0.14 | ) | $ | 0.02 |   | $ | (0.15 | ) |
| Discontinued  operations                     |       | $                      | (0.02      | ) | $ | 0.01 |   | $ | 0.35 |   | $ | — |   |
| Net (loss)  income per share, basic          |       | $                      | (0.16      | ) | $ | (0.12 | ) | $ | 0.37 |   | $ | (0.15 | ) |
|                                         |       |                   |       |   |   |   |   |   |   |
| Weighted average shares outstanding, basic   |       | 13,996,759             |       | 14,254,562 |   | 14,291,132 |   | 14,318,702 |   |
| Weighted average shares outstanding, diluted |       | 13,996,759             |       | 14,254,562 |   | 14,291,132 |   | 14,318,702 |   |

 

33

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**SpherixIncorporated**

**Notes toFinancial Statements**

 

----

 
| ** **                                   | ** ** | **2006 Quarter Ended** | ** ** |
|----------------------------------------------|------------|------------------------|------------|
| ** **                                   | ** ** | **March 31,**     | ** ** | **June 30,** | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
| ** **                                   | ** ** | ** **             | ** ** | **(Restated)** | ** ** | **(Restated)** | ** ** | ** ** | ** ** |
| **Revenue**                                  |       | $                      | 2,735      |   | $ | — |   | $ | — |   | $ | 4,200 |   |
|                                         |       |                   |       |   |   |   |   |   |   |
| Operating expense                            |       |                   |       |   |   |   |   |   |   |
| Direct costs                                 |       | —                 |       | — |   | — |   | — |   |
| Selling, general  and administrative expense |       | 568,482                |       | 574,174 |   | 568,651 |   | 614,928 |   |
| Research and  development expense            |       | 104,751                |       | 176,988 |   | 440,915 |   | 160,954 |   |
|                                         |       |                   |       |   |   |   |   |   |   |
| Total operating  expense                     |       | 673,233                |       | 751,162 |   | 1,009,566 |   | 775,882 |   |
|                                         |       |                   |       |   |   |   |   |   |   |
| Loss from operations                         |       | (670,498               | )          | (751,162 | ) | (1,009,566 | ) | (771,682 | ) |
|                                         |       |                   |       |   |   |   |   |   |   |
| Interest income                              |       | 34,246                 |       | 53,293 |   | 30,335 |   | 42,929 |   |
| Interest expense                             |       | (33,438                | )          | (1,592 | ) | (1,453 | ) | (689 | ) |
|                                         |       |                   |       |   |   |   |   |   |   |
| Loss from continuing operations before taxes |       | (669,690               | )          | (699,461 | ) | (980,684 | ) | (729,442 | ) |
| Income tax  benefit                          |       | 55,515                 |       | 351,192 |   | 366,985 |   | 1,605,581 |   |
|                                         |       |                   |       |   |   |   |   |   |   |
| **(Loss) income from continuing operations** |       | (614,175               | )          | (348,269 | ) | (613,699 | ) | 876,139 |   |
|                                         |       |                   |       |   |   |   |   |   |   |
| Discontinued operations                      |       |                   |       |   |   |   |   |   |   |
| Income from  discontinued operations         |       | 136,661                |       | 958,062 |   | 986,144 |   | 4,616,341 |   |
| Income tax  expense                          |       | (55,515                | )          | (371,192 | ) | (381,985 | ) | (1,675,631 | ) |
| Income from discontinued operations          |       | 81,146                 |       | 586,870 |   | 604,159 |   | 2,940,710 |   |
|                                         |       |                   |       |   |   |   |   |   |   |
| **Net (loss) income**                        |       | $                      | (533,029   | ) | $ | 238,601 |   | $ | (9,540 | ) | $ | 3,816,849 |   |
|                                         |       |                   |       |   |   |   |   |   |   |
|                                         |       | —                 |       | (20,000 | ) | (15,000 | ) | (70,050 | ) |
| Net (loss) income per share, basic           |       |                   |       |   |   |   |   |   |   |
| Continuing  operations                       |       | $                      | (0.05      | ) | $ | (0.03 | ) | $ | (0.04 | ) | $ | 0.06 |   |
| Discontinued  operations                     |       | $                      | 0.01       |   | $ | 0.04 |   | $ | 0.04 |   | $ | 0.21 |   |
| Net (loss)  income per share, basic          |       | $                      | (0.04      | ) | $ | 0.02 |   | $ | (0.00 | ) | $ | 0.28 |   |
|                                         |       |                   |       |   |   |   |   |   |   |
| Net (loss) income per share, diluted         |       |                   |       |   |   |   |   |   |   |
| Continuing  operations                       |       | $                      | (0.05      | ) | $ | (0.03 | ) | $ | (0.04 | ) | $ | 0.06 |   |
| Discontinued  operations                     |       | $                      | 0.01       |   | $ | 0.04 |   | $ | 0.04 |   | $ | 0.21 |   |
| Net (loss)  income per share, basic          |       | $                      | (0.04      | ) | $ | 0.02 |   | $ | (0.00 | ) | $ | 0.28 |   |
|                                         |       |                   |       |   |   |   |   |   |   |
| Weighted average shares outstanding, basic   |       | 12,982,950             |       | 13,724,642 |   | 13,789,379 |   | 13,812,204 |   |
| Weighted average shares outstanding, diluted |       | 12,982,950             |       | 13,726,756 |   | 13,789,379 |   | 13,812,204 |   |

