**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**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
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|   | **For the fiscal year****ended  December 31,  2008**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
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| **o**  | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
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|   | **For the transition period from                                                                to                                                  ** |
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|   | **Commission file number 0-5576**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |

 

**SPHERIX INCORPORATED**

(Exact name of Registrant as specified in its Charter)

 

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

 

**6430 Rockledge Drive, Suite 503, Bethesda, Maryland20817**

(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 Capital 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 Noo

 

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 check mark whether the Registrant is a large acceleratedfiler, an accelerated filer, a non-accelerated filer, or a smaller reporting company (as definedin Rule 12b-2 of the Exchange Act).

 

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

 

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) – $8,145,058

 

There were 14,357,162shares of the Registrant’s Common Stock outstanding as of March 24, 2009.

 

 

 

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**PART I**

 

Certain statements contained in this Form 10-K,including without limitation, statements containing the words “believes,” “estimates,”“expects” and words of similar import, constitute “forward looking statements”within the meaning of Section 27A of the Securities Act of 1933 and Section 21Eof the Securities Exchange Act of 1934. Such words and expressions are intended to identify such forward lookingstatements, but are not intended to constitute the exclusive means ofidentifying such statements.  Suchforward looking statements involve known and unknown risks, uncertainties andother factors that may cause the actual results, performance or achievements ofthe Company, or industry results, to be materially different from any futureresults, performance or achievements expressed or implied by such forwardlooking statements.  Given theseuncertainties, prospective investors are cautioned not to place undue relianceon such forward looking statements.  TheCompany disclaims any obligation to update any such factors or to publiclyannounce the results of any revisions to any of the forward looking statementscontained herein to reflect any events or developments.  See the Company’s Form 8-K filed October 10,2007, for a more detailed statement concerning forward looking statements.

 

**Item1.  DESCRIPTION OF BUSINESS**

 

**General**

 

Spherix Incorporated (the “Company” or “Spherix”), a Delaware corporation, was foundedin 1967.  The Company’s principalsegments are Biospherics, our biotechnology research and development business,and Health Sciences, a technical and regulatory consulting business.  The Health Sciences segment was created in July 2007when Claire L. Kruger, CEO and COO, joined the Company in advance of theanticipated sale of the Company’s wholly-owned subsidiary, InfoSpherixIncorporated.  InfoSpherix was theCompany’s information services segment and was sold on August 15, 2007 ina move to allow the Company to devote its resources to the activities of the Biospherics segment.

 

The Company has created two wholly-ownedsubsidiaries, Biospherics Incorporated and Spherix Consulting, Inc., forits two operating segments.  The Company’sHealth Sciences contracts are now in the name of Spherix Consulting, Inc.and the Company’s patents and other assets and operations are in the process ofbeing transferred into the name of Biospherics Incorporated.  The subsidiaries began operations on January 1,2009.  Spherix now provides management,strategic guidance, business development, marketing and other services to itssubsidiaries.

 

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

 

The Company’sCommon Stock trades on the NASDAQ Capital Market system under the symbol SPEX.

 

**Available Information**

 

Our principal Internetaddress is www.spherix.com.  We make available free of charge on www.spherix.com our annual, quarterlyand current reports, and amendments to those reports, as soon as reasonablypracticable after we electronically file such material with, or furnish it to,the Securities and Exchange Commission (“SEC”).

 

**Biospherics**

** **

Biosphericsis dedicated to 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®”.  The Companyholds the patents for use of Naturlose as a treatment for Type 2 diabetes, and Biospherics is devoting all of its timeand resources to developing Naturlose as a treatment for Type 2 diabetes.  The use patents for Naturlose as a treatmentfor Type 2 diabetes expire in 2012, and the Company believes it will beeligible for an additional extension on its patents following Food and DrugAdministration (FDA) approval ofNaturlose as a drug.  As set forthbelow, this product is in the development stage and will require substantialadditional investment to bring it tomarket.  The Company does not have, andis not likely to obtain, the resources to unilaterally bring Naturlose tomarket, and the Company is hopeful that it can commercialize Naturlose byeither selling or licensing the technology to a third party.

 

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*InitialTrials.*  Initial trials conducted at the University ofMaryland School of Medicine found tagatose to be effective as atreatment of Type 2 diabetes in humans. In addition to alleviating symptoms of this major disease, over theone-year trial, all subjects lost weight at physician-approved rates and showeda significant increase in the desirable type of cholesterol, HDL.  Other than for initial laxation at high doses(45 to 75 grams per capita per day), accommodated in about two weeks, nountoward effects were found in any of the research.  In addition, the studies found that Naturloseproduced no rise in blood glucose or insulin levels in diabetic or normalsubjects.  Naturlose taken before theconsumption of glucose produced a blunting effect on the otherwise normallyexpected rise in blood glucose.

 

*Phase 3 Clinical Trial*

 

In late 2005, theFDA provided the Company permissionto begin a Phase 3 clinical trial for Naturlose as a stand-alone drug to treatdiabetes.  A Phase 3 clinical trial,which gathers evidence regarding effectiveness and safety, is needed toevaluate the overall benefit-risk relationship of new drugs proposed to theFDA.  The Phase 3 clinical trial is thelast major test, if successful, before requesting drug approval.  Since receiving FDA permission to begin thePhase 3 clinical trial, Biospherics’sresearch and development (R&D) activity has been focused primarily onplanning, instituting, and running the Phase 3 trial.  The trial is being guided by the Company’sCEO, Claire L. Kruger, an experienced FDA regulatory consultant, and the Company’s President, RobertA. Lodder, an experienced professor of pharmaceutical sciences, as well asdrawing on the in-house support and expertise of the staff of the Company’sHealth Sciences segment.

 

The Phase 3 clinicaltrial started April 2007.  The trial is a multicenter,randomized, double-blind, placebo-controlled trial.  During the course of the trial, participants representing thedemographic mix in the U.S. will receive doses of Naturlose, three times a day,to test its ability to treat Type 2 diabetes while an equal number of subjectswill receive a placebo.  A minimum of 330participants must complete the trial in accord with the current protocol (165using Naturlose and 165 using a placebo).

 

The Company anticipatesthat the earliest the Phase 3 trial could be completed is mid-2010, but acknowledgesthat many factors including, but not limited to, the time to complete thetrial, could result in further delays. If successful, FDA approval would not likely be received before mid-2011at the earliest.  The Company currentlyexpects to obtain interim analysis results from the Phase 3 trial duringmid-2009, which may allow the Company some preliminary insight as to theefficacy of Naturlose as a treatment for Type 2 diabetes.

 

*Dose Range Trial*

 

Biosphericsis also conducting a six-month Phase 2 Dose Range trial to evaluate whetherlower doses of Naturlose are effective in treating Type 2 diabetes.  The trial will evaluate three different dailydoses which are lower than the daily dose currently in use in the Phase 3trial.  The Dose Range trial is expectedto be completed in 2009.

 

*Administration of the Phase 3 andDose Range Trials*

 

The trials were initiallycommenced in both Australia and in the United States.  In 2007, the Company terminated theAustralian operations and expanded the United States portion of the trial.  However, patient recruitment in the U.S.proceeded slower than expected.  Toenhance enrollment and retention, the Company successfully petitioned the FDAto eliminate the need for pre-mixed liquid solutions for the delivery of studymedicine.  The solutions were replacedwith powder sachets, which are more convenient for the trial participants, andtherefore improved patient retention. Beginning in October 2008, Biospherics also started conducting a portion of the Phase 3 and DoseRange trials in India wherepatient retention is greater than in the U.S. Spherix signed an agreement with a Contract Research Organization (CRO)in July 2008 to oversee the work of two India CROs hired to execute thetrials in India.  These changes have beensuccessful in enhancing recruitment and compliance in the trials.  The Company expects that the Phase 2 DoseRange trial likely will becompleted in 2009 and the Phase 3 trial likelywill be completed by mid-2010, based on the current enrollment andretention numbers.

 

*Manufacturing*

 

Biosphericsdoes not own or operate its own manufacturing facilities.  To date, we have acquired tagatose for use inthe trials from Arla Foods Ingredients amba (“Arla”), our food and beverage uselicensee.  However, Arla has 

 

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discontinued manufacture oftagatose.  In 2008, the Company signedletters of intent with Inalco, S.p.A., a manufacturer capable of providingBiospherics with batches of pharmaceutical grade tagatose for submission to theDrug Master File (DMF) in support of the planned New Drug Application (NDA)submission.  Biospherics is now usingboth Inalco and Arla tagatose in the Phase 3 trial in an effort to satisfy oneof FDA’s requirements.  Successfullybridging the drug from each source is a critical step in achieving FDAapproval.

 

*MarketResearch*

 

TheCompany has contracted with two market consulting firms to analyze thecompetitive situation in the diabetes market and generate forecasts to allowBiospherics to evaluate market segment opportunities and the impact ofMedicaid, government initiatives, and third party payers on the diabetestherapeutic category.  Primary marketresearch is being conducted to evaluate the impact of formulation types, sizeand packaging on sales in the diabetes therapeutic category.

 

*Plan forCommercialization of Naturlose*

 

The Company believes it has sufficient resources tocomplete the current Phase 3 trial, but does not have sufficient resources to prepare, submit and pursue the FDANDA and if approved, to manufacture and market Naturlose as a Type 2 diabetesdrug.  The Company is therefore applyingits resources to continue the Phase 3and Dose Range trials and to explore the manufacturing and marketing issueswith a goal to market, sell and/or license Naturlose to a pharmaceuticalor other company which would complete the commercialization.  To date, the Company has not had, and doesnot expect to have, any meaningful offers until the efficacy of Naturlose hasbeen demonstrated further.

 

Continued progress on the clinical trial of Naturloseas a treatment of Type 2 diabetes and on the other initiatives described aboveis dependent upon many factors including, but not limited to, the Companyhaving sufficient funds and resources. The total cost of completing the Phase 3 trial is difficult to determineand can be affected by a number of factors, including completion of the trials in a timely manner.  Although it cannot be certain, the Company’scurrent funds on hand may be sufficient for it to complete the trial and arebelieved to be sufficient to meet all of the Company’s short-termobligations.  Additional funds may berequired if the Phase 3 trials are further delayed, and will likely be requiredto engage in any substantial directed marketing activities.

 

*Food and Beverage 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 (formerly MD Foods Ingredients amba, “MDFI”) of Denmark.  Arla has not been successful in generatingany substantial market for tagatose, Arla has ceased manufacturing tagatose,and the Company has received no meaningful royalties from Arla under thelicense agreement.

 

Biosphericsrevenue from royalties accounted for 1% of the Company’s total revenue fromcontinuing operations in 2008.

 

**HealthSciences**

 

In July 2007, the Company entered into the HealthSciences business whenClaire L. Kruger, CEO and COO, joined the Company in advance of the anticipatedsale of the Company’s wholly-owned subsidiary, InfoSpherix Incorporated.  The Health Sciences business provides technicaland regulatory consulting services to biotechnology and pharmaceuticalcompanies, as well as providing technical support for the Company’s own R&Dactivities.

 

During 2008 and 2007, Health Sciences providedservices to 16 and 10 companies, respectively. The Company generally provides its services on either a fixed-pricebasis or on a “time and expenses” basis, charging hourly rates for each staffmember involved in a project, based on his or her skills and experience.  Our engagement agreements typically providefor monthly billing and payment of our invoices within thirty 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.

 

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Revenues are primarily derived from services providedin response to client requests or events that occur without notice, andengagements, generally billed as services are performed, are terminable orsubject to postponement or delay at any time by clients.  Revenues and operating margins for anyparticular quarter are generally affected by staffing mix, resourcerequirements, and timing and size of engagements.

 

Health Sciences is also monitoring and directing thePhase 3 clinical trial of Naturlose for Biospherics.

 

Health Sciences revenueaccounted for 99% of the Company’s total revenue in 2008.

 

**InfoSpherix Incorporated**

 

On August 15, 2007, the Company soldInfoSpherix.  Accordingly, the operationsof InfoSpherix are reported in the accompanying financial statements asdiscontinued operations in the Consolidated Statement of Operations, and theassets held for sale of the discontinued segment are separately identified inthe Company’s Consolidated Balance Sheet.

 

InfoSpherix professionalsdesigned and operated contact centers, websites, and field kiosks providinginformation management and materials to the public on various sociallybeneficial subjects, as well as other information services, such asreservations and tourism.

 

**GovernmentContracts**

 

Following the sale of InfoSpherix, the Company is nolonger engaged in the performance of government contracts.

 

**IndustrySegments**

 

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

 

**MarketConcentration**

 

During 2008 and 2007, 99% and 93% of the Company’srevenue was generated from the Health Sciences business, respectively.  Revenue from three customers accounted for38%, 14% and 14% of the Company’s revenue in 2008 and, 39%, 22% and 15% in2007.  No other single customer accountedfor 10 percent or more of consolidated revenue. The loss of any of these customers could have a material effect on theCompany taken as a whole if not replaced.

 

**Patents and Trademarks**

 

The Company has established a worldwide patentposition for tagatose and Naturlose. These patents 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.

 

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Trademarks.  The Company has trademarked its names, “Spherix”and “Biospherics,” and “Naturlose” for the non-food uses of tagatose.

 

With respect to all of its inventions, the Company hasreceived numerous patents,including foreign issues.  In addition toits patent position, the Company relies on the common law protection of suchinformation as trade secrets and on confidentiality agreements to protect thevalue of these assets.

 

**SalesBacklog**

 

The Company’s backlog as of December 31, 2008 and2007 from the Health Sciences business was approximately $1.2 million and$230,000, respectively.  The Companybills for its consulting services primarily on a time and material basis andthese amounts represent estimated contract values.  Further, the Company’s consulting contractsare generally terminable or subject to postponement or delay at any time byclients.  As a result, backlog at anyparticular time is not a reliable indicator of revenues for any future periods.

 

**Competition**

 

*Biospherics*

 

Competitors of Biospherics are numerous and include, among others, majorpharmaceutical, chemical, consumer, and biotechnology companies; specializedfirms; universities and other research institutions.  The Company’s competitors may succeed indeveloping technologies and products that are more effective than any that arebeing developed by the Company, and that could render the Company’s technologyand potential products obsolete and noncompetitive.  Many of these competitors have substantiallygreater financial and technical resources and production and marketingcapabilities than the Company.

 

*Health Sciences*

 

Competitors of Health Sciences are numerous, includingsome that are much larger companies with greater resources.  The segment’s success in winning andretaining clients is heavily dependent on the efforts and reputation of itsCEO.  We believe the barriers to entry inparticular areas of our consulting expertise are low.

 

**Researchand Development**

 

Biosphericsexpenditures for research and development were approximately $4.0 million and$5.9 million in 2008 and 2007, respectively. These expenditures were incurred primarily in the ongoing efforts tocommercialize Naturlose.

 

**GovernmentalRegulation**

 

The business activities of the Company are subject toa variety of Federal and state compliance, licensing, and certificationrequirements.  Products such as Naturlose may not becommercially marketed without prior approval from the FDA and comparableagencies in foreign countries.  In theUnited States, the process for obtaining FDA approval typically includespre-clinical studies, the filing of an Investigational New Drug application, orIND, human clinical trials and filing and approval of a New Drug Application,or NDA.  The FDA may, at any time, imposea clinical hold on ongoing clinical trials. If the FDA imposes a clinical hold, clinical trials cannot commence orrecommence without FDA authorization and then only under terms authorized by theFDA.

 

The results of the trials andother information are then submitted to the FDA in the form of an NDA forreview and potential approval to commence commercial sales.  In responding to an NDA, the FDA may grantmarketing approval, request additional information in a complete response letter,or deny the approval if it determines that the NDA does not provide an adequatebasis for approval.  A complete responseletter generally contains a statement of specific conditions that must be metin order to secure final approval of the NDA and may require additionaltesting.  If and when those conditionshave been met to the FDA’s satisfaction, the FDA will typically issue anapproval letter, which authorizes commercial marketing of the product withspecific prescribing information for specific indications.  Any approval required from the FDA might notbe obtained on a timely basis, if at all.

 

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Among the conditions for anNDA approval is the requirement that the manufacturing operations conform on anongoing basis with current Good Manufacturing Practices, or cGMP.  A successful inspection of the manufacturingfacility by the FDA is a prerequisite for final approval.  Following approval of the NDA, thethird-party manufacturer(s) remain subject to periodic inspections by theFDA.  We also face similar inspectionscoordinated by the EMEA by inspectors from particular European Union membercountries that conduct inspections on behalf of the European Union and from otherforeign regulatory authorities.  Anydetermination by the FDA or other regulatory authorities of manufacturing orother deficiencies could materially adversely affect our business.

 

Regulatory requirements andapproval processes in European Union countries are similar in principle tothose in the United States and can be at least as costly and uncertain.  The European Union has established a unifiedcentralized filing and approval system administered by the Committee forMedicinal Products for Human Use designed to reduce the administrative burdenof processing applications for pharmaceutical products derived from newtechnologies.  In addition to obtainingregulatory approval of products, it is generally necessary to obtain regulatoryapproval of the facility in which the product will be manufactured.

