Overview

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

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

Biospherics is focused on only one potential product, Naturlose as an effective treatment for Type 2 diabetes. In April 2007, the Company 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 incurred substantial development costs and expects to continue to incur substantial development costs until completed, without any substantial corresponding revenue.

InfoSpherix provided contact center information and reservations services for government and industry. On August 15, 2007, the Company sold InfoSpherix to focus substantially all of its efforts on Biospherics. The operations of InfoSpherix are reported in the accompanying financial statements as discontinued operations.

Results of Operations-2008 Compared with 2007

Revenue and Direct Costs

Revenue and direct contract costs are primarily related to the Company's Health Sciences business, which started in July 2007 and has seen a steady growth in revenue each quarter. The consulting business generally provides services on either a fixed-price basis or on a "time and expenses" basis, charging hourly rates for each staff member involved in a project, based on his or her skills and experience. Engagement agreements typically provide for monthly billing and payment within thirty (30) days of receipt, and permit clients to terminate engagements at any time.

No substantial revenue is expected from the Biospherics segment until the Company is successful in selling or licensing its technology.

Research and Development

Research and development expenditures relate solely to the Biospherics segment and consist primarily of salaries and related personnel costs, fees paid to consultants and outside service providers, and other expenses related to 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 Naturlose for the treatment of Type 2 diabetes are the primary focus of the Biospherics division. The R&D expenditures for 2007 included start-up costs for the Phase 3 clinical trial, including approximately $2 million for drug packaging, warehousing and shipping, and those of the same periods in 2008 consisted of costs related to both the Phase 3 clinical trial and a Phase 2 Dose Range trial.

Patient recruitment for the U.S. clinical trial was slower than the Company originally expected. To enhance enrollment and retention, the Company successfully petitioned the FDA to eliminate the need for pre-mixed liquid solutions for the delivery of study medicine. The solutions were replaced with powder sachets, which are more convenient for the trial participants, and therefore improved patient retention. In addition, beginning October 2008, the Company started conducting a portion of the Phase 3 and Dose Range trials in India where patient retention is greater than in the U.S. In July 2008, the Company signed an agreement with a Contract Research Organization (CRO) to oversee the work of two India CROs hired to execute the trials in India. These changes have been successful in enhancing recruitment and compliance in the trial. The Company expects that the Dose Range trial will likely be completed in 2009 and the Phase 3 trial will likely be completed in mid-2010, based on the current enrollment and retention numbers. The Company currently expects to obtain interim analysis results from the Phase 3 trial during mid-2009, which may allow the Company some preliminary insight as to the efficacy of Naturlose as a treatment for Type 2 diabetes.

Selling, General and Administrative

Our selling, general and administrative expenses consist primarily of salaries and related expenses for executive, finance and other administrative personnel, professional fees and other corporate expenses, including facilities-related expenses. The decrease between years is primarily the result of the relocation of the 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 primarily derived from interest earned on the proceeds of the sale of the InfoSpherix subsidiary in August 2007. During 2008, the funds available for investing (cash and cash equivalents and short-term investments) decreased from $15.8 to $11.3 million. In addition, the average yield on investments also decreased during the course of 2008.

Income Tax

The income tax benefit (expense) is related to the sale 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 the sale of InfoSpherix for $17 million ($15 million at closing and $2 million following a 15-month escrow period), pursuant to the Stock Purchase Agreement dated June 25, 2007. The $15 million sale proceeds were included in the gain on sale of the discontinued segment at the time of closing in August 2007. The $2 million escrow balance was recorded as a gain on sale of the discontinued segment when it was realized in November 2008. The InfoSpherix segment comprised the majority of the Company's operations prior to the sale. The sale was conducted to allow Spherix to focus substantially all of its efforts on Biospherics.

The results of operations of the discontinued InfoSpherix 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

Sales Backlog

The Company's backlog as of December 31, 2008 and 2007, from the Health Sciences business was approximately $1.2 million and $230,000, respectively. The Company bills for its consulting services primarily on a time and material basis and these amounts represent estimated contract values. Further, the Company's consulting contracts are generally terminable or subject to postponement or delay at any time by clients. As a result, backlog at any particular time is not a reliable indicator of revenues for any future periods.