 

The Company has restated certaintax amounts between continuing and discontinued operations in accordance withthe tax allocation guidance contained in Statement of Financial AccountingStandards no. 109 “Accounting for Income Taxes.”  For 2007 and 2006, an income tax benefit of $3.4million and $2.4 million has been allocated to continuing operations with anoff-setting amount charged to income tax expense on discontinuedoperations.  Amounts relate to netoperating losses of the discontinued operations, which will be utilized by continuingoperations.  This

 

34

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**SpherixIncorporated**

**Notes toFinancial Statements**

 

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restatement had no effecton the Company’s total income tax or net income as previously reported in its June 30,2007 and September 30, 2007 reports on Form 10-Q.

 

**Item 9.****        ****CHANGES IN AND DISAGREEMENTS WITHACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE**

 

None.

 

**Item9A(T).  CONTROLS AND PROCEDURES**

 

*InherentLimitations on the Effectiveness of Controls*

 

Management, including ourChief Executive Officer and 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 provide absoluteassurance that all control issues and instances of fraud, if any, within theCompany have been detected.  Theseinherent limitations include the realities that judgments in decision-makingcan be faulty, and that breakdowns can occur because of simple error ormistake.  Additionally, controls can becircumvented by the individual acts of some persons, by collusion of two ormore 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.

 

*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 periods specifiedin the SEC’s rules and forms, and that such information is accumulated andcommunicated to our management, including our Chief Executive Officer and ChiefFinancial Officer, as appropriate, to allow timely decisions regarding requireddisclosure. These controls and procedures are based closely on the definitionof “disclosure controls and procedures” in Rule 13a-15(e) promulgatedunder the Exchange Act.  Rules adopted by the SEC require that wepresent the conclusions of the Chief Executive Officer and Chief FinancialOfficer about the effectiveness of our disclosure controls and procedures as ofthe end of the period covered by this report.

 

The Company carried outan evaluation, under the supervision and with the participation of the Company’smanagement, including the Company’s Chief Executive Officer and Chief FinancialOfficer, of the effectiveness of the design and operation of the Company’sdisclosure controls and procedures to provide reasonable assurance of achievingtheir objective pursuant to Exchange Act Rule 13a-14.  Based upon that evaluation, the ChiefExecutive Officer and Chief Financial Officer concluded that the Company’sdisclosure controls and procedures are effective, as of December 31, 2007.

 

*Management’s Annual Report onInternal Control over Financial Reporting*

 

Our management isresponsible for establishing and maintaining adequate internal control overfinancial reporting, as such term is defined in Exchange Act Rule 13a-15(f).  Under the supervision and with theparticipation of our management, including our principal executive officer andprincipal financial officer, we conducted an evaluation of the effectiveness ofour internal control over financial reporting based on the framework set forthin Internal Control—Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO).

 

35

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**SpherixIncorporated**

**Notes toFinancial Statements**

 

----

 

Based on our evaluation,management has concluded that its internal control over financial reporting waseffective as of December 31, 2007.

 

This Annual Report doesnot include an attestation report of the Company’s registered public accountingfirm regarding internal control over financial reporting. Management’s reportwas not subject to attestation by the Company’s registered public accountingfirm pursuant to temporary rules of the Securities and Exchange Commissionthat permit the Company to provide only management’s report in this AnnualReport on Form 10-K.

 

*Changes in Internal Control overFinancial Reporting*

 

There have been nochanges in the Company’s internal control over financial reporting during thequarter ended December 31, 2007 that have materially affected, or arereasonably likely to materially affect, the Company’s internal control overfinancial reporting.

 

**Item9B.  OTHER INFORMATION**

 

There was no informationrequired to be disclosed on Form 8-K during the fourth quarter of 2007,which was not so disclosed.

 

36

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**SpherixIncorporated**

 

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**PART III**

 

**Item 10through 14.**

 

Information required by Part III(Items 10 through 14) of this Form 10-K is incorporated by reference tothe Company’s definitive Proxy Statement for the Annual Meeting of Stockholdersfor the fiscal year ended December 31, 2007, which will be filed with theSecurities and Exchange Commission not later than 120 days after the end of thefiscal year to which this report relates.