 

In 2008, the FDAissued a directive for diabetes trials to demonstrate that the therapy will notresult in an unacceptable increase in cardiovascular risk.  TheCompany believes the design of its Phase 3 clinical trial of Naturlose as atreatment for Type 2 diabetes meets the requirements of the FDA directive.

 

The Company is required to comply with theSarbanes-Oxley Act of 2002, including the provisions of Section 404 on theassessment of internal controls as modified for non-accelerated filers.  Starting with its year ended 2007, Spherix performed an annual evaluation of theeffectiveness of the Company’s internal control over financial reporting andreports on management’s assessment of the adequacy of those controls in itsannual report on Form 10-K.  Anannual independent audit assessment of our internal controls will also berequired beginning with the year ending 2009.

 

The increase inaccounting related regulations over the years, particularly those governingpublic companies, has had the effect of increasing the Company’s cost forexternal accounting services, from 0.3% of revenue in 1997 ($40,000) to 25% ofrevenue in 2008 ($260,000).  The Companyanticipates the cost of compliance is likely to further increase in 2009 withthe implementation of the external audit requirements of Section 404 fornon-accelerated filers.

 

**Environment**

** **

Compliance with current federal, state and localprovisions regulating the discharge of materials into the environment, orotherwise relating to the protection of the environment, has not had, and inthe opinion of management will not have, a material effect on the Company’sfinancial position, results of operations, capital expenditures, cash flows orcompetitive position.

 

**Employees**

 

The Company employs 11 individuals on a full- orpart-time basis.  Of this total, 9 arefull-time employees.  The Company’semployees are not currently unionized, and management believes that itsrelations with the Company’s employees are harmonious.

 

**Item 1A.  RISK FACTORS**

 

Any of the risk factors we describe below couldseverely harm our business, financial condition and operating results.  The market price of our common stock coulddecline if one or more of these risks and uncertainties develop into actualevents.

 

**RISKSRELATED TO OUR BUSINESS**

 

**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 TOCOMMERCIALIZE NATURLOSE.**   We have limited our biotech efforts toattempting to commercialize Naturlose as a treatment for Type 2 diabetes.  We are engaged in a Phase 3 clinical trialand are devoting nearly all of our available resources to this singular effort.  If we are not successful, we will likely needto cease all operations.

 

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**WE DO NOT HAVE THE RESOURCES TOBECOME A FULL SCALE BIOTECHNOLOGY COMPANY AND WE MAY NOT BE ABLE TOATTRACT A NECESSARY BUYER/LICENSEE/PARTNER. **We intend tocontinue to develop Naturlose as a viable Type 2 diabetes treatment and tocontinuously seek a sale, license or partner. Our hope and expectation is that as we proceed with the development,incremental successes may allow us to negotiate a favorable transaction.  There can be no assurance, however, that wewill have such incremental successes, or that even if we achieve them, we willattract a buyer, licensee or partner.  Wehave limited resources and we may fully expend our funds before we are able toattract a purchaser/partner.

 

**CLINICALTESTS ARE LONG, EXPENSIVE AND UNCERTAIN PROCESSES.  IF NATURLOSE DOES NOT RECEIVE THE NECESSARYREGULATORY APPROVALS, WE WILL BE UNABLE TO COMMERCIALIZE NATURLOSE.**  Wehave not received, and may never receive, regulatory approval for thecommercial sale of Naturlose.  Clinicaltrials are long, expensive and uncertain processes.  Satisfaction of regulatory requirementstypically depends on the nature, complexity and novelty of the product, andrequires the expenditure of substantial resources.  Data obtained from clinical trials can beinterpreted in different ways, which could delay, limit or prevent regulatoryapproval.  Negative or inconclusiveresults or medical events during a clinical trial could cause us to delay orterminate our development efforts.

 

Furthermore, interim resultsof preclinical or clinical studies do not necessarily predict their finalresults.  Clinical trials have a highrisk of failure.  A number of companiesin the pharmaceutical industry, including biotechnology companies, havesuffered significant setbacks in advanced clinical trials, even after achievingwhat appeared to be promising results in earlier trials.  If we experience delays in the testing orapproval process or if we need to perform more or larger clinical trials thanoriginally planned, our financial results and the commercial prospects forNaturlose may be materially impaired.  Inaddition, we have limited experience in conducting and managing the clinicaltrials necessary to obtain regulatory approval in the United States and abroadand, accordingly, may encounter unforeseen problems and delays in the approvalprocess.

 

**REGULATORY AUTHORITIES MAY NOTAPPROVE OUR PRODUCT CANDIDATES EVEN IF THEY MEET SAFETY AND EFFICACY ENDPOINTSIN CLINICAL TRIALS.** The FDA and foreign regulatory agencies can delay, limit or denymarketing approval for many reasons, including:

 

·                  a productcandidate may not be considered safe or effective;

·                  themanufacturing processes or facilities we have selected may not meet theapplicable requirements; and

·                  changes in theirapproval policies or adoption of new regulations may require additional work onour part.

 

Any delay in, or failureto receive or maintain, approval for Naturlose could prevent us from evergenerating meaningful revenues.

 

Naturlose may not beapproved even if it achieves endpoints in clinical trials.  Regulatory agencies, including the FDA, ortheir advisors may disagree with our trial design and our interpretations ofdata from preclinical studies and clinical trials.  Regulatory agencies may change requirementsfor approval even after a clinical trial design has been approved.  Regulatory agencies may also approve aproduct candidate for fewer or more limited indications than requested, or maygrant approval subject to the performance of post-marketing studies.  In addition, regulatory agencies may notapprove the labeling claims that are necessary or desirable for the successfulcommercialization of Naturlose.

 

**OURFINANCIAL RESOURCES ARE LIMITED AND WE WILL NEED TO RAISE ADDITIONAL CAPITAL INTHE FUTURE TO CONTINUE OUR BUSINESS.  WE MAY NOTBE ABLE TO OBTAIN ADDITIONAL FINANCING IF NEEDED. **As of December 31,2008, the Company had cash and cash equivalents and marketable securities ofapproximately $11.3 million andexpects to expend all or nearly all of this amount within the next twoyears.  Our future capital requirementswill depend on many factors, including the progress of the clinical trials andcommercialization of Naturlose, as well as general and administrativecosts.  We will need to raise additionalcapital to continue our business beyond this period.  The current economic downturn and its impacton the stock markets will most likely have a negative impact on our efforts toraise additional capital.  We cannotensure that additional funding will be available or, if it is available, thatit can be obtained on terms and conditions we will deem acceptable.  Any additional funding derived from the saleof equity securities is likely to result in significant dilution to ourexisting stockholders.  In addition, wehave received notice from the NASDAQ Stock Market that our common stock may bedelisted from the NASDAQ Markets if we fail to achieve compliance with NASDAQ’s$1.00 minimum bid price per share requirement by late October 2009. Thesematters involve risks and uncertainties that may prevent us 

 

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from raising additional capital or may cause the terms upon which weraise additional capital, if additional capital is available, to be lessfavorable to us than would otherwise be the case.

 

**UNSTABLE MARKET CONDITIONS MAY HAVESERIOUS ADVERSE CONSEQUENCES ON OUR BUSINESS.**  The recent economic downturn and marketinstability has made the business climate more volatile and more costly.  Our general business strategy may beadversely affected by unpredictable and unstable market conditions, including:

 
| · | one or more of our  current service providers, manufacturers and other partners may encounter  difficulties during challenging economic times, which would directly affect  our ability to attain our goals on schedule and on budget;                                 |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| · | demand for our  consulting services may decrease resulting in a decrease in revenue;                                                                                                                                                                                   |
| · | our ability to collect  on trade receivables may be negatively impacted by slow payments or bad debt;                                                                                                                                                                  |
| · | our efforts to raise  additional capital may be negatively impacted;                                                                                                                                                                                                   |
| · | additional funding may  not be available or, if it is available, may not be on terms and conditions  we deem acceptable;                                                                                                                                               |
| · | any additional funding  derived from the sale of equity securities is likely to result in significant  dilution to our existing stockholders; and                                                                                                                      |
| · | failure to secure the  necessary financing in a timely manner and on favorable terms could have a  material adverse effect on our business strategy, financial performance, and  stock price and could require us to delay or abandon the clinical development  plans. |

 

**IF CLINICAL TRIALS OF NATURLOSEARE PROLONGED, DELAYED OR SUSPENDED, IT MAY TAKE SIGNIFICANTLY LONGER ANDCOST SUBSTANTIALLY MORE TO OBTAIN APPROVAL FOR OUR DRUG CANDIDATE AND ACHIEVEPROFITABILITY, IF AT ALL. **Wehave already encountered several challenges which have delayed our Phase 3trial.  Each delay makes it more likelythat we will need interim financing to complete the Phase 3 trial.  We cannot predict whether we will encounteradditional problems with our trial that will cause us or regulatory authoritiesto delay or suspend the clinical trial, or delay the analysis of data from theongoing trial.  Any of the followingcould delay the clinical development of Naturlose as a drug:

 
| · | ongoing discussions  with the FDA regarding the scope or design of our trial;                                                                                          |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| · | delays in receiving, or  the inability to obtain, required approvals from reviewing entities at  clinical sites selected for participation in our trial;               |
| · | delays in enrolling patients  into the trial;                                                                                                                          |
| · | a lower than  anticipated retention rate of patients in the trial;                                                                                                     |
| · | the need to repeat the  trial as a result of inconclusive or negative results or unforeseen  complications in testing;                                                 |
| · | inadequate supply or  deficient quality of materials necessary to conduct our trial;                                                                                   |
| · | serious and unexpected  drug-related side effects experienced by participants in our clinical trials;                                                                  |
| · | the placement by the  FDA of a clinical hold on a trial;  or                                                                                                      |
| · | any restrictions on or  post-approval commitments with regard to any regulatory approval we  ultimately obtain that render the drug candidate not commercially viable. |

 

**WE CURRENTLY RELY ON THIRDPARTIES TO CONDUCT****PORTIONSOF OUR TRIAL, AND THOSE THIRD PARTIES MAY NOT PERFORM SATISFACTORILY. **We rely on third parties to enrollqualified patients, conduct our trial, provide services in connection with suchtrial, and coordinate and oversee significant aspects of the trial.  Our reliance on these third parties forclinical development 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 drug candidatemay be delayed.

 

**WE DONOT HAVE INTERNAL MANUFACTURING CAPABILITIES, AND IF WE FAIL TO DEVELOP ANDMAINTAIN SUPPLY RELATIONSHIPS WITH OUTSIDE MANUFACTURERS, WE MAY BE UNABLETO DEVELOP OR COMMERCIALIZE NATURLOSE.**  Our ability to develop andcommercialize 

 

9

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Naturlose will depend in part on our abilityto arrange for other parties to manufacture Naturlose at a competitive cost, inaccordance with regulatory requirements and in sufficient quantities forclinical testing and eventual commercialization.  If we are unable to enter into or maintaincommercial-scale manufacturing agreements on acceptable terms, or if we areunable to successfully bridge material from a manufacturer to the Arla materialused in the trials, the development and commercialization of Naturlose could bedelayed, which would adversely affect our ability to generate revenues andwould increase our expenses.

 

**FAILURETO OBTAIN REGULATORY APPROVAL IN FOREIGN JURISDICTIONS WOULD PREVENT MARKETINGOF NATURLOSE.**  We expect to have Naturlose marketed bothinside and outside of the United States. In order to market Naturlose in the European Union and many otherforeign jurisdictions, we must obtain separate regulatory approvals and complywith numerous and varying regulatory requirements.  The approval procedure varies among countriesand can involve additional testing.  Thetime required to obtain approval may differ from that required to obtain FDAapproval.  The foreign regulatoryapproval process may include all of the risks associated with obtaining FDAapproval.  We may not obtain foreignregulatory approvals on a timely basis, if at all.  Approval by the FDA does not ensure approvalby regulatory authorities in other countries, and approval by one foreignregulatory authority does not ensure approval by regulatory authorities inother foreign countries or by the FDA. We and our collaborators may not be able to file for regulatoryapprovals and may not receive necessary approvals to commercialize our productsin any market.  The failure to obtainthese approvals could materially adversely affect our business, financialcondition and results of operations.

 

**EVEN IF OUR CLINICAL TRIALS ARESUCCESSFUL, WE MAY NOT HAVE A COMMERCIALLY VIABLE DRUG OR PRODUCT. **We have a number of hurdlesto overcome to have a commercially viable drug or product even assuming ourclinical trials are successful, including:

 

·                  Wemust secure one or more manufacturers for Naturlose and we must bridge thematerials supplied by the manufacturer(s) to the previously supplied Arlamaterials to gain FDA approval.

·                  Wemust demonstrate that the product will be accepted in the market place.  Even if the clinical trial is successful, themarket may not accept a drug which must be consumed in powder form, three timesa day, and in the quantities used in our trial.

 

**IF PHYSICIANS AND PATIENTS DO NOTACCEPT NATURLOSE, WE MAY NOT BE ABLE TO GENERATE SIGNIFICANT REVENUES FROMPRODUCT SALES. **Even ifwe obtain regulatory approval for Naturlose, it may not gain market acceptanceamong physicians, patients and the medical community for a variety of reasonsincluding:

 

·                  timingof market introduction of competitive drugs;

·                  lowerdemonstrated clinical safety and efficacy compared to other drugs;

·                  lackof cost-effectiveness;

·                  lackof availability of reimbursement from managed care plans and other third-partypayors;

·                  inconvenientand/or difficult administration;

·                  prevalenceand severity of adverse side effects;

·                  potentialadvantages of alternative treatment methods;

·                  safetyconcerns with similar drugs marketed by others;

·                  thereluctance of the target population to try new therapies and of physicians toprescribe these therapies;  and

·                  ineffectivesales, marketing and distribution support.

 

If Naturlose fails to achieve market acceptance, wewould not be able to generate significant revenue or achieve profitability.

 

**BIOTECHNOLOGY BUSINESS HAS ASUBSTANTIAL RISK OF PRODUCT LIABILITY CLAIMS. THE DEFENSE OF ANY PRODUCT LIABILITY CLAIM BROUGHT AGAINST US WILLDIVERT MANAGEMENT TIME AND REQUIRE SIGNIFICANT EXPENSE. **We could be exposed tosignificant potential product liability risks that are inherent in thedevelopment, manufacture, sales and marketing of drugs and relatedproducts.  Our insurance may not,however, provide adequate coverage against potential liabilities.  Furthermore, product liability insurance isbecoming increasingly expensive.  As aresult, we may be unable to maintain current amounts of insurance coverage orobtain additional or sufficient insurance at a reasonable cost to protectagainst losses that could have a material adverse effect on us.  If a claim is brought against us, we might berequired to pay legal and 

 

10

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other expenses to defend the claim, as well as uncovered damage awardsresulting from a claim brought successfully against us.  Furthermore, whether or not we are ultimatelysuccessful in defending any such claims, we might be required to redirectsignificant financial and managerial resources to such defense, and adversepublicity is likely to result.

 

**OUR PATENT PROTECTION MAY NOTBE SUFFICIENT TO PROTECT US. **Ourcurrent use patent for Naturlose as a treatment for Type 2 diabetes expires in2012.  We are exploring the prospects ofextending the life of the patent of Naturlose for up to an additional threeyears.  In order for the Company’srequest for an extension to be considered, FDA approval is needed prior to thepatent’s expiration in 2012.  There is noassurance, however, that this effortwill be successful.

 

**WE HAVE SUSTAINED LOSSES IN THEPAST AND WE MAY SUSTAIN LOSSES IN THE FUTURE.**  We have incurred losses from continuingoperations in prior years, including 2008 and 2007. Our net losses fromcontinuing operations before taxes for the years ended December 31, 2008and 2007 were $6.2 million and $9.3 million, respectively.  We expect to incur substantial losses in 2009and thereafter until we find a purchaser/licensee.  We may not return to profitable operations.

 

**WE MAY NOT BE ABLE TO RETAINOUR KEY EXECUTIVES AND PERSONNEL.** As a small company, our success depends on theservices of key employees in executive and other positions.  The loss of the services of one or more ofsuch employees could have a material adverse effect on us.

 

**WE FACE INTENSE COMPETITION BYCOMPETITORS.**  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 AFFECT THE PRICE OF OUR STOCK.**  Our common stock has traded as low as $0.20and as high as $1.30 between January 1, 2008 and December 31, 2008.Some of the factors leading to this volatility include:

 

·                  relatively smallamounts of our stock trading on any given day;

·                  fluctuations inour operating results;

·                  announcements oftechnological innovations or new products which we or our competitors make;

·                  developmentswith respect to patents or proprietary rights; and

·                  recent economicdownturn and market instability.