Critical Accounting Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of the contingent assets and liabilities at the date of the financial statements and revenue and expenses for the period reported. Estimates are based upon historical experience and various other assumptions that are believed to be reasonable under the circumstances. These estimates are evaluated periodically and form the basis for making judgments regarding the carrying values of assets and liabilities and the reported amount of revenue and expenses. Actual results may differ substantially from these estimates.

Spherix's critical accounting policies are those it believes are the most important in determining its financial condition and results, and require significant subjective judgment by management as a result of inherent uncertainties. A summary of the Company's significant accounting policies is set out in the notes to the consolidated financial statements. Such policies are discussed below.

Accounting for Taxes and Valuation Allowances

We currently have significant deferred tax assets, resulting from net operating loss carry forwards. These deferred tax assets may reduce taxable income in future periods. Based on the Company's losses and its accumulated deficit, the Company has provided a full valuation allowance against the net deferred tax asset. A valuation allowance is required when it is more likely than not that all or a portion of a deferred tax asset will not be realized. Cumulative losses weigh heavily in the overall assessment of valuation allowances.

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

New Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board ('FASB") issued Statement of Financial Accounting Standards No. 157, "Fair Value Measurements" ("SFAS 157"). SFAS 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. SFAS 157 became effective January 1, 2008, with the exception of nonfinancial assets and nonfinancial liabilities. The effective date of these items has been deferred to fiscal years beginning after November 15, 2008. The adoption of the portions of SFAS 157 that became effective January 1, 2008 did not have a material effect on our financial position, results of operations or cash flow. The adoption of SFAS 157 for nonfinancial assets 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, "The Fair Value Option for Financial Assets and Financial Liabilities" ("SFAS 159"). SFAS 159 permits entities to choose to measure many financial assets and liabilities at fair value. The fair value option may be applied, subject to certain exceptions, on an instrument by instrument basis; is irrevocable; and is applied only to entire instruments and not to portions of

instruments. SFAS 159 was effective for our fiscal year beginning January 1, 2008. The adoption of SFAS 159 did not have a material 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 and requirements in accounting for business combinations. This Statement applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008.

In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161, "Disclosures About Derivative Instruments and Hedging Activities - an amendment of FASB Statement No. 133" ("SFAS 161). SFAS 161 requires enhanced disclosures about an entity's derivative and hedging activities. This Statement is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. We do not expect the adoption of SFAS 161 to have a material effect on 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 at December 31, 2007. A $6.2 million loss from operations before taxes was partly offset by the $2 million that was realized in November 2008 upon the receipt of the escrow balance from the 2007 sale of InfoSpherix. Expenditures for the year included approximately $4.2 million for R&D activity and related market 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 $7,000 provided by investing activities consisting primarily of $1.9 million used to purchase short-term investments and $2.1 million provided from the release of the escrow balance and the interest revenue related to the 2007 sale of the InfoSpherix subsidiary.

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

Spherix expects to expend approximately $7 million over the next year including $5 million in costs related to the Phase 3 and Dose Range trials and other R&D and marketing activity related to the commercialization of Naturlose. The Phase 3 clinical trial is expected to be completed in mid-2010 and the Dose Range trial in 2009. The Company intends to finance the Biospherics activities principally through proceeds received from the 2007 sale of InfoSpherix and is considering raising additional funds through the sale of common stock and/or other means. While the Company completes its Phase 3 trial, it is taking other steps to prepare for commercialization of Naturlose as a treatment for Type 2 diabetes on the assumption that the trials will be successful. These steps include the Dose Range trial, exploring manufacturing alternatives and seeking marketing assistance. The Company's goal is to attract a pharmaceutical company to purchase or license the technology at the earliest practicable stage. Our preliminary marketing analysis suggests that we may increase our chances of success by engaging in some directed marketing efforts as we proceed with the Phase 3 trial.

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

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

The total cost of completing the Phase 3 trial is difficult to determine and can be affected by any number of factors including, but not limited to, the time to complete the trial. No guarantee can be given that the Company will be successful in its efforts to raise additional funds and, as many of our costs are "fixed," any additional delays in the Phase 3 trial could cause us to expend all of our funds before the trial is complete.