 

**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 (incorporated  by reference to Form 8-K dated February 29, 2008)                                                                            |
| (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) |   | Employment Agreement  dated as of August 15, 2007, by and between Claire L. Kruger and the  Company (incorporated by reference to Form 10-Q dated September 30,  2008)                                                              |
| (10.15) |   | Employment Agreement  dated as of August 16, 2007, by and between Robert A. Lodder and the  Company (incorporated by reference to Form 10-Q dated September 30,  2008)                                                              |
| (10.16) |   | Employment Agreement  dated as of August 16, 2007, by and between Robert L. Clayton and the  Company (incorporated by reference to Form 10-Q dated September 30,  2008)                                                             |
| (10.17) |   | Lease termination  agreement dated August 1, 2007, between Indian Creek Investors, LLC and  the Company (incorporated by reference to Form 10-Q dated  September 30, 2008)                                                          |

 

37

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| (10.18) |   | Lease agreement dated  October 4, 2007, between Elizabethean Court Associates III Limited  Partnership and the Company (incorporated by reference to Form 10-Q  dated September 30, 2008)                                                |
|---------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (10.19) |   | Stock Purchase  Agreement by and among the Company, InfoSpherix and Active dated as of  June 25, 2007 (incorporated by reference from the Company’s Schedule 14A  as filed with the Securities and Exchange Commission on July 16, 2007) |
| (10.20) |   | Amended And Restated  By-Laws of Spherix Incorporated (incorporated by reference to Form 8-K  dated November 15, 2007)                                                                                                                        |
| (23)    |   | Consent of Independent  Registered Public Accounting Firm                                                                                                                                                                                               |
| (31.1)  |   | Certification of Chief Executive Officer of Spherix  Incorporated pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                        |
| (31.2)  |   | Certification of Chief Financial Officer of Spherix  Incorporated pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                        |
| (32.1)  |   | Certification of Chief Executive Officer of Spherix  Incorporated pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                        |
| (32.2)  |   | Certification of Chief Financial Officer of Spherix  Incorporated pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                        |

 

38

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**SIGNATURES**

 

Pursuant to therequirements of Section 13 or 15(d) of the Exchange Act of 1934, theRegistrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

 
| ** ** |               | **Spherix Incorporated** |
|------------|--------------------|--------------------------|
| ** ** |               | **(Registrant)**         |
|       |               |                     |
| Date:      | April 3, 2008 | By:                      | /s/ Claire L. Kruger |
|       |               |                     | Claire L. Kruger |
|       |               |                     | Chief Executive Officer  and Chief |
|       |               |                     | Operating Officer |
|       |               |                     |   |
| Date:      | April 3, 2008      | By:                      | /s/ Robert L. Clayton |
|       |               |                     | Robert L. Clayton |
|       |               |                     | Chief Financial Officer  and Treasurer |

 

Pursuant to therequirements of the Securities Exchange Act of 1934, this report has beensigned below by the following persons on behalf of the Registrant and in thecapacities and on the dates indicated.

 
| /s/ Douglas T. Brown            |   | Director                       | April 3, 2008 |
|---------------------------------|--------|--------------------------------|--------------------|
| Douglas T. Brown                |   |                           |               |
|                            |   |                           |               |
| /s/ Robert L. Clayton           |   | CFO and Treasurer              | April 3, 2008 |
| Robert L. Clayton               |   |                           |               |
|                            |   |                           |               |
| /s/ A. Paul  Cox, Jr.      |   | Chairman of the Board          | April 3, 2008 |
| A. Paul Cox, Jr.           |   |                           |               |
|                            |   |                           |               |
| /s/ Claire L. Kruger            |   | Chief Executive Officer        | April 3, 2008 |
| Claire L. Kruger                |   | and Chief Operating  Officer   |               |
|                            |   |                           |               |
| /s/ Gilbert V. Levin            |   | Director; Director of  Science | April 3, 2008 |
| Gilbert V. Levin                |   | and Technology                 |               |
|                            |   |                           |               |
| /s/ Robert A.  Lodder, Jr. |   | Director and President         | April 3, 2008 |
| Robert A.  Lodder, Jr.     |   |                           |               |
|                            |   |                           |               |
| /s/ Aris Melissaratos           |   | Director                       | April 3, 2008 |
| Aris Melissaratos               |   |                           |               |
|                            |   |                           |               |
| /s/ Robert J. Vander  Zanden    |   | Director                       | April 3, 2008 |
| Robert J. Vander Zanden         |   |                           |               |

 

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