 

**OURCOMMON STOCK WILL BE DELISTED FROM NASDAQ CAPITAL MARKET SYSTEM IF WE FAIL TOCOMPLY WITH CONTINUED LISTING STANDARDS.**  On July 21, 2008, we were advised thatwe were in danger of our common stock being delisted from the NASDAQ due tofailing to meet the minimum $1 per share stock price requirement.  Spherix has until late October 2009 toregain compliance.  The Company canachieve compliance at any time during this period if the bid price of itscommon stock closes at $1.00 per share or more for a minimum of ten (10) consecutivebusiness days.  If the Company does notregain compliance with this rule by late October 2009, NASDAQ willprovide notice to the Company that its common stock will be delisted fromNASDAQ and the Company will have an opportunity to appeal thedetermination.  On November 17,2008, the stockholders of Spherix authorized a reverse split of the Company’scommon stock within a range of 1:5 to 1:20. Accordingly, the Board of Directors has the authority, at any time untilmid-November 2009, to determine whether and when to implement a reversestock split and the actual ratio of such a split within the 1:5 to 1:20range.  It is expected that the Board ofDirectors will defer a decision on the reverse stock split until the thirdquarter of 2009.  The Company will alsobe delisted if its stockholders’ equity falls below the $2.5 million minimumrequirement of the NASDAQ Capital Market. At December 31, 2008, the Company’s shareholders’ equity was $10.4million.

 

**DIVIDENDSON OUR COMMON STOCK ARE NOT LIKELY. **Weintend to retain future earnings, if any, in order to provide funds for use inthe operation and expansion of our business and for further research anddevelopment.  Accordingly, we do notanticipate paying cash dividends on our common stock in the foreseeablefuture.  

 

11

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Investors must look solely to appreciation in the market price of theshares of our common stock to obtain a return on their investment.

 

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

 

**INSIDERSOWN A SIGNIFICANT PORTION OF OUR COMMON STOCK, WHICH COULD LIMIT OURSTOCKHOLDERS’ ABILITY TO INFLUENCE THE OUTCOME OF KEY TRANSACTIONS**.  As of December 31, 2008, our officersand directors and their affiliates owned approximately 18% of the outstandingshares of our common stock.  As a result,our officers and directors are able to exert considerable influence over theoutcome of any matters submitted to a vote of the holders of our common stock,including the election of our Board of Directors.  The voting power of these stockholders couldprevent or frustrate attempts to effect a transaction that is in the bestinterests of the other stockholders and could also discourage others fromseeking to purchase our common stock, which might depress the price of ourcommon stock.

 

**Item 1B.  UNRESOLVED STAFF COMMENTS**

 

None.

 

**Item 2.  PROPERTIES**

 

The Company’sheadquarters are located in Bethesda, Maryland where it leases 5,000 squarefeet of office space under a lease that expires March 31, 2013.  The Company also leases 5,000 square feet ofresearch lab and warehouse space for Biospherics in Annapolis, Maryland under a lease that expires June 30,2009. Biospherics is conducting no operations at the Annapolis, Maryland facilityand the Company does not expect to renew this lease.  The capacity of the Bethesda facility is adequate forthe Company’s current needs.

 

**Item 3.  LEGAL PROCEEDINGS**

 

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

 

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

 

A Special Meeting ofStockholders was held on November 17, 2008, where the following action was taken:

 

The Board of Directors wasgranted the authority at any time during the following twelve (12) months toeffect a reverse stock split of the Company’s issued and outstandingcommon stock at a ratio to be designated by the Board of Directors within arange of 1:5 to 1:20 and to reducethe number of authorized shares of common stock at a corresponding ratio (the “ReverseStock Split”).  The Reverse Stock Splitwas ratified, with 9,473,637 shares voted in favor, 2,549,509 shares votedagainst, and 80,655 shares abstaining.

 

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**PART II**

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

 

As of March 5, 2009, the number of shareholdersof record of the Company’s common stock was approximately 819.  The Company’s common stock is traded in theover-the-counter market and is quoted in the NASDAQ Capital Market System underthe symbol SPEX.  No dividends were paidin 2008 or 2007.

 

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, 2008, based on thedaily closing prices as reported by NASDAQ:

 
| ** **       | ** ** | **High** | ** ** | **Low** | ** ** |
|------------------|------------|----------|------------|---------|------------|
| 1st Quarter 2008 |       | $        | 1.29       |    | $          | 1.05 |   |
| 2nd Quarter 2008 |       | $        | 1.15       |    | $          | 0.65 |   |
| 3rd Quarter 2008 |       | $        | 0.80       |    | $          | 0.51 |   |
| 4th Quarter 2008 |       | $        | 0.74       |    | $          | 0.20 |   |
|             |       |     |       |    |       |
| 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 |   |

 

On July 21, 2008,NASDAQ notified the Company that the bid price of the Company’s common stockfor the last thirty consecutive business days had closed below the minimum$1.00 per share required for continued listing on NASDAQ.  On each of October 22, 2008, December 19, 2008 and March 24,2009, the Company received notification from NASDAQ advising the Company that,given the continued extraordinary market conditions, NASDAQ has suspended enforcement of the minimum bidprice and market value of publicly held shares continued listing requirements.

 

The most recent NASDAQ noticeprovides that all companies currently in a bid price or market value complianceperiod, such as Spherix, will not be subject to delisting during the suspensionperiod and will be granted an extended compliance period.  Accordingly, Spherix will have until late October 2009to regain compliance.  The Company canachieve compliance at any time during either the suspension or the extendedcompliance period if the bid price of its common stock closes at $1.00 pershare or more for a minimum of ten (10) consecutive business days.  If the Company does not regain compliancewith this rule by late October 2009, NASDAQ will provide notice tothe Company that its common stock will be delisted from NASDAQ and the Companywill have an opportunity to appeal the determination.

 

On November 17,2008, the stockholders authorized a reverse split of the Company’s common stockwithin a range of 1:5 to 1:20. Accordingly, the Board of Directors has the authority, at any time untilmid-November 2009, to determine whether and when to implement a reversestock split and the actual ratio of such a split within the 1:5 to 1:20range.  It is expected that the Board ofDirectors will defer a decision on the reverse stock split until the thirdquarter of 2009.

 

At September 30, 2008,the Company’s stockholders’ equity fell below the $10 million limit requiredfor continued listing on the NASDAQ Global Market.  Accordingly, the Company transferred itslisting from the NASDAQ Global Market to the NASDAQ Capital Market, which has alower stockholders’ equity limit of $2.5 million.  At December 31, 2008, the Company’sstockholders’ equity was $10.4 million, with the receipt of the $2 million escrowpayment from the InfoSpherix sale inthe fourth quarter of 2008 contributing to the increase.  Management expects the Company’s stockholders’equity will drop below $10 million again by the end of the first quarter of2009.

 

**Equity Compensation PlanInformation**

 

The following table provides information about theCompany’s Common Stock that may be issued upon the exercise of options andrights under all of the Company’s existing equity compensation plans as of December 31,2008.

 

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| **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       |       | 40,500                                                                                                                                                          |       | $                                                                                                                                             | 2.57       |                                                                                                                                                                                                                          | 857,700    |   |
| Equity  compensation plans not approved by securities holders |       | N/A                                                                                                                                                             |       | N/A                                                                                                                                           |       | N/A                                                                                                                                                                                                                           |       |
| Total                                                         |       | 40,500                                                                                                                                                          |       | $                                                                                                                                             | 2.57       |                                                                                                                                                                                                                          | 857,700    |   |

 

**Item 6.    SELECTED FINANCIAL DATA**

 

Not applicable.

 

**Item 7.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF OPERATIONS**

 

**Overview**

 

The Company now operates via two principal segments, Biospherics and Health Sciences.  Biospherics seeks to develop one proprietaryproduct for commercial application. Health Sciences provides technical and regulatory consulting services tobiotechnology and pharmaceutical companies, as well as providing technicalsupport for the Company’s own R&D activities.

 

TheHealth Sciences segment was created in July 2007, when Claire L. Kruger,CEO and COO, joined the Company.  TheCompany organized Health Sciences to better facilitate its Biospherics effortsand to provide a modest amount of revenue during the Biospherics developmentefforts.

 

Biospherics is focused ononly one potential product, Naturlose as an effective treatment for Type2 diabetes.  In April 2007, theCompany commenced a Phase 3 clinical trial under a Food and Drug Administration(FDA) Investigational New Drug (IND) application process for this purpose.  As a result, the Company has incurredsubstantial development costs and expects to continue to incur substantialdevelopment costs until completed, without any substantial correspondingrevenue.

 

InfoSpherixprovided contact center information and reservations services for governmentand industry.  On August 15, 2007,the Company sold InfoSpherix to focus substantially all of its efforts onBiospherics.  The operations ofInfoSpherix are reported in the accompanying financial statements asdiscontinued operations.

 

**Results of Operations—2008Compared with 2007**

 

**Revenue and Direct Costs**

 

Revenue and directcontract costs are primarily related to the Company’s Health Sciences business,which started in July 2007 and has seen a steady growth in revenue eachquarter.  The consulting businessgenerally provides services on either a fixed-price basis or on a “time andexpenses” basis, charging hourly rates for each staff member involved in aproject, based on his or her skills and experience.  Engagement agreements typically provide formonthly billing and payment within thirty (30) days of receipt, and permitclients to terminate engagements at any time.

 

No substantial revenue isexpected from the Biosphericssegment until the Company is successful in selling or licensing its technology.

 

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**Researchand Development**

 

Research and development expenditures relate solely tothe Biosphericssegment and consist primarily of salaries and related personnel costs, feespaid to consultants and outside service providers, and other expenses relatedto our efforts to commercialize Naturlose. We expense our research and development costs as they are incurred.

 

The Company’s ongoing Phase 3 and Dose Range trials in the use of Naturlosefor the treatment of Type 2 diabetes are the primary focus of the Biospherics division.  The R&D expenditures for 2007 includedstart-up costs for the Phase 3 clinical trial, including approximately $2million for drug packaging, warehousing and shipping, and those of the sameperiods in 2008 consisted of costs related to both the Phase 3 clinical trialand a Phase 2 Dose Range trial.

 

Patient recruitment for the U.S. clinical trial wasslower than the Company originally expected. To enhance enrollment and retention, the Company successfully petitionedthe FDA to eliminate the need for pre-mixed liquid solutions for the deliveryof study medicine.  The solutions werereplaced with powder sachets, which are more convenient for the trialparticipants, and therefore improved patient retention.  In addition, beginning October 2008, theCompany started conducting a portion of the Phase 3 and Dose Range trials in India where patientretention is greater than in the U.S.  InJuly 2008, the Company signed an agreement with a Contract ResearchOrganization (CRO) to oversee the work of two India CROs hired to execute thetrials in India.  These changes have beensuccessful in enhancing recruitment and compliance in the trial.  The Company expects that the Dose Range trialwill likely be completed in 2009 and the Phase 3 trial will likely be completedin mid-2010, based on the current enrollment and retention numbers.  The Company currently expects to obtaininterim analysis results from the Phase 3 trial during mid-2009, which mayallow the Company some preliminary insight as to the efficacy of Naturlose as atreatment for Type 2 diabetes.

 

**Selling, General andAdministrative**

 

Our selling, general and administrative expenses consistprimarily of salaries and related expenses for executive, finance and otheradministrative personnel, professional fees and other corporate expenses,including facilities-related expenses. The decrease between years is primarily the result of the relocation ofthe Company’s headquarters to a smaller facility in Bethesda, Maryland,effective April 1, 2008, which decreased the Company’s overhead costs.

 

**Interest**

 

Interest revenue in 2008 and 2007 was primarilyderived from interest earned on the proceeds of the sale of the InfoSpherixsubsidiary in August 2007.  During2008, the funds available for investing (cash and cash equivalents andshort-term investments) decreased from $15.8 to $11.3 million.  In addition, the average yield on investmentsalso decreased during the course of 2008.

 

**Income Tax**

 

The income tax benefit (expense) is related to thesale of InfoSpherix in the third quarter of 2007 and the related release of the$2 million escrow balance in November 2008.

 

**Discontinued Operations**

 

On August 15, 2007, the Company completed thesale of InfoSpherix for $17 million ($15 million at closing and $2 millionfollowing a 15-month escrow period), pursuant to the Stock Purchase Agreementdated June 25, 2007.  The $15million sale proceeds were included in the gain on sale of the discontinuedsegment at the time of closing in August 2007.  The $2 million escrow balance was recorded asa gain on sale of the discontinued segment when it was realized in November 2008.  The InfoSpherix segment comprised themajority of the Company’s operations prior to the sale.  The sale was conducted to allow Spherix tofocus substantially all of its efforts on Biospherics.

 

15

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The results of operations of the discontinued InfoSpherixsegment, including the costs to sell the segment, are as follows:

 
| ** **                                            | ** ** | **2008**  | ** ** | **2007**    | ** ** |
|-------------------------------------------------------|------------|-----------|------------|-------------|------------|
| Revenue                                               |       | $         | —     |        | $          | 15,371,000 |   |
|                                                  |       |      |       |        |       |
| Direct cost and  operating expense                    |       | —    |       | (13,202,000 | )          |
| Selling, general  and administrative expense          |       | —    |       | (1,749,000  | )          |
| Interest revenue                                      |       | 70,000    |       | 170,000     |       |
| Interest expense                                      |       | —    |       | (21,000     | )          |
| Other income                                          |       | —    |       | —      |       |
| Gain on sale of  segment                              |       | 2,000,000 |       | 8,567,000   |       |
| **Income  from discontinued operations before taxes** |       | $         | 2,070,000  |        | $          | 9,136,000 |   |

 

# **Sales Backlog**

 

The Company’s backlog as of December 31, 2008 and2007, from the Health Sciences business was approximately $1.2 million and$230,000, respectively.  The Companybills for its consulting services primarily on a time and material basis andthese amounts represent estimated contract values.  Further, the Company’s consulting contractsare generally terminable or subject to postponement or delay at any time byclients.  As a result, backlog at anyparticular time is not a reliable indicator of revenues for any future periods.

 

# **Critical Accounting Estimates**

# ** **

The preparation of financial statements in conformitywith accounting principles generally accepted in the United States of Americarequires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities and the disclosure of the contingent assetsand liabilities at the date of the financial statements and revenue andexpenses for the period reported. Estimates are based upon historical experience and various otherassumptions that are believed to be reasonable under the circumstances.  These estimates are evaluated periodicallyand form the basis for making judgments regarding the carrying values of assetsand liabilities and the reported amount of revenue and expenses.  Actual results may differ substantially fromthese 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.

 

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

# ** **

We currently have significant deferred tax assets,resulting from net operating loss carry forwards.  These deferred tax assets may reduce taxableincome in future periods.  Based on theCompany’s losses and its accumulated deficit, the Company has provided a fullvaluation allowance against the net deferred tax asset.  A valuation allowance is required when it ismore likely than not that all or a portion of a deferred tax asset will not berealized.  Cumulative losses weighheavily in the overall assessment of valuation allowances.

 

We expect to continue to maintain a full valuationallowance on future tax benefits until an appropriate level of profitability issustained, or we are able to develop tax strategies that would enable us toconclude that it is more likely than not that a portion of our deferred taxassets would be realizable.

 

**NewAccounting Pronouncements**

 

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.  SFAS 157 became effective January 1,2008, with the exception of nonfinancial assets and nonfinancialliabilities.  The effective date of theseitems has been deferred to fiscal years beginning after November 15,2008.  The adoption of the portions ofSFAS 157 that became effective January 1, 2008 did not have a materialeffect on our financial position, results of operations or cash flow.  The adoption of SFAS 157 for nonfinancialassets and nonfinancial liabilities has not had a material effect 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 

 

16

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instruments.  SFAS 159 waseffective for our fiscal year beginning January 1, 2008.  The adoption of SFAS 159 did not have amaterial effect on our financial position, results of operations or cash flows.

 

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 DerivativeInstruments and Hedging Activities - an amendment of FASB Statement No. 133”(“SFAS 161).  SFAS 161 requires enhanceddisclosures about an entity’s derivative and hedging activities.  This Statement is effective for financialstatements issued for fiscal years and interim periods beginning after November 15,2008.  We do not expect the adoption ofSFAS 161 to have a material effecton our financial position, results of operations or cash flows.

 

**Liquidity and Capital Resources**

 

Working capital as of December 31, 2008, was$10.8 million, which represents a $4.1 million decrease from working capital atDecember 31, 2007.  A $6.2 millionloss from operations before taxes was partly offset by the $2 million that wasrealized in November 2008 upon the receipt of the escrow balance from the2007 sale of InfoSpherix.  Expenditures forthe year included approximately $4.2 million for R&D activity and relatedmarket research costs.

 

Cash flow for the year ended December 31, 2008,consisted of $6.4 million used in operating activities (including approximately$4.2 million in R&D activity and related market research) and $7,000provided by investing activities consisting primarily of $1.9 million used topurchase short-term investments and $2.1 million provided from the release ofthe escrow balance and the interest revenue related to the 2007 sale of theInfoSpherix subsidiary.

 

On June 25, 2007, as part of the sale ofInfoSpherix, the Company closed its bank line-of-credit. Accordingly, we are operating our Biosphericsand Health Sciences efforts solely from the net proceeds we receivedfrom the sale of InfoSpherix.  The newlylaunched Health Sciences business is not expected to generate any substantialexcess cash flow in the next twelve (12) months.

 

Spherix expects to expend approximately $7 millionover the next year including $5 million in costs related to the Phase 3 andDose Range trialsand other R&D and marketing activity related to the commercialization ofNaturlose.  The Phase 3 clinical trial isexpected to be completed in mid-2010 and the Dose Range trial in 2009.  TheCompany intends to finance the Biosphericsactivities principally through proceeds received from the 2007 sale ofInfoSpherix and is considering raising additional funds through the sale ofcommon stock and/or other means.  Whilethe Company completes its Phase 3 trial, it is taking other steps to preparefor commercialization of Naturlose as a treatment for Type 2 diabetes on theassumption that the trials will be successful. These steps include the DoseRange trial, exploringmanufacturing alternatives and seeking marketing assistance.  The Company’s goal is to attract apharmaceutical company to purchase or license the technology at the earliestpracticable stage.  Our preliminarymarketing analysis suggests that we may increase our chances of success byengaging in some directed marketing efforts as we proceed with the Phase 3trial.

 

Continued progress on the clinical trial of Naturloseas a treatment of Type 2 diabetes and on the other initiatives described aboveis dependent upon many factors including, but not limited to, the Companyhaving sufficient funds and resources. To date, the Company has not had, and does not expect to have, anymeaningful offers until the efficacy of Naturlose has been further established.  The Company believes its current financialresources are sufficient 

 

17

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to complete the Phase 3 trial provided the trial is completed asexpected by mid-2010, but does not believe its resources will be sufficient tothen prepare, submit and pursue the FDA new drug application (NDA) or takeother steps necessary to bring Naturlose to market as a Type 2 diabetesdrug.  Additional funds may be requiredif the Phase 3 trial is further delayed.

 

The total cost ofcompleting the Phase 3 trial is difficult to determine and can be affected byany number of factors including, but not limited to, the time to complete thetrial.  No guarantee can be given thatthe Company will be successful in its efforts to raise additional funds and, asmany of our costs are “fixed,” any additional delays in the Phase 3 trial couldcause us to expend all of our funds before the trial is complete.

 

**Item8.  FINANCIAL STATEMENTS ANDSUPPLEMENTARY DATA**

 

Financial statements and supplementary data requiredby this Item 8 follow.

 

**Index toFinancial Statements**

 
| ** **                                                                                                            | **Page** |
|-----------------------------------------------------------------------------------------------------------------------|----------|
|                                                                                                                  |     |
| Report of Independent  Registered Public Accounting Firm                                                              | 19       |
|                                                                                                                  |     |
| Consolidated  Statements of Operations for the years ended December 31, 2008 and 2007                            | 20       |
|                                                                                                                  |     |
| Consolidated Balance  Sheets as of December 31, 2008 and 2007                                                    | 21       |
|                                                                                                                  |     |
| Consolidated  Statements of Changes in Stockholders’ Equity for the years ended  December 31, 2008 and 2007 | 22       |
|                                                                                                                  |     |
| Consolidated Statements of Cash Flows for the years  ended December 31, 2008 and 2007                            | 23       |
|                                                                                                                  |     |
| Notes to  Consolidated Financial Statements                                                                           | 24       |

 

18

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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM**

 

Board of Directors andShareholders

Spherix Incorporated

 

We have audited theaccompanying consolidated balance sheets of Spherix Incorporated (a Delawarecorporation) and subsidiary (the Company) as of December 31, 2008 and2007, and the related consolidated statements of operations, changes instockholders’ equity, and cash flows for each of the two years in the periodended December 31, 2008.**Thesefinancial statements are the responsibility of the Company’s management.**Our responsibility is to express an opinion on thesefinancial statements based on our audits.

 

We conducted our auditsin accordance with the standards of the Public Company Accounting OversightBoard (United States).**Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement.**The Company is not required tohave, nor were we engaged to perform an audit of its internal control overfinancial 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 theCompany’s internal 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 principlesused and significant estimates made by management, as well as evaluating theoverall financial statement presentation.**We believethat our audits provide a reasonable basis for our opinion.

 

In our opinion, thefinancial statements referred to above present fairly, in all materialrespects, the financial position of Spherix Incorporated as of December 31,2008 and 2007, and the results of its operations and its cash flows for each ofthe two years in the period ended December 31, 2008 in conformity withaccounting principles generally accepted in the United States of America.

 
| /s/ GRANT THORNTON LLP |
|------------------------|
|                   |
| McLean, Virginia       |
| March 27, 2009    |

 

19

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**Spherix Incorporated**

**ConsolidatedStatements of Operations**

**For the years ended December 31,2008 and 2007**

 
| ** **                                    | ** ** | **2008**   | ** ** | **2007**   | ** ** |
|-----------------------------------------------|------------|------------|------------|------------|------------|
|                                          |       |       |       |       |       |
| **Revenue**                                   |       | $          | 1,025,961  |       | $          | 154,698 |   |
|                                          |       |       |       |       |       |
| Operating  expense                            |       |       |       |       |       |
| Direct costs                                  |       | 397,645    |       | 54,292     |       |
| Research and  development expense             |       | 4,004,565  |       | 5,865,426  |       |
| Selling, general  and administrative expense  |       | 3,135,310  |       | 3,872,041  |       |
|                                          |       |       |       |       |       |
| Total operating  expense                      |       | 7,537,520  |       | 9,791,759  |       |
|                                          |       |       |       |       |       |
| Loss from  operations                         |       | (6,511,559 | )          | (9,637,061 | )          |
|                                          |       |       |       |       |       |
| Interest income                               |       | 348,443    |       | 378,055    |       |
| Interest expense                              |       | (2,220     | )          | (77        | )          |
| Other expense                                 |       | (5,994     | )          | —     |       |
|                                          |       |       |       |       |       |
| Loss from  continuing operations before taxes |       | (6,171,330 | )          | (9,259,083 | )          |
| Income tax  benefit                           |       | 552,803    |       | 3,408,015  |       |
|                                          |       |       |       |       |       |
| **Loss  from continuing operations**          |       | (5,618,527 | )          | (5,851,068 | )          |
|                                          |       |       |       |       |       |
| Discontinued  operations                      |       |       |       |       |       |
| Income from  discontinued operations          |       | 2,070,091  |       | 9,136,047  |       |
| Income tax  expense                           |       | (587,098   | )          | (4,223,353 | )          |
| Income from  discontinued operations          |       | 1,482,993  |       | 4,912,694  |       |
|                                          |       |       |       |       |       |
| **Net  loss**                                 |       | $          | (4,135,534 | )          | $          | (938,374 | ) |
|                                          |       |       |       |       |       |
| Net (loss)  income per share, basic           |       |       |       |       |       |
| Continuing  operations                        |       | $          | (0.39      | )          | $          | (0.41 | ) |
| Discontinued  operations                      |       | $          | 0.10       |       | $          | 0.35 |   |
| Net (loss)  income per share, basic           |       | $          | (0.29      | )          | $          | (0.07 | ) |
|                                          |       |       |       |       |       |
| Net (loss)  income per share, diluted         |       |       |       |       |       |
| Continuing  operations                        |       | $          | (0.39      | )          | $          | (0.41 | ) |
| Discontinued  operations                      |       | $          | 0.10       |       | $          | 0.35 |   |
| Net (loss)  income per share, diluted         |       | $          | (0.29      | )          | $          | (0.07 | ) |
|                                          |       |       |       |       |       |
| Weighted average  shares outstanding, basic   |       | 14,342,953 |       | 14,215,289 |       |
| Weighted average  shares outstanding, diluted |       | 14,342,953 |       | 14,215,289 |       |

 

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

 

20

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**Spherix Incorporated**

**ConsolidatedBalance Sheets**

**As of December 31, 2008 and 2007**

 
| ** **                                                                                                                                                                                | ** ** | **2008**    | ** ** | **2007**    | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------|------------|-------------|------------|
| **ASSETS**                                                                                                                                                                                |       |        |       |        |       |
| Current assets                                                                                                                                                                            |       |        |       |        |       |
| Cash and cash  equivalents                                                                                                                                                                |       | $           | 9,404,843  |        | $          | 15,839,959 |   |
| Short-term  investments                                                                                                                                                                   |       | 1,894,434   |       | —      |       |
| Trade accounts  receivable                                                                                                                                                                |       | 281,342     |       | 38,581      |       |
| Other receivables                                                                                                                                                                         |       | 37,223      |       | 167,229     |       |
| Prepaid expenses  and other assets                                                                                                                                                        |       | 282,971     |       | 372,242     |       |
| Total current  assets                                                                                                                                                                     |       | 11,900,813  |       | 16,418,011  |       |
|                                                                                                                                                                                      |       |        |       |        |       |
| Property and  equipment, net                                                                                                                                                              |       | 310,365     |       | 55,088      |       |
| Patents, net of  accumulated amortization of $38,588 and $110,599                                                                                                                         |       | 14,433      |       | 32,371      |       |
| Deposit                                                                                                                                                                                   |       | 35,625      |       | 35,625      |       |
| Total assets                                                                                                                                                                              |       | $           | 12,261,236 |        | $          | 16,541,095 |   |
|                                                                                                                                                                                      |       |        |       |        |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                                            |       |        |       |        |       |
| Current  liabilities                                                                                                                                                                      |       |        |       |        |       |
| Accounts payable  and accrued expenses                                                                                                                                                    |       | $           | 710,881    |        | $          | 1,046,537 |   |
| Accrued salaries  and benefits                                                                                                                                                            |       | 304,756     |       | 362,334     |       |
| Income taxes  payable                                                                                                                                                                     |       | —      |       | 50,738      |       |
| Deferred revenue                                                                                                                                                                          |       | 39,347      |       | 15,165      |       |
| Total current  liabilities                                                                                                                                                                |       | 1,054,984   |       | 1,474,774   |       |
|                                                                                                                                                                                      |       |        |       |        |       |
| Deferred  compensation                                                                                                                                                                    |       | 660,000     |       | 609,000     |       |
| Deferred rent                                                                                                                                                                             |       | 136,736     |       | 6,531       |       |
| Total liabilities                                                                                                                                                                         |       | 1,851,720   |       | 2,090,305   |       |
|                                                                                                                                                                                      |       |        |       |        |       |
| 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; 14,437,600 and 14,399,140  issued, 14,357,162 and 14,318,702 outstanding at December 31, 2008 and  2007, respectively |       | 72,188      |       | 71,996      |       |
| Paid-in capital  in excess of par value                                                                                                                                                   |       | 27,602,486  |       | 27,508,418  |       |
| Treasury stock,  80,438 shares, at cost at December 31, 2008 and 2007, respectively                                                                                                  |       | (464,786    | )          | (464,786    | )          |
| Accumulated  deficit                                                                                                                                                                      |       | (16,800,372 | )          | (12,664,838 | )          |
| Total  stockholders’ equity                                                                                                                                                          |       | 10,409,516  |       | 14,450,790  |       |
| Total  liabilities and stockholders’ equity                                                                                                                                          |       | $           | 12,261,236 |        | $          | 16,541,095 |   |

 

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

 

21

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**Spherix Incorporated**

**ConsolidatedStatements of Changes in Stockholders’ Equity**

**For the years ended December 31,2008 and 2007**

 
| ** **                                      | ** ** | ** **       | ** ** | ** **     | ** ** | ** **                  | ** ** | ** **       | ** ** | ** **             | ** ** | **Retained**       | ** ** | ** **       | ** ** |
|-------------------------------------------------|------------|------------------|------------|----------------|------------|-----------------------------|------------|------------------|------------|------------------------|------------|--------------------|------------|------------------|------------|
| ** **                                      | ** ** | ** **       | ** ** | ** **     | ** ** | **Paid-in **           | ** ** | ** **       | ** ** | ** **             | ** ** | **Earnings ** | ** ** | ** **       | ** ** |
| ** **                                      | ** ** | **Common Stock** | ** ** | **Capital in** | ** ** | **Treasury Stock**          | ** ** | **(Accumulated** | ** ** | **Stockholders’** | ** ** |
| ** **                                      | ** ** | **Shares**       | ** ** | **Amount**     | ** ** | **Excess of Par** | ** ** | **Shares**       | ** ** | **Amount**             | ** ** | ** Deficit)** | ** ** | ** Equity** | ** ** |
| 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 income                                      |       | —           |       | —         |       | —                      |       | —           |       | —                 |       | (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       |       |
| Stock-based  compensation                       |       | 38,460           |       | 192            |       | 94,068                      |       | —           |       | —                 |       | —             |       | 94,260           |       |
| Net loss                                        |       | —           |       | —         |       | —                      |       | —           |       | —                 |       | (4,135,534         | )          | (4,135,534       | )          |
| Balance,  December 31, 2008                |       | 14,437,600       |       | $              | 72,188     |                        | $          | 27,602,486       |       | 80,438                 |       | $                  | (464,786   | )                | $          | (16,800,372 | ) | $ | 10,409,516 |   |

 

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

 

22

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**SpherixIncorporated**

**Consolidated Statements of Cash Flows**

**For theyears ended December 31, 2008 and 2007**

 
| ** **                                                                    | ** ** | **2008**   | ** ** | **2007**   | ** ** |
|-------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| **Cash  flows from operating activities**                                     |       |       |       |       |       |
| Net loss                                                                      |       | $          | (4,135,534 | )          | $          | (938,374 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities:  |       |       |       |       |       |
| Income from  discontinued operations                                          |       | (1,482,993 | )          | (4,912,694 | )          |
| Income tax  benefit                                                           |       | (552,803   | )          | (3,408,015 | )          |
| Depreciation and  amortization                                                |       | 85,718     |       | 210,417    |       |
| Gain on sale of  fixed assets                                                 |       | (14,701    | )          | —     |       |
| Patent write-off                                                              |       | 9,860      |       | 51,158     |       |
| Stock-based  compensation                                                     |       | 94,260     |       | 81,067     |       |
| Changes in  assets and liabilities:                                           |       |       |       |       |       |
| Receivables                                                                   |       | (112,755   | )          | (205,331   | )          |
| Prepaid expenses  and other assets                                            |       | 89,271     |       | (41,720    | )          |
| Accounts payable  and accrued expenses                                        |       | (410,670   | )          | 924,221    |       |
| Deferred rent                                                                 |       | (19,795    | )          | (149,775   | )          |
| Deferred  compensation                                                        |       | 51,000     |       | 114,000    |       |
| Deferred revenue                                                              |       | 24,182     |       | 15,165     |       |
| Net cash used in  activities of continuing operations                         |       | (6,374,960 | )          | (8,259,881 | )          |
| Net cash used in  activities of discontinued operations                       |       | (34,295    | )          | (368,733   | )          |
| Net cash used in  operating activities                                        |       | (6,409,255 | )          | (8,628,614 | )          |
|                                                                          |       |       |       |       |       |
| **Cash  flows from investing activities**                                     |       |       |       |       |       |
| Proceeds from  the sale of subsidiary                                         |       | 2,070,091  |       | 15,291,000 |       |
| Purchase of  short-term investments                                           |       | (1,894,434 | )          | —     |       |
| Purchase of  property and equipment                                           |       | (183,403   | )          | (25,258    | )          |
| Proceeds from  the sales of fixed assets                                      |       | 15,187     |       | —     |       |
| Net cash  provided by investing activities of continuing operations           |       | 7,441      |       | 15,265,742 |       |
| Net cash used in  investing activities of discontinued operations             |       | —     |       | (1,316,588 | )          |
| Net cash  provided by investing activities                                    |       | 7,441      |       | 13,949,154 |       |
|                                                                          |       |       |       |       |       |
| **Cash  flows from financing activities**                                     |       |       |       |       |       |
| Net change in  book overdraft                                                 |       | (33,302    | )          | 28,972     |       |
| Proceeds from  issuance of common stock, net                                  |       | —     |       | 757,500    |       |
| Net cash (used  in) provided by financial activities of continuing operations |       | (33,302    | )          | 786,472    |       |
| Net cash used in  financing activities of discontinued operations             |       | —     |       | (130,824   | )          |
| Net cash (used  in) provided by financing activities                          |       | (33,302    | )          | 655,648    |       |
|                                                                          |       |       |       |       |       |
| **Net  (decrease) increase in cash and cash equivalents**                     |       | (6,435,116 | )          | 5,976,188  |       |
| **Cash  and cash equivalents, beginning of year**                             |       | 15,839,959 |       | 9,863,771  |       |
|                                                                          |       |       |       |       |       |
| **Cash  and cash equivalents, end of year**                                   |       | $          | 9,404,843  |       | $          | 15,839,959 |   |
|                                                                          |       |       |       |       |       |
| **Supplemental  cash flow information**                                       |       |       |       |       |       |
| Interest paid                                                                 |       | $          | 2,220      |       | $          | 77 |   |

 

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

 

23

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**Spherix Incorporated**

**Notes to Consolidated Financial Statements**

 

----

 

**1.             Summary of Significant AccountingPolicies**

 

# ***Nature ofBusiness***

 

Prior to August 15, 2007, the Company’s principalsegments of operation were InfoSpherix and Biospherics.  Biospherics develops proprietary products for commercialapplications.  InfoSpherix providedcontact center information and reservations services for government andindustry.  On August 15, 2007, theCompany sold InfoSpherix.  The sale allowed Spherix to focus substantiallyall of its efforts on Biospherics,where the principal focus is on the commercialization of Naturlose.  The operations of InfoSpherix are reported inthe accompanying financial statements as discontinued operations.

 

Biospherics engagesin product 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 undera Food and Drug Administration (FDA) Investigational New Drug (IND) applicationprocess for this purpose.  As a result,the Company expects to incur substantial development costs for the foreseeablefuture, without any substantial corresponding revenue (see Note 9,“Liquidity”).

 

In July 2007, the Company started a new HealthSciences business to provide technical and regulatory consulting services tobiotechnology and pharmaceutical companies, as well as aiding the Company’s ownR&D activities.

 

***Basisof Presentation***

 

The consolidated financial statements havehistorically included the accounts of both Spherix Incorporated and InfoSpherixIncorporated (collectively, the “Company”). All intercompany balances and transactions have been eliminated.

 

On August 15, 2007, the Company soldInfoSpherix.  Accordingly, the operationsof InfoSpherix are reported in the accompanying financial statements asdiscontinued operations in the Consolidated Statement of Operations.  In July 2007, Spherix entered into theHealth Sciences business to provide technical and regulatory consultingservices to biotechnology and pharmaceutical companies, as well as aiding theCompany’s own R&D activities.

 

***Useof Estimates and Assumptions***

 

The accompanying consolidated financial statementshave been prepared in conformity with accounting principles generally acceptedin the United States of America.  Thisrequires management to make estimates and assumptions that affect certainreported amounts of assets and liabilities and disclosures of contingent assetsand liabilities at the date of the financial statements, and the reportedamounts of revenue and expenses during the period.  Accordingly, actual results could differ fromthose estimates and assumptions.

 

***CashEquivalents***

 

The Company considers all highly liquid investmentswith original maturities of three months or less to be cash equivalents.  At December 31, 2008, the Company hadapproximately $9.4 million invested in funds with a maturity of three months orless, which are included as cash and cash equivalents.  The Company maintains cash balances atseveral banks.  Accounts at each institutionare insured by the Federal Deposit Insurance Corporation up to $250,000.  At December 31, 2008, the Company’s cashand cash equivalent in excess of the FDIC limits was $8.9 million.

 

***Short-termInvestments***

 

The Company’s short-term investments consist ofinvestments in debt securities, which mature in one year or less, and are valuedat amortized cost, which approximates fair value.

 

24

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**Spherix Incorporated**

**Notes to Consolidated FinancialStatements**

 

----

 

***Concentrations***

 

During 2008 and 2007, revenue from three HealthSciences clients accounted for 66% and 86% of the Company’s total revenue.

 

***Propertyand Equipment and Depreciation***

 

Property and equipment are stated at cost and consistof office furniture and equipment, computer hardware and software, andleasehold improvements.  The Companycomputes depreciation and amortization under the straight-line method andtypically over the following estimated useful lives of the related assets:

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

 

Leasehold improvements are depreciated or amortizedover the lesser of the term of the related lease or the estimated useful livesof the assets (generally 5 to 10 years). Major additions, improvements and renewals are capitalized and ordinaryrepairs, maintenance, and renewals are expensed in the year incurred.  Gains or losses from the sale or retirementof property and equipment result from the difference between sales proceeds (ifany) and the assets’ net book value, and are recorded in the consolidatedStatement of Operations.

 

***PatentCosts***

 

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 the lifeof the patent or the projected sales period of the product or process.

 

***Revenue Recognition***

 

Revenue is recognized when services have been renderedand collectability is reasonably assured. On time and expense contracts revenue is recognized at contractuallyagreed-upon rates based upon direct labor hours expended and other direct costsincurred.  Revenue for fixed-pricecontracts is recognized as deliverables or milestones are completed.  Losses, if any, on contracts are recordedduring the period when first determined.

 

***DirectCosts***

 

The Company’s direct costs consist primarily of laborcosts.

 

***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 development costs are charged tooperations as incurred.

 

***Income Taxes***

 

Deferred income taxes are recognized for the taxconsequences in future years of differences between the tax bases of assets andliabilities and their financial reporting amounts at each year end, based onenacted tax laws and statutory tax rates applicable to the periods in which thedifferences are expected to affect taxable income.  A valuation allowance is established basedupon periodic assessments made by management to reduce deferred tax assets tothe amount expected to be realized. Income tax expense is the current tax provision for the period and thechange during the period in deferred tax assets and liabilities.

 

25

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**Spherix Incorporated**

**Notes to Consolidated FinancialStatements**

 

----

 

The Company’s policy isto recognize interest and penalties on tax liabilities as interestexpense.  At December 31, 2008 and2007, the Company had no unrecognized income tax benefits and recognized nointerest or penalties on income tax liabilities.

 

***DiscontinuedOperations***

 

On August 15, 2007, the Company completed thesale of InfoSpherix for $17 million ($15 million at closing and $2 millionfollowing a 15-month escrow period), pursuant to the Stock Purchase Agreementdated June 25, 2007.  The $15million sale proceeds were included in the gain on sale of the discontinuedsegment at the time of closing in August 2007.  The $2 million escrow balance was recorded asa gain on sale of the discontinued segment and realized in November 2008.  The InfoSpherix segment comprised themajority of the Company’s operations prior to the sale.  The sale was conducted to allow Spherix tofocus substantially all of its efforts on Biospherics, with the principal focus on the commercializationof Naturlose.

 

The results of operations of the discontinuedInfoSpherix segment, including the costs to sell the segment, are as follows:

 
| ** **                                            | ** ** | **2008**  | ** ** | **2007**    | ** ** |
|-------------------------------------------------------|------------|-----------|------------|-------------|------------|
| Revenue                                               |       | $         | —     |        | $          | 15,371,000 |   |
|                                                  |       |      |       |        |       |
| Direct cost and  operating expense                    |       | —    |       | (13,202,000 | )          |
| Selling, general  and administrative expense          |       | —    |       | (1,749,000  | )          |
| Interest revenue                                      |       | 70,000    |       | 170,000     |       |
| Interest expense                                      |       | —    |       | (21,000     | )          |
| Other income                                          |       | —    |       | —      |       |
| Gain on sale of  segment                              |       | 2,000,000 |       | 8,567,000   |       |
| **Income  from discontinued operations before taxes** |       | $         | 2,070,000  |        | $          | 9,136,000 |   |

 

***FairValue Information***

 

The estimated fair value of the Company’s financialinstruments, which include cash, receivables, and accounts payable reported inthe Consolidated Balance Sheet, approximate their carrying value given theirshort maturities.

 

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

 

Effective January 1, 2006, the Company adoptedStatement 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 to value stock options.  For the years ended December 31, 2008and 2007, the Company recognized $13,000 and $24,000, respectively, in stockbased compensation expense relating to 59,000 stock options awarded in February 2006and $81,000 and $57,000 related to the issuance of restricted stock (see Note8, “Stockholders’ Equity”).

 

***NetIncome (Loss) Per Share***

 

Basic net income (loss) per common share has beencomputed by dividing net income (loss) by the weighted-average number of commonshares outstanding during the year. Diluted net income per common share is computed by dividing net incomeby the weighted-average number of common shares outstanding with an assumedincrease in common shares outstanding for common stock equivalents.  At December 31, 2008, the Company hadoutstanding 40,500 options, none of which were assumed likely to be exercisedbecause the fair market price is below the exercise price.  Diluted net loss per common share has beencomputed by dividing net loss by the weighted-average number of 

 

26

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**Spherix Incorporated**

**Notes to Consolidated FinancialStatements**

 

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common shares outstandingwithout an assumed increase in common shares outstanding for common stockequivalents, as common stock equivalents are antidilutive.

 

**New Accounting Pronouncements**

** **

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.  SFAS 157 became effective January 1,2008, with the exception of nonfinancial assets and nonfinancialliabilities.  The effective date of theseitems has been deferred to fiscal years beginning after November 15,2008.  The adoption of the portions ofSFAS 157 that became effective January 1, 2008 did not have a materialeffect on our financial position, results of operations or cash flow.  We do not expect the adoption of SFAS 157 fornonfinancial assets and nonfinancial liabilities to have a material effect onour 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 159was effective for our fiscal year beginning January 1, 2008.  The adoption of SFAS 159 did not have amaterial effect on our financial position, results of operations or cash flows.

 

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 effect onour financial position, results of operations or cash flows.

 

**2.             Fair Value Measurement**

 

Effective January 1,2008, the company adopted Statement of Financial Accounting Standards No. 157*Fair Value Measurements,* (“SFAS 157”),to value its financial assets measured at fair value.  At December 31, 2008, the Company had nofinancial liabilities.

 

The following tablepresents the Company’s financial assets measured at fair value as of December 31,2008:

* *
| ** **      | ** ** | **Fair Value Measurement Using**      | ** ** |
|-----------------|------------|------------------------------------------------------|------------|
| **Description** | ** ** | **Fair Value at  Dec. 31, 2008** | ** ** | **Quoted Market  Prices(1)** | ** ** | **Observable   Inputs(2)** | ** ** | **Unobservable  Inputs(3)** | ** ** |
|            |       |                                                 |       |   |   |   |   |   |   |
| Debt securities |       | $                                                    | 1,890,000  |   | $ | 1,890,000 |   | $ | — |   | $ | — |   |
|                 |            |                                                      |            |  |  |  |  |  |  |  |  |  |  |

 

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(1) The highest level of fair value input and represents inputs to fair value fromquoted prices in active markets for identical assets and liabilities to thosebeing valued.

(2) Directly or indirectly observable inputs, other than quoted prices in activemarkets, for the assets or liabilities being valued including but not limitedto, interest rates, yield curves, principal-to-principal markets, etc.

(3) Lowest level of fair value input because it is unobservable and reflects theCompany’s own assumptions about what market participants would use in pricingassets and liabilities at fair value.

 

An associatedpronouncement, SFAS No. 159 *The Fair Value Option forFinancial Assets and Financial Liabilities,* was also effective atthe beginning of the Company’s 2008 fiscal year. The Company has elected not to

 

27

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**Spherix Incorporated**

**Notes to Consolidated FinancialStatements**

 

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apply the fair value option to measure any of the financial assets andliabilities on its balance sheet not already valued at fair value under otheraccounting pronouncements. These other financial assets and liabilities areprimarily short-term investments, accounts receivable, accounts payable anddebt which are reported at historical value. The fair value of these financialassets and liabilities approximate their historical value because of theirshort duration.

 

**3.             Allowance for Doubtful Accounts**

 

Management regularly reviews accounts receivables foruncollectible and potentially uncollectible accounts, and when necessaryestablishes an allowance for doubtful accounts. An allowance for doubtful accounts from continuing operations was notdeemed necessary at December 31, 2008 and 2007.

 

**4.             Property and Equipment**

 

During 2008, the Company relocated its headquarters toa smaller facility.  The increase inoffice furniture and equipment and the decrease in leasehold improvements are adirect result of this move.  Thecomponents of property and equipment as of December 31, at cost are:

 
| ** **                                 | ** ** | **2008** | ** ** | **2007** | ** ** |
|--------------------------------------------|------------|----------|------------|----------|------------|
| Computers                                  |       | $        | 14,000     |     | $          | 12,000 |   |
| Office furniture  and equipment            |       | 187,000  |       | 94,000   |       |
| Leasehold  improvements                    |       | 283,000  |       | 549,000  |       |
| Total cost                                 |       | 484,000  |       | 654,000  |       |
| Accumulated  depreciation and amortization |       | (174,000 | )          | (599,000 | )          |
| Property and  equipment, net               |       | $        | 310,000    |     | $          | 55,000 |   |

 

The Company’s depreciation expense for the years endedDecember 31, 2008 and 2007 was $78,000 and $187,000, respectively.  In 2008, lease incentives under the Bethesdafacility lease provided for $150,000 of leasehold improvements.

 

**5.             Patents and Intangible Assets**

 

The Company’s amortization expense for the years endedDecember 31, 2008 and 2007 was $8,000 and $23,000, respectively.  The Company’s future amortization based onits patents and intangible assets at December 31, 2008 is as follows:

 
| **Year** | ** ** | **Amortization  Expense** | ** ** |
|----------|------------|---------------------------|------------|
| 2009     |       | $                         | 7,000      |   |
| 2010     |       | 7,000                     |       |
| Total    |       | $                         | 14,000     |   |

 

**6.             Line of Credit**

 

On June 25, 2007, as part of the Stock PurchaseAgreement to sell InfoSpherix, the Company agreed to terminate theline-of-credit with Bank of America (“the Bank”).  Accordingly, the Company has closed theline-of-credit with the Bank.

 

**7.             Accounts Payable and Accrued Expenses**

 

Accounts payable and accrued expenses consisted of thefollowing at December 31:

 
| ** **       | ** ** | **2008** | ** ** | **2007** | ** ** |
|------------------|------------|----------|------------|----------|------------|
|             |       |     |       |     |       |
| Accounts payable |       | $        | 524,000    |     | $          | 232,000 |   |
| Accrued expenses |       | 187,000  |       | 780,000  |       |
| Book overdraft   |       | —   |       | 35,000   |       |
|             |       | $        | 711,000    |     | $          | 1,047,000 |   |

 

28

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**Spherix Incorporated**

**Notes to Consolidated FinancialStatements**

 

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**8.             Stockholders’Equity**

 

***Private Placements***

 

During 2007, the Company sold 442,358 shares of commonstock for an additional $758,000 in proceeds under the July 22, 2005,Standby Equity Distribution Agreement (“SEDA”). The SEDA ended on October 12, 2007.

 

***RestrictedStock***

 

In August 2007, the Company granted 30,000 and15,000 shares in restricted stock as part of the employment agreements for theCompany’s Chief Executive Officer and President.  The fair value of the stock was $55,800 and$30,000, which will be recognized as compensation expense over the respectivevesting periods of two and one years.

 

In August 2008 and2007, the Company issued 38,460 and 19,140 shares, respectively, of restrictedstock with a fair value of $40,000 in each year to its independent BoardMembers, which was recognized as compensation expense at the time ofissue.  The fair value of the above stockawards was based on the closing market price on the date of grant.

 

***StockOption Plan***

 

The Company has an Employees’Stock Option Plan (the “Plan”) which permits issuance of both Incentive StockOptions (ISO) and Non-Qualified Stock Options, whereby options may be grantedto officers, Directors and other key employees to purchase up to 1,000,000shares of common stock in amounts determined by the Compensation Committee ofthe Board of Directors through December 31, 2010.  During 2008 and 2007, no stock options weregranted under the Plan.  At December 31,2008, 857,700 options were available for grant under the Plan.

 

Activity for the two years ended December 31,2008, for all option grants is shown below:

 
| ** **                                                      | ** ** | **2008   Shares** | ** ** | **2008   Weighted   Average   Exercise   Price** | ** ** | **2007   Shares** | ** ** | **2007   Weighted   Average   Exercise   Price** | ** ** |
|-----------------------------------------------------------------|------------|------------------------|------------|----------------------------------------------------------------------|------------|------------------------|------------|----------------------------------------------------------------------|------------|
| Outstanding at  beginning of year                               |       | 216,800                |       | $                                                                    | 7.36       |                   | 501,100    |                                                                 | $          | 7.11 |   |
| Granted                                                         |       | —                 |       | $                                                                    | —     |                   | —     |                                                                 | $          | — |   |
| Exercised                                                       |       | —                 |       | $                                                                    | —     |                   | —     |                                                                 | $          | — |   |
| Expired or  forfeited                                           |       | (176,300               | )          | $                                                                    | 8.46       |                   | (284,300   | )                                                                    | $          | 6.91 |   |
| Outstanding at  end of year                                     |       | 40,500                 |       | $                                                                    | 2.57       |                   | 216,800    |                                                                 | $          | 7.36 |   |
|                                                            |       |                   |       |                                                                 |       |                   |       |                                                                 |       |
| Options  exercisable at end of year                             |       | 39,000                 |       |                                                                 |       | 214,550                |       |                                                                 |       |
| Weighted-average  fair value of options granted during the year |       | $                      | —     |                                                                 |       |                   | $          | —                                                               |       |   |   |
|                                                            |       |                   |       |                                                                 |       |                   |       |                                                                 |       |
| Price range of  options                                         |       |                   |       |                                                                 |       |                   |       |                                                                 |       |
| Outstanding                                                     |       | $2.20-$3.41            |       |                                                                 |       | $2.20-$8.67            |       |                                                                 |       |
| Exercised                                                       |       | $                      | —     |                                                                 |       |                   | $          | —                                                               |       |   |   |
| Expired or  forfeited                                           |       | $6.35-$8.67            |       |                                                                 |       | $2.20-$10.51           |       |                                                                 |       |

 

29

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**Spherix Incorporated**

**Notes to Consolidated FinancialStatements**

 

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The following table summarizes information withrespect to stock options outstanding at December 31, 2008:

 
| **Range of   Exercise Price** | ** ** | **Number of   Options   Outstanding   at 12/31/08** | ** ** | **Weighted   Average   Exercise Price** | ** ** | **Weighted   Average   Remaining   Contractual Life** | ** ** |
|----------------------------------------------|------------|------------------------------------------------------------------------------|------------|--------------------------------------------------------|------------|---------------------------------------------------------------------------|------------|
| $                                            | 2.20       |                                                                         |       | 28,000                                                 |       | $                                                                         | 2.20       |   | 2.1 |   |
| $                                            | 3.41       |                                                                         |       | 12,500                                                 |       | $                                                                         | 3.41       |   | 1.1 |   |
|                                         |       | 40,500                                                                       |       |                                                   |       |                                                                      |       |

 

The following tablesummarizes information with respect to stock options exercisable at December 31,2008:

 
| **Year of Option   Expiration** | ** ** | **Number of   Options** | ** ** | **Weighted   Average   Exercise Price** | ** ** | **Price Range** | ** ** |
|------------------------------------------------|------------|-----------------------------------|------------|--------------------------------------------------------|------------|----------------------|------------|
| 2010                                           |       | 12,500                            |       | $                                                      | 3.41       |                 | $          | 3.41 |   |
| 2011                                           |       | 26,500                            |       | $                                                      | 2.20       |                 | $          | 2.20 |   |
| All Years                                      |       | 39,000                            |       |                                                   |       |                 |       |

 

The Company used thefollowing assumptions in the Black-Scholes calculation used to measure the fairvalue of stock-based compensation in accordance with SFAS 123R for stockoptions granted in 2006.  No stockoptions were granted in 2008 or 2007.

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

** **

**9.             Liquidity**

** **

Working capital as of December 31, 2008, was$10.8 million, which represents a $4.1 million decrease from working capital atDecember 31, 2007.  A $6.2 millionloss from operations before taxes was partly offset by the $2 million that wasrealized in November 2008 upon the receipt of the escrow balance from the2007 sale of InfoSpherix.  Expendituresfor the year included approximately $4.2 million for R&D activity andrelated market research costs.

 

Spherix expects to expend approximately $7 millionover the next year including $5 million in costs related to the Phase 3 andDose Range trialsand other R&D and marketing activity related to the commercialization ofNaturlose.  The Phase 3 clinical trial isexpected to be completed in mid-2010 and the Dose Range trial in 2009.  TheCompany intends to finance the Biosphericsactivities principally through proceeds received from the 2007 sale ofInfoSpherix and is considering raising additional funds through the sale ofcommon stock and/or other means.  Whilethe Company completes its Phase 3 trial, it is taking other steps to preparefor commercialization of Naturlose as a treatment for Type 2 diabetes on theassumption that the trials will be successful. These steps include the DoseRange trial, exploringmanufacturing alternatives and seeking marketing assistance.  The Company’s goal is to attract apharmaceutical company to purchase or license the technology at the earliestpracticable stage.  Our preliminarymarketing analysis suggests that we may increase our chances of success byengaging in some directed marketing efforts as we proceed with the Phase 3trial.

 

Continued progress on the clinical trial of Naturloseas a treatment of Type 2 diabetes and on the other initiatives described aboveis dependent upon many factors including, but not limited to, the Companyhaving sufficient funds and resources. To date, the Company has not had, and does not expect to have, anymeaningful offers until the efficacy of Naturlose has been further established.  The Company believes its current financialresources are sufficient to complete the Phase 3 trial provided the trial iscompleted as expected by mid-2010, but does not believe its resources 

 

30

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**Spherix Incorporated**

**Notes to Consolidated FinancialStatements**

 

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will be sufficient tothen prepare, submit and pursue the FDA new drug application (NDA) or takeother steps necessary to bring Naturlose to market as a Type 2 diabetesdrug.  Additional funds may be requiredif the Phase 3 trial is further delayed.

 

The total cost ofcompleting the Phase 3 trial is difficult to determine and can be affected byany number of factors including, but not limited to, the time to complete thetrial.  No guarantee can be given thatthe Company will be successful in its efforts to raise additional funds and, asmany of our costs are “fixed,” any additional delays in the Phase 3 trial couldcause us to expend all of our funds before the trial is complete.

 

**10.          Income Taxes**

 

Income tax from continuing operations for 2008 and2007 was as follows:

 
| ** **                                    | ** ** | **2008** | ** ** | **2007** | ** ** |
|-----------------------------------------------|------------|----------|------------|----------|------------|
| U.S. Federal  income tax benefit              |       | $        | 465,000    |     | $          | 3,434,000 |   |
| State and local  income tax benefit (expense) |       | 88,000   |       | (26,000  | )          |
| Total income tax  benefit                     |       | $        | 553,000    |     | $          | 3,408,000 |   |

 
| ** **                   | ** ** | **2008** | ** ** | **2007** | ** ** |
|------------------------------|------------|----------|------------|----------|------------|
| Current income  tax benefit  |       | $        | 553,000    |     | $          | 3,437,000 |   |
| Deferred income  tax expense |       | —   |       | (29,000  | )          |
| Total income tax  benefit    |       | $        | 553,000    |     | $          | 3,408,000 |   |

 

The tax effects of significant temporary differencesrepresenting deferred tax assets as of December 31, 2008 and 2007 are asfollows:

 
| ** **                       | ** ** | **2008**   | ** ** | **2007**   | ** ** |
|----------------------------------|------------|------------|------------|------------|------------|
| Property and  equipment          |       | $          | (70,000    | )          | $          | 140,000 |   |
| Deferred rent                    |       | 54,000     |       | 2,000      |       |
| Accrued vacation                 |       | 19,000     |       | 4,000      |       |
| Tax credit                       |       | 82,000     |       | 90,000     |       |
| Deferred  compensation           |       | 305,000    |       | 260,000    |       |
| Net operating  loss carryforward |       | 8,001,000  |       | 5,908,000  |       |
| Accrued bonus                    |       | —     |       | 45,000     |       |
| Stock based  compensation        |       | 27,000     |       | 42,000     |       |
| Other                            |       | 1,000      |       | (1,000     | )          |
|                             |       | 8,419,000  |       | 6,490,000  |       |
| Valuation  allowance             |       | (8,419,000 | )          | (6,490,000 | )          |
| Deferred tax  asset              |       | $          | —     |       | $          | — |   |

 

At December 31, 2008and 2007, the Company had net operating loss carry forwards for U.S. federalincome tax purposes of approximately $18.7 million and $14.0 million, respectively,which will begin to expire in 2019.  At December 31,2008 and 2007, the Company had net operating loss carry forwards for stateincome tax purposes of approximately $30.5 million and $25.9 million,respectively, which will begin to expire in 2019.  Based on the Company’s historical losses andits accumulated deficit, the Company has provided a full valuation allowanceagainst the net deferred tax asset.

 

31

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**Spherix Incorporated**

**Notes to Consolidated FinancialStatements**

 

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Reconciliation between actual tax expenses and taxescomputed at the statutory Federal rate of 34 percent for 2008 and 2007 are asfollows:

 
| ** **                                                        | ** ** | **2008**   | ** ** | **2007** | ** ** |
|-------------------------------------------------------------------|------------|------------|------------|----------|------------|
| U.S. Federal  income tax benefit at the statutory rate of 34%     |       | $          | 2,432,000  |     | $          | 3,148,000 |   |
| Effect of  permanent differences                                  |       | (25,000    | )          | 370,000  |       |
| State income  taxes (expense) benefit, net of federal tax benefit |       | (39,000    | )          | 434,000  |       |
| Other                                                             |       | 112,000    |       | 16,000   |       |
| Change in  valuation allowance                                    |       | (1,928,000 | )          | (560,000 | )          |
| Income tax benefit                                                |       | $          | 552,000    |     | $          | 3,408,000 |   |

 

***Tax Uncertainties***

 

EffectiveJanuary 1, 2007, the Company adopted the provisions of FASB InterpretationNo. 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes, aninterpretation of FASB Statement No. 109 (“SFAS”).  The interpretation prescribes recognition andmeasurement parameters for the financial statement recognition and measurementof tax positions taken or expected to be taken in the Company’s taxreturn.  For those benefits to berecognized, a tax position must be more-likely-than-not to be sustained uponexamination by taxing authorities.  Theamount recognized is measured as the largest amount of benefit that has agreater than 50 percent likelihood of being realized upon ultimatesettlement.  The Company recognized noadjustments related to the implementation of FIN 48.  At December 31, 2008 and 2007, theCompany had no material unrecognized income tax benefits and recognized nointerest or penalties on income tax liabilities.

 

TheCompany’s policy is to recognize interest and penalties on tax liabilities asinterest expense.  It is anticipated thatthe Company’s unrecognized tax benefits will not change in the next 12 months.

 

The Companyis subject to U.S. federal income tax and state and local income tax inmultiple jurisdictions.  The statute oflimitations for the consolidated U.S. federal income tax return is closed forall tax years up to and including 2004, except for pre-2004 tax returns thatgenerated net operating loss carry forwards that could be adjusted onaudit.   Currently, no federal or stateand local income tax returns are under examination by the respective taxingauthorities.

 

**11.          Commitmentsand Contingencies**

 

***Government Contracts***

 

Followingthe sale of InfoSpherix, the Company is no longer engaged in the performance ofgovernment contracts.

 

***Leases***

 

Related tothe sale of InfoSpherix, Spherix signed a lease termination agreement for theBeltsville office and subsequently signed a lease agreement for office space inBethesda, Maryland.  In 2007, atermination expense of $475,000 less $105,000 from the elimination of deferredrent was recorded as a cost of discontinued operations.  The Company also adjusted the estimateduseful life on leasehold improvements to reflect the shorter lease period.

 

The Companyhas commitments under operating leases through 2013 relating to itsadministrative offices in Bethesda, Maryland and its research lab andadministrative office in Annapolis, Maryland.

 

32

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**Spherix Incorporated**

**Notes to Consolidated FinancialStatements**

 

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Futureminimum rentals as of December 31, 2008, under non-cancelable leases areas follows:

 
| **Year Ending December 31,** | ** ** | **Operating  Leases** | ** ** |
|---------------------------------------------|------------|-----------------------|------------|
|                                        |       |                  |       |
| 2009                                        |       | 192,000               |       |
| 2010                                        |       | 150,000               |       |
| 2011                                        |       | 155,000               |       |
| 2012                                        |       | 159,000               |       |
| 2013                                        |       | 40,000                |       |
|                                        |       | $                     | 696,000    |   |
|                                             |            |                       |            |  |

 

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.  In 2008, lease incentives under the Bethesdafacility lease provided for $150,000 of leasehold improvements.  The Company incurred net operating leaserental expenses of approximately $244,000 and $455,000 for the years 2008 and2007, respectively.

 

***Related Party Transactions***

 

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

 

Underemployment agreements with Dr. Gilbert V. Levin and Mrs. M. KarenLevin, the Company’s founders, the Company has agreed to provide Dr. and Mrs. Levineach with lifetime payments of $12,500 each quarter and to fund long-termlifetime healthcare and health insurance policies following their retirementsfrom the Company on August 14, 2008 and January 4, 2006,respectively.  At December 31, 2008,the Company’s liability for both Dr. and Mrs. Levin was estimated tobe $500,000 for the lifetime payments and $250,000 for funding the long-termlifetime healthcare and health insurance policies based on actuariallydetermined amounts.  The non-currentportion of these amounts is reported on the accompanying balance sheet asdeferred compensation.  During 2008 and2007, the Company paid Dr. and Mrs. Levin a combined total of$123,000 and $50,000 in post-retirement benefits.

 

Dr. and Mrs. Levin have agreed to serve asconsultants to the Company on an as-needed basis, at a specified dailyrate.  No consulting payments were madeto the Levins during 2008 or 2007.

 

**12.          Employee BenefitPlans**

 

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 aminimum of 1,000 hours in the past Plan or anniversary year.

 

Underprovisions of the Plan, the Company, for any plan year, has contributed anamount equal to 50% of the participant’s contribution or 21⁄2% of the participant’seligible compensation, whichever is less. The Company may, at its own discretion, make additional matchingcontributions to participants.  Companycontributions, net of forfeitures, amounted to $9,000 and $110,000 in 2008 and2007, respectively.

 

**13.          Information byBusiness Segment**

 

Operatingsegments are components of an enterprise about which separate financialinformation is available that is evaluated regularly by the chief operatingdecision maker, or decision-making group, in deciding how to allocate resourcesand in assessing performance.  Followingthe sale of the InfoSpherix subsidiary on August 15, 2007, the Companyoperated via two principal segments, Biospherics and Health Sciences.  Biospherics develops proprietary products forcommercial applications.  Health Sciencesbusiness provides technical and regulatory consulting services to biotechnologyand pharmaceutical companies, as well as aiding the Company’s own R&Dactivities.

 

33

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**Spherix Incorporated**

**Notes to Consolidated****Financial Statements**

 

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Financialinformation by business segment for the years ended December 31, 2008 and2007 is summarized below:

 
| ** **                            | ** ** | ** **                                           | ** ** | **Year Ended December 31,** | ** ** |
|---------------------------------------|------------|------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                            | ** ** | ** **                                           | ** ** | **2008**                                   | ** ** | **2007** | ** ** |
| **Revenues**                          |       | Health Sciences                                      |       | $                                          | 1,012,000  |   | $ | 144,000 |   |
|                                  |       | Biospherics                                          |       | 14,000                                     |       | 11,000 |   |
|                                  |       | Total revenues                                       |       | $                                          | 1,026,000  |   | $ | 155,000 |   |
|                                  |       |                                                 |       |                                       |       |   |   |
| **Operating  Income (Loss) and Loss** |       | Health Sciences                                      |       | $                                          | 433,000    |   | $ | 34,000 |   |
| **Before  Income Taxes**              |       | Biospherics                                          |       | (4,164,000                                 | )          | (5,898,000 | ) |
| ** **                            |       | General and administration                           |       | (2,780,000                                 | )          | (3,773,000 | ) |
|                                  |       | Total operating  loss                                |       | (6,511,000                                 | )          | (9,637,000 | ) |
|                                  |       | Interest income                                      |       | 348,000                                    |       | 378,000 |   |
|                                  |       | Interest expense                                     |       | (2,000                                     | )          | — |   |
|                                  |       | Other expense                                        |       | (6,000                                     | )          | — |   |
|                                  |       | Loss from  continuing operations before income taxes |       | $                                          | (6,171,000 | ) | $ | (9,259,000 | ) |
|                                  |       |                                                 |       |                                       |       |   |   |
| **Identifiable  Assets**              |       | Health Sciences                                      |       | $                                          | 296,000    |   | $ | 85,000 |   |
|                                  |       | Biospherics                                          |       | 21,000                                     |       | 89,000 |   |
|                                  |       | General  corporate assets                            |       | 11,944,000                                 |       | 16,367,000 |   |
|                                  |       | Total assets                                         |       | $                                          | 12,261,000 |   | $ | 16,541,000 |   |
|                                  |       |                                                 |       |                                       |       |   |   |
| **Capital  Expenditures**             |       | Health Sciences                                      |       | $                                          | —     |   | $ | — |   |
| ** **                            |       | Biospherics                                          |       | —                                     |       | 10,000 |   |
|                                  |       | General  corporate assets                            |       | 333,000                                    |       | 15,000 |   |
|                                  |       | Total capital  expenditures                          |       | $                                          | 333,000    |   | $ | 25,000 |   |
|                                  |       |                                                 |       |                                       |       |   |   |
| **Depreciation  and Amortization**    |       | Health Sciences                                      |       | $                                          | —     |   | $ | — |   |
| ** **                            |       | Biospherics                                          |       | 5,000                                      |       | 19,000 |   |
|                                  |       | General  corporate assets                            |       | 81,000                                     |       | 191,000 |   |
|                                  |       | Total  depreciation and amortization                 |       | $                                          | 86,000     |   | $ | 210,000 |   |

 

Operatingincome (loss) from continuing operations consists of revenue less operatingexpenses.  In computing operating loss,interest expense and income taxes were not considered.  The operating income for the Health Sciencessegment was 43% and 24% of that segment’s revenue for 2008 and 2007.

 

Biospherics is concentrating all of its efforts on thePhase 3 clinical trial of its most promising product, “Tagatose” (also known as“Naturlose”) as a treatment of Type 2 diabetes in humans.  This product is in the development stage andwill require substantial additional investment to 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.

 

**14.          Subsequent Events**

 

The Company has created two wholly-owned subsidiaries, BiosphericsIncorporated and Spherix Consulting, Inc., for its two operatingsegments.  The Company’s Health Sciencescontracts are now in the name of Spherix Consulting, Inc. and the Company’spatents and other assets and operations are in the process of being transferredinto 

 

34

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**Spherix Incorporated**

**Notes to Consolidated****Financial Statements**

 

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thename of Biospherics Incorporated.  Thesubsidiaries began operations on January 1, 2009.  Spherix now provides management, strategicguidance, business development, marketing and other services to itssubsidiaries.

 

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

 

                None.

 

**Item 9A(T). CONTROLS AND PROCEDURES**

 

*Inherent Limitations on the Effectiveness of Controls*

 

Management, including our Chief Executive Officer and ChiefFinancial Officer, do not expect that our disclosure controls and procedureswill 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, thedesign of a control system must reflect the fact that there are resourceconstraints, and management necessarily was required to apply its judgment inevaluating the cost-benefit relationship of possible controls andprocedures.  Because of the inherentlimitations in all control systems, no evaluation of controls can provideabsolute assurance that all control issues and instances of fraud, if any, withinthe Company 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.

 

*Disclosure Controls and Procedures*

 

We maintain disclosure controls and procedures that aredesigned to ensure that information required to be disclosed in our ExchangeAct reports, such as this report on Form 10-K, is recorded, processed,summarized and reported within the time periods specified in the SEC’s rules andforms, and that such information is accumulated and communicated to ourmanagement, including our Chief Executive Officer and Chief Financial Officer,as appropriate, to allow timely decisions regarding required disclosure. Thesecontrols and procedures are based closely on the definition of “disclosurecontrols and procedures” in Rule 13a-15(e) promulgated under theExchange Act.  Rules adopted by theSEC require that we present the conclusions of the Chief Executive Officer andChief Financial Officer about the effectiveness of our disclosure controls andprocedures as of the end of the period covered by this report.

 

The Companycarried out an evaluation, under the supervision and with the participation ofthe Company’s management, including the Company’s Chief Executive Officer andChief Financial Officer, of the effectiveness of the design and operation ofthe Company’s disclosure controls and procedures to provide reasonableassurance of achieving their 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 at a reasonable assurancelevel, as of December 31, 2008.

 

*Management’s Annual Report on Internal Control over Financial Reporting*

 

Our management is responsible for establishing andmaintaining adequate internal control over financial reporting, as such term isdefined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of our management,including our principal executive officer and principal financial officer, weconducted an evaluation of the effectiveness of our internal control overfinancial reporting based on the framework set forth in Internal Control–IntegratedFramework issued by the Committee of Sponsoring Organizations of the TreadwayCommission (COSO).  

 

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**Spherix Incorporated**

**Notes to Consolidated****Financial Statements**

 

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Based on our evaluation,management has concluded that its internal control over financial reporting waseffective as of December 31, 2008.

 

This Annual Report does not include an attestation reportof the Company’s registered public accounting firm regarding internal controlover financial reporting. Management’s report was not subject to attestation bythe Company’s registered public accounting firm pursuant to temporary rules ofthe Securities and Exchange Commission that permit the Company to provide onlymanagement’s report in this Annual Report on Form 10-K.

 

*Changes in Internal Control over Financial Reporting*

 

There have been no changes in the Company’s internalcontrol over financial reporting during the quarter ended December 31,2008 that have materially affected, or are reasonably likely to materiallyaffect, the Company’s internal control over financial reporting.

 

**Item 9B.  OTHER INFORMATION**

 

There wasno information required to be disclosed on Form 8-K during the fourthquarter of 2008, which was not so disclosed.

 

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**SpherixIncorporated**

 

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**PART III**

 

**Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE**

 

Thefollowing table sets forth information concerning the Spherix Board ofDirectors.

 
| ** **                 | ** ** | ** ** | ** ** | ** **                             | ** ** | **Director** | ** ** |
|----------------------------|------------|------------|------------|----------------------------------------|------------|--------------|------------|
| **Name**                   | ** ** | **Age**    | ** ** | **Position**                           | ** ** | **Since**    | ** ** |
| Douglas T. Brown           |       | 55         |       | Director                               |       | 2004         |       |
| A. Paul Cox, Jr.      |       | 71         |       | Chairman  of the Board                 |       | 2004         |       |
| Claire L. Kruger           |       | 50         |       | Director,  and Chief Executive Officer |       | 2007         |       |
| Gilbert V. Levin           |       | 84         |       | Director                               |       | 1967         |       |
| Robert A. Lodder, Jr. |       | 49         |       | Director,  and President               |       | 2005         |       |
| Aris Melissaratos          |       | 65         |       | Director                               |       | 2008         |       |
| Robert J. Vander Zanden    |       | 63         |       | Director                               |       | 2004         |       |

 

Mr. Douglas T. Brown, a Board Member since 2004,is Senior Vice President and Manager of the Corporate Banking GovernmentContracting Group for PNC Bank N.A., Washington, DC.  Mr. Brown has been with PNC and itspredecessor bank, Riggs Bank, since 2001 and previously worked for Bank ofAmerica, N.A. and its predecessor banks for 16 years as a Loan Officer, as wellas a manager of Loan Officers in the Mid-Atlantic region.  Subsequent to 1990, the majority of Mr. Brown’scustomers were companies that provided services to the Federal Government andState governments.  Mr. Brown holdsa B.A. degree in Political Science from American University and a graduatedegree from The Stonier Graduate School of Banking at the University ofDelaware.  He is not now, nor has he beenfor the past five years, a director of a public, for-profit company other thanSpherix.

 

Mr. A. Paul Cox, Jr., PE, CMC, a BoardMember since 2004, was elected Chairman of the Board in 2007.  He brings sales, information technology andgeneral corporate management experience to Spherix.  He holds a B.E.S. in Electrical Engineeringand an M.S. in Management Science, both from The Johns Hopkins University.  Mr. Cox began his career designingspecial purpose digital computers, earning three patents from the WestinghouseUnderseas Division, where he remained for seven years.  He joined IBM Corporation, advancing throughtechnical assignments, achieving increasing management responsibility ininformation systems, technical services and sales positions, and becomingRegional Marketing Rep and then Marketing Unit Manager.  Mr. Cox became President, CEO, and BoardMember of Data Systems Corporation for nine years until selling the company toa division of ADP.  He became Chairmanand CEO of the Codema Corporation, a management consulting company.  He was then recruited by Standard Register asits Corporate Vice President and General Manager of their business andequipment division.  Now Principal of hisown Asset Protection Company, Mr. Cox has served on various educational,industrial, civic and charitable boards. He is not now, nor has he been for the past five years, a director of apublic, for-profit company other than Spherix.

 

Dr. Claire L. Kruger was elected to the SpherixIncorporated Board of Directors in August 2007, and was also elected ChiefExecutive Officer and Director of Health Sciences at that time.  Dr. Kruger received her Ph.D. inToxicology from Albany Medical College, and her B.S. in Biology from ClarksonCollege.  With more than 20 years ofconsulting experience, her primary areas of expertise are in foods, consumerproducts and pharmaceuticals, where she provides scientific, regulatory, andstrategic support to clients in both the US and international regulatoryarenas.  Dr. Kruger has conductedtoxicity evaluations of foods and food contaminants, as well as health riskassessments and exposure assessments of drugs, cosmetics, and pesticides.  Her clients include food, drug, and dietarysupplement manufacturers, agricultural producers, biotechnology companies,trade associations, and law firms.  Inher role as a consultant, Dr. Kruger has been involved in the safetyevaluation of a variety of consumer products, providing oversight of productcompliance with current and emerging scientific and regulatory guidance.  She is not now, nor has she been for the pastfive years, a director of a public, for-profit company other than Spherix.

 

Dr. Gilbert V. Levin founded Spherix Incorporatedin 1967 and has served the Company in a variety of capacities sinceincorporation.  He served as Director ofScience and Technology until his retirement in August 2008.  Dr. Levin previously served in thepublic health departments of Maryland, California, and the District of Columbiaand, subsequently, as a research scientist and corporate official.  Among his inventions are low-caloricsweeteners; biological nutrient removal (BNR) for municipal wastewater, rapiddetection and identification of microorganisms; and the 

 

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Labeled Release lifedetection experiment that landed on Mars in 1976 aboard NASA’s VikingMission.  He holds a Bachelor’s, Master’s,and a Ph.D., all from The Johns Hopkins University, where he also served on itsBoard of Trustees and presently serves on its National Advisory Council for theWhiting School of Engineering.  Dr. Levinwas recently appointed Adjunct Professor, Arizona State University, Beyond: Centerfor Fundamental Concepts in Science.  Heis not now, nor has he ever been, a director of a public company other thanSpherix.  Dr. Levin has not workedfor any company other than Spherix since 1967.

 

Dr. Robert A. Lodder, Spherix Incorporated BoardMember since 2005, was elected President in August 2007.  He served as a Professor of PharmaceuticalSciences at the College of Pharmacy, University of Kentucky Medical Center, andholds joint appointments in the Department of Electrical and Computer Engineering,and the Division of Analytical Chemistry of the Department of Chemistry atKentucky.  Dr. Lodder received hisB.S. degree cum laude in Natural Science in 1981, and his M.S. in Chemistry in1983 from Xavier University, Cincinnati, Ohio. He received his Ph.D. in Analytical Chemistry in 1988 from IndianaUniversity.  He was a founder ofInfraReDx, Inc. in 1998 and Prescient Medical, Inc. in 2004.  Neither of these companies are public, andthey do not engage in business with Spherix. He is not now, nor has he been for the past five years, a director of apublic, for-profit company other than Spherix.

 

Mr. Aris Melissaratos was elected to the SpherixBoard of Directors in February 2008. He currently serves as Senior Advisor to the President of Johns HopkinsUniversity with responsibilities for technology transfer, corporatepartnerships, and enterprise development. From 2003 to 2007, he served as Secretary of Business and EconomicDevelopment for the State of Maryland, driving the state’s unemployment figuresto an impressive 3.6% and positioning Maryland for leadership in the emerging “knowledgeeconomy.”  He worked for WestinghouseElectric Corporation for 32 years, culminating as the corporation’s ChiefTechnology Officer and Vice President for Science and Technology, responsiblefor running Westinghouse’s research and development functions.  He also served as the Chief OperationsOfficer for the company’s Defense Electronics Group, where he was responsiblefor managing 16,000 employees (9,000 engineers) and $3.2 billion dollars ofsales.  After Westinghouse, he becameVice President of Thermo Electron Corporation and CEO of its Coleman ResearchCorporation and Thermo Information Solutions subsidiaries.  He formed Armel Scientifics, LLC, whichinvested in over 30 start-up companies in Life Sciences and AdvancedTechnology.  He holds a B.E.S. inelectrical engineering from The Johns Hopkins University, a Master of Sciencein engineering management from George Washington University, and has completedthe program for Management Development at the Harvard University School ofBusiness.  He completed the course workfor a Ph.D. in International Politics at the Catholic University of America butdid not complete the dissertation.  Mr. Melissaratoscurrently serves as a member of the Board of Directors of Avatech Solutions, Inc.in Owings Mills, MD, a software and technology firm.

 

Dr. Robert J. Vander Zanden, Board Member since2004, having served in two Vice President positions with Kraft FoodsInternational, brings a long and distinguished career in technical and businessaspects of the food science industry to Spherix.  Dr. Vander Zanden holds a Ph.D. in FoodScience from Kansas State University, and an M.S. and B.S. in Chemistry, thelatter from the University of Wisconsin – Platteville, where he was named aDistinguished Alumnus in 2002.  In his30-year career, he has been with ITT Baking Company as a Product DevelopmentScientist, with Ralston Purina as Manager Dietary Foods R&D, with Keebleras Group Director, Product and Process Development, with Group Gamesa, aFrito-Lay Company, as Vice President, Technology, with Nabisco, as VicePresident of R&D for their International Division and with the acquisitionof Nabisco by Kraft Foods, he became the Vice President of R&D for Kraft’sLatin American Division.  Dr. VanderZanden retired from Kraft Foods in 2004. He currently holds the title of Adjunct Professor and Lecturer in theDepartment of Food Science and Human Nutrition at Clemson University.  His focus on achieving product and processinnovation through training, team building and creating positive workingenvironments has resulted in his being recognized with many awards for productand packaging innovation.  He is not now,nor has he been for the past five years, a director of a public, for-profitcompany other than Spherix.

 

**Corporate Governance**

 

The Audit Committeemembers during 2008 were Mr. Brown, Chair; Mr. Cox, and Dr. VanderZanden.  The Audit Committee Charter isavailable on the Company’s website at www.spherix.com.  Each member of the Audit Committee satisfiesthe independence requirements and other established criteria of the NASD andthe Securities and Exchange Commission. The Board of Directors believes that, while the members of its Audit Committeehave substantial financial and management experience and are fully qualified tocarry out the functions of the Audit 

 

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Committee, none of itsmembers meets the requirements of an audit committee financial expert asdefined in the Securities and Exchange Commission rules.

 

**Executive Officers**

 

The ExecutiveOfficers of the Company are elected annually by the Board of Directors and arelisted in the following table.

 
| **Name**          | ** ** | **Age** | ** ** | **Position**                                        | ** ** |
|-------------------|------------|---------|------------|-----------------------------------------------------|------------|
| Robert L. Clayton |       | 45      |       | Interim CFO and Treasurer                           |       |
| Claire L. Kruger  |       | 50      |       | Chief Executive Officer and Chief Operating Officer |       |
| Robert A. Lodder  |       | 49      |       | President                                           |       |

 

Drs. Krugerand Lodder’s professional experience are discussed above.

 

Mr. Robert L.Clayton was elected to the Office of Interim CFO in August 2007, and waselected Director of Finance and Treasurer in May 2005.  Mr. Clayton previously served asController.  Prior to joining Spherix, hewas a Senior Auditor for the public accounting firm Rubino & McGeehinChartered.  Mr. Clayton holds a B.S.in business and management from the University of Maryland and a C.P.A. fromthe District of Columbia.  He is not now,nor has he been for the past five years, a director of a public, for-profit company.

 

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

 

**Section 16(a) BeneficialOwnership Regarding Compliance**

 

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

 

Based solely upona review of (i) copies of the Section 16(a) filings received bythe Company during or with respect to 2008 and (ii) certain writtenrepresentations of its Officers and Directors, the Company believes that eachfiling required to be made pursuant to Section 16(a) of the ExchangeAct during and with respect to 2008 and 2007 was filed in a timely manner.

 

**Code of Ethics**

 

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

 

**Item 11. EXECUTIVE COMPENSATION**

 

We strive to payour named executive officers at or near the median paid by comparablecompanies.  In 2007, the CompensationCommittee hired an outside company, Equilar, Inc., to compare the totalcompensation of the Spherix Executives to the total compensation of fourteen(14) companies identified by Equilar, Inc. to be peer companies toSpherix.  The Equilar Report on ExecutiveCompensation showed that Spherix Executives are not compensated at the samelevel as colleagues in peer companies. Based upon the fiscal health of Spherix, however, it was determined bythe Compensation Committee that no special efforts should be made to bringExecutive total compensation to equivalent levels of those in peercompanies.  All 2009 base salaryincreases (with few exceptions) will be kept in line with inflation.  The Compensation Committee recommended to theBoard the salary adjustment for the President and Chief Executive Officer ofSpherix.

 

39

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The followingSummary of Compensation table sets forth the compensation paid by the Companyduring the two years ended December 31, 2008, to all Executive Officersearning in excess of $100,000 during any year.

 

**Summary of Compensation**

** **
| ** **                  | ** ** | ** ** | ** ** | ** **          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Non-Equity**          | ** ** | **Change in  Pension Value  and Non-  Qualified** | ** ** | ** **                | ** ** | ** **         | ** ** |
|-----------------------------|------------|------------|------------|---------------------|------------|------------|------------|------------|------------|------------|------------|-------------------------|------------|------------------------------------------------------------------|------------|---------------------------|------------|--------------------|------------|
| ** **                  | ** ** | ** ** | ** ** | ** **          | ** ** | ** ** | ** ** | **Stock**  | ** ** | **Option** | ** ** | **Incentive Plan** | ** ** | **Deferred**                                                     | ** ** | ** **                | ** ** | ** **         | ** ** |
| **Name and**           | ** ** | ** ** | ** ** | ** **          | ** ** | **Bonus**  | ** ** | **Award**  | ** ** | **Award**  | ** ** | **Compensation**        | ** ** | **Compensation**                                                 | ** ** | **All Other**        | ** ** | ** **         | ** ** |
| **Principal Position** | ** ** | **Year**   | ** ** | **Salary ($)** | ** ** | **($)(1)** | ** ** | **($)(2)** | ** ** | **($)(3)** | ** ** | **($)(4)**              | ** ** | **Earnings ($)**                                            | ** ** | **Compensation ($)** | ** ** | **Total ($)** | ** ** |
| C. Kruger                   |       | 2008       |       | 186,667             |       | —     |       | 18,600     |       | —     |       | 76,000                  |       | —                                                           |       | —                    |       | 281,267            |       |
| CEO and COO                 |       | 2007       |       | 72,333              |       | —     |       | 26,350     |       | —     |       | 33,751                  |       | —                                                           |       | —                    |       | 132,434            |       |
|                        |       |       |       |                |       |       |       |       |       |       |       |                    |       |                                                             |       |                      |       |               |       |
| R. Lodder                   |       | 2008       |       | 166,667             |       | —     |       | 22,500     |       | —     |       | 68,000                  |       | —                                                           |       | —                    |       | 257,167            |       |
| President                   |       | 2007       |       | 60,000              |       | —     |       | 10,000     |       | —     |       | 18,667                  |       | —                                                           |       | —                    |       | 88,667             |       |
|                        |       |       |       |                |       |       |       |       |       |       |       |                    |       |                                                             |       |                      |       |               |       |
| R. Clayton                  |       | 2008       |       | 224,625             |       | —     |       | —     |       | 940        |       | —                  |       | —                                                           |       | —                    |       | 225,565            |       |
| CFO and  Treasurer          |       | 2007       |       | 150,314             |       | 100,000    |       | —     |       | 940        |       | —                  |       | —                                                           |       | —                    |       | 251,254            |       |

 

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| (1) | R. Clayton received a stay bonus  of $100,000 in 2007.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | On August 1, 2007, C. Kruger  was granted 30,000 shares in restricted stock with a market price on the date  of grant of $1.86. The restricted stock vested in equal amounts of 10,000  shares on August 1, 2007 and August 1, 2008, and the remaining  10,000 will vest on August 1, 2009. On August 16, 2007, R. Lodder  was granted 15,000 shares in restricted stock with a market price of the date  of grant of $2.00. The restricted stock vested in equal amounts of 7,500  shares on March 1, 2008 and September 1, 2008. |
| (3) | On February 17, 2006, R.  Clayton was granted stock options for 2,000 shares, respectively. Information  regarding forfeiture and assumptions made in the valuation are disclosed in  Note 8.                                                                                                                                                                                                                                                                                                                                                                    |
| (4) | Awards pursuant to the  May 12, 2005 Spherix Incorporated Incentive Compensation Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |

 

**Outstanding EquityAwards at Fiscal Year-End**

 
| ** ** | ** ** | **Option Awards**                                                                     | ** ** | ** Stock Awards**                                                                | ** ** |
|------------|------------|---------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------|------------|
| ** ** | ** ** | **Number of   Securities   Underlying  Unexercised  Options (#)** | ** ** | **Number of  Securities   Underlying   Unexercised  Options (#)** | ** ** | **Option  Exercise** | ** ** | **Option  Expiration** | ** ** | **Number   of Shares   or Units  of Stock  that have  not Vested** | ** ** | **Market  Value of   Shares or  Units of  Stock that  have not** | ** ** |
| **Name**   | ** ** | **Exercisable**                                                                       | ** ** | **Unexercisable**                                                                     | ** ** | **Price ($)** | ** ** | **Date** | ** ** | **(#)** | ** ** | **Vested ($)** | ** ** |
| C. Kruger  |       | —                                                                                |       | —                                                                                |       | — |   | — |   | 10,000 | (2) | 4,600 |   |
| R. Lodder  |       | —                                                                                |       | —                                                                                |       | — |   | — |   | — |   | — |   |
| R. Clayton |       | 1,000                                                                                 |       | 1,000                                                                                 | (1)        | $ | 2.20 |   | 2/15/2011 |   | — |   | — |   |
|            |            |                                                                                       |            |                                                                                       |            |  |  |  |  |  |  |  |  |  |

 

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(1)          Will vestin equal installments on 2/16/2009 and 2/16/2010.

(2)          Will veston 8/1/2009.

 

**Potential PaymentUpon Termination or Change in Control**

 

The onlycommitment we have regarding payments upon termination of employment are thecommitments to Dr. and Mrs. Levin, each of whom has retired as anemployee of the Company.  On July 2,2008, the Company entered into a Letter Agreement confirming and clarifyingcertain matters regarding the retirements of Dr. and Mrs. Levin.  This agreement provides the followingcontinuing post-employment benefits:

 

·                  Lifetime quarterly payments of$12,500 to each of Dr. Levin and his wife;

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

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

·                  Freeuse of cell phones and computers for a period of three (3) years;

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

 

40

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Unless otherwise agreedby the Board of Directors, the named Executive Officers would be entitled toseverance upon termination of employment pursuant to the Company’s severance policy.  The policy provides:

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

 

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

 

**Director Compensation**

 
| **Name**                 | ** ** | **Fees Earned or  Paid in Cash ($)** | ** ** | **Stock Awards ($)** | ** ** | **All Other   Compensation ($)** | ** ** | **Total   ($)** | ** ** |
|--------------------------|------------|---------------------------------------------------------------|------------|--------------------------------|------------|-------------------------------------------------|------------|----------------------|------------|
| Douglas T. Brown         |       | 25,000                                                        |       | 10,000                         |       | —                                          |       | 35,000               |       |
| A. Paul Cox, Jr.    |       | 26,000                                                        |       | 10,000                         |       | —                                          |       | 36,000               |       |
| George C. Creel          |       | 6,000                                                         |       | —                         |       | —                                          |       | 6,000                |       |
| Aris  Melissaratos       |       | 17,000                                                        |       | 10,000                         |       | —                                          |       | 27,000               |       |
| Robert J. Vander  Zanden |       | 26,000                                                        |       | 10,000                         |       | —                                          |       | 36,000               |       |
| Gilbert V. Levin         |       | —                                                        |       | —                         |       |                                            | *          |                 | *          |

 

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*              Underemployment agreements with Dr. Gilbert V. Levin and Mrs. M. KarenLevin, the Company’s founders, the Company has agreed to provide Dr. and Mrs. Levineach with lifetime payments of $12,500 each quarter and to fund long-termlifetime healthcare and health insurance policies following their retirementsfrom the Company on August 14, 2008 and January 4, 2006,respectively.  At December 31, 2008,the Company’s liability for both Dr. and Mrs. Levin was estimated tobe $500,000 for the lifetime payments and $250,000 for funding the long-termlifetime healthcare and health insurance policies based on actuariallydetermined amounts.  The non-currentportion of these amounts is reported on the accompanying balance sheet asdeferred compensation.  During 2008 and2007, the Company paid Dr. and Mrs. Levin a combined total of$123,000 and $50,000 in post-retirement benefits.  In addition, Dr. Levin also received$87,000 and $125,000 in salaries during 2008 and 2007, respectively.  Dr. Levin continues to serve as a memberof the Board of Directors.

 

Non-employee directors of Spherix Incorporated (“Spherix”)receive the following annual compensation for service as a member of Spherix:

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

 

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| **Item  12.** | **SECURITY  OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT, AND RELATED STOCKHOLDERS** |
|---------------|-----------------------------------------------------------------------------------------------|

 

The following table sets forth the shares of CommonStock beneficially owned by all Executive Officers and Directors as a group asof December 31, 2008.  Except for Dr. Levinand his wife, no person is known by the Company to own beneficially more than5% of the outstanding Common Stock.  Theownership of Dr. Levin is detailed below.

 

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

** **
| **Title of Class** | ** ** | **Name of Beneficial Owner**     | ** ** | **Amount and Nature of  Ownership** | ** **   | **Percent Of Class** | ** ** |
|------------------------------|------------|-------------------------------------------------|------------|----------------------------------------------------|--------------|--------------------------------|------------|
| Common                       |       | Gilbert V. Levin                                |       | 2,419,307                                          | (1) (2) | 16.9                           | %          |
| Common                       |       | Douglas T. Brown                                |       | 39,652                                             | (2)          | *                              |       |
| Common                       |       | A. Paul Cox, Jr.                           |       | 30,652                                             | (2)          | *                              |       |
| Common                       |       | Robert J. Vander Zanden                         |       | 30,652                                             | (2)          | *                              |       |
| Common                       |       | Robert A. Lodder, Jr.                      |       | 27,852                                             | (2)          | *                              |       |
| Common                       |       | Claire L. Kruger                                |       | 20,000                                             | (2)          | *                              |       |
| Common                       |       | Aris Melissaratos                               |       | 9,615                                              | (2)          | *                              |       |
| Common                       |       | Robert L. Clayton                               |       | 1,000                                              | (2)          | *                              |       |
| Common                       |       | All Executive Officers and Directors as a Group |       | 2,578,730                                          | (2)          | 18.0                           | %          |

 

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| *   | Less  than 1% of the outstanding shares of Common Stock of the Company.                                                                                                                                                                                                                                                                                                                             |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (1) | Includes  shares owned by M. Karen Levin.                                                                                                                                                                                                                                                                                                                                                           |
| (2) | Included  in the number of shares beneficially owned by G.V. Levin, D.T. Brown, A.P.  Cox, R.J. Vander Zanden, R.A. Lodder, C.L. Kruger, A. Melissaratos, R.L.  Clayton and All Executive Officers and Directors as a Group are 0, 7,500,  7,500, 7,500, 5,000, 0, 0, 1,000, and 28,500 shares, respectively, which such  persons have a right to acquire within 60 days pursuant to stock options. |

 

As of December 31, 2008, Dr. Levin, 3170 S.Ocean Boulevard, #602S, Palm Beach, FL 33480, beneficially owned in theaggregate 2,419,307 shares of Common Stock (16.9% of the 14,318,702 outstandingshares).  As principal Stockholders ofthe Company, Dr. Levin and his wife are considered control persons withrespect to the Company.

 

All Directors and Executive Officers as a group,beneficial owners of 2,578,730 shares of Common Stock, owned 18.0% of the14,318,702 outstanding shares. With the exception of Cede & Co., theholder of record for certain brokerage firms and banks, no other person isknown by the Company to own beneficially more than 5% of the outstanding CommonStock of the Company.

 

In February 2001, the Board of Directors adoptedthe Rights Agreement (the “Agreement”). The Agreement provides each Stockholder of record a dividenddistribution of one “right” for each outstanding share of the Company’s CommonStock.  Rights become exercisable at theearlier of ten days following:  (1) apublic announcement that an acquirer has purchased or has the right to acquire10% or more of the Company’s Common Stock, or (2) the commencement of atender offer which would result in an offeror beneficially owning 10% or moreof the outstanding Common Stock of the Company. All rights held by an acquirer or offeror expire on the announcedacquisition date, and all rights expire at the close of business on December 31,2010.  Each right entitles a Stockholderto acquire, at a stated purchase price, 1/100 of a share of the Company’spreferred stock, which carries voting and dividend rights similar to one shareof its Common Stock.  Alternatively, aright holder may elect to purchase for the stated price an equivalent number ofshares of the Company’s Common Stock at a price per share equal to one-half ofthe average market price for a specified period.  In lieu of the stated purchase price, a rightholder may elect to acquire one-half of the Common Stock available under thesecond option.  The purchase price of thepreferred stock fractional amount is subject to adjustment for certain eventsas described in the Agreement.  At thediscretion of a majority of the Board and within a specified time period, theCompany may redeem all of the rights at a price of $0.001 per right.  The Board may also amend any provisions ofthe Agreement prior to exercise.

 

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

 

*Related Transactions*

 

Underemployment agreements with Dr. Gilbert V. Levin and Mrs. M. KarenLevin, the Company’s founders, the Company has agreed to provide Dr. and Mrs. Levineach with lifetime payments of $12,500 each quarter and to fund long-termlifetime healthcare and health insurance policies following their retirementsfrom the Company on August 14, 2008 and January 4, 2006,respectively.  At December 31, 2008,the Company’s liability for both Dr. and Mrs. Levin was estimated tobe $500,000 for the lifetime payments and $250,000 for funding the long-termlifetime healthcare and health insurance policies based on actuariallydetermined amounts.  The non-currentportion of these amounts is reported on the accompanying balance sheet asdeferred compensation.  During 2008 and2007, the Company paid Dr. and Mrs. Levin a combined total of$123,000 and $50,000 in post-retirement benefits.  In addition, Dr. Levin also received$87,000 and $125,000 in salaries during 2008 and 2007, respectively.  Dr. Levin continues to serve as a memberof the Board of Directors.

 

*Director Independence*

 

The current Board of Directors consists of Mr. DouglasT. Brown, Mr. A. Paul Cox, Jr., Dr. Claire L. Kruger, Dr. GilbertV. Levin, Dr. Robert A. Lodder, Jr., Mr. Aris Melissaratos, and Dr. RobertJ. Vander Zanden.  The Board of Directorshas determined that a majority of its members, being Messrs. Brown, Cox,Melissaratos, and Vander Zanden, are independent Directors within the meaningof the applicable NASDAQ rules.  TheCompany’s Audit, Compensation, and Nominating Committees consist solely ofindependent Directors.

 

**Item14.  PRINCIPAL ACCOUNTING FEES ANDSERVICES**

 

**GrantThornton LLP Fees For Fiscal 2007**

 

The following table sets forth the fees paid by the Company toGrant Thornton LLP for audit and other services in 2008 and 2007:

 
| ** ** | ** ** | **2008** | ** ** | **2007** | ** ** |
|------------|------------|----------|------------|----------|------------|
|       |       |     |       |     |       |
| Audit fees |       | $        | 131,000    |     | $          | 202,000 |   |
| Tax fees   |       | —   |       | 3,000    |       |
| Total      |       | $        | 131,000    |     | $          | 205,000 |   |

 

The Audit Committee considered whether the provisionof services referenced above is compatible with maintaining Grant Thornton’sindependence. The Audit Committee’s policy is to pre-approve all audit andpermissible non-audit services provided by the independent auditors.  These services may include audit services,audit-related services, tax services and other services.  Pre-approval is generally provided for up toone year.  The Audit Committee may alsopre-approve particular services on a case-by-case basis.

 

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**PART IV**

 

**Item 15. 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) |
| (3.2)                             |   | Amended and Restated By-Laws of Spherix Incorporated  (incorporated by reference to Form 8-K dated November 15, 2007) |
| (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)                            |   | 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, 2007) |
| (10.3)                            |   | 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, 2007) |
| (10.4)                            |   | 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, 2007) |
| (10.5)                            |   | Letter Agreement dated as of July 2, 2008, by and between  Gilbert V. Levin, M. Karen Levin and the Company (incorporated by reference  to Form 8-K filed July 8, 2008) |
| (10.6)                            |   | 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) |
| (10.7)                            |   | 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) |
| (10.8)                            |   | 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 March 6, 2001) |
| (10.11)                           |   | 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) |
| (10.12)                           |   | 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, 2007) |
| (10.13)                           |   | 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, 2007) |
| (10.14)                           |   | 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) |
| (10.15)                           |   | 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) |
| (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 |

 

44

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**SIGNATURES**

 

Pursuant to the requirements of Section 13 or 15(d) ofthe Exchange Act of 1934, the Registrant has duly caused this report to besigned on its behalf by the undersigned, thereunto duly authorized.

 
|   |                      | **Spherix Incorporated** |
|--------|---------------------------|--------------------------|
|   |                      | **(Registrant)**         |
|   |                      |                     |
|   |                      |                     |
| Date:  |  March 27, 2009 |                     | By: | /s/ Claire L. Kruger |
|   |                      |                     |   | Claire L. Kruger |
|   |                      |                     |   | Chief Executive Officer and Chief Operating Officer |
|   |                      |                     |   |
|   |                      |                     |   |
| Date:  |  March 27, 2009 |                     | By: | /s/ Robert L. Clayton |
|   |                      |                     |   | Robert L. Clayton |
|   |                      |                     |   | Chief Financial Officer and Treasurer |

 

Pursuant to the requirements of the Securities Exchange Act of1934, this report has been signed below by the following persons on behalf ofthe Registrant and in the capacities and on the dates indicated.

 
| /s/ Douglas T. Brown           |   | Director                    |   | March 27, 2009  |   |
|--------------------------------|--------|-----------------------------|--------|----------------------|--------|
| Douglas T. Brown               |   |                        |   |                 |   |
|                           |   |                        |   |                 |   |
|                           |   |                        |   |                 |   |
| /s/ Robert L. Clayton          |   | CFO and Treasurer           |   | March 27, 2009  |   |
| Robert L. Clayton              |   |                        |   |                 |   |
|                           |   |                        |   |                 |   |
|                           |   |                        |   |                 |   |
| /s/ Claire L. Kruger           |   | Chief Executive Officer     |   | March 27, 2009  |   |
| Claire L. Kruger               |   | and Chief Operating Officer |   |                 |   |
|                           |   |                        |   |                 |   |
|                           |   |                        |   |                 |   |
| /s/ Gilbert V. Levin           |   | Director                    |   | March 27, 2009  |   |
| Gilbert V. Levin               |   |                        |   |                 |   |
|                           |   |                        |   |                 |   |
|                           |   |                        |   |                 |   |
| /s/ Robert A. Lodder, Jr. |   | Director and President      |   | March 27, 2009  |   |
| Robert A. Lodder, Jr.     |   |                        |   |                 |   |
|                           |   |                        |   |                 |   |
|                           |   |                        |   |                 |   |
| /s/ Aris Melissaratos          |   | Director                    |   | March 27,  2009 |   |
| Aris Melissaratos              |   |                        |   |                 |   |
|                           |   |                        |   |                 |   |
| /s/ Robert J. Vander Zanden    |   | Director                    |   | March 27, 2009  |   |
| Robert J. Vander Zanden        |   |                        |   |                 |   |

 

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