COMBIMATRIX CORPORATION & U.S. HOME SYSTEMS, INC.

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Hello Readers,

Let’s get this straight. Over the last two years, Washington and the Fed have poured between $3 trillion and $4 trillion into the economy and, now, we could be slipping into another recession? Who, besides the feds, didn’t see that coming? Oh yeah, right, we are counting on the same gang who got us into this mess to get us out of it. All the money went to bail out the banks, government mortgage programs, and stimulus for all of those shovel-ready jobs. In short, very little of it was seen by average people, unless they were collecting jobless benefits. And so, the markets are poised to take another leg downward as does our Current Portfolio. Thank you Ben, Timmy, Barack, Nancy, and Harry. Or as Laurel always said to Hardy, “Another fine mess you’ve gotten us into Ollie.”

Here are the headlines since the last Newsletter about companies in the Current Portfolio; dates in parentheses are when we first recommended them. We are not giving updates about companies on the “Endangered List” unless we feel the news to be highly significant.

Threshold Pharmaceuticals (THLD)(8/5/10). Balance sheet still looks pretty good.

Alpha Pro Tech (APT)(7/20/10). Recent numbers a little disappointing but company still shows a profit; balance sheet still looks okay.

Cardica (CRDC)(7/5/10). Sets earnings call for August 17, the day after we post this Newsletter.

Aeterna Zentaris (AEZS)(6/20/10). Balance sheet still looks good. Receives NIH grant for a Phase 1/2 study in advanced prostate cancer with AEZS-108.

Aastrom Biosciences (ASTM)(6/20/10). Sets earnings news for August 17, the day after we post this Newsletter. Plans shareholders meeting for October 21.

Dusa Pharmaceuticals (DUSA)(6/5/10). Will stop cancer trial as FDA denies orphan status, but stock price doesn’t seem affected. Balance sheet still looks good.

PHC, Inc (PHC)(5/20/10). Seven Hills Behavioral Institute receives CMS approval.

Wildan Group (WLDN)(5/20/10). Releases some pretty good quarterly numbers; balance sheet still looks good.

CombinatorX (CRXX)(5/5/10). Balance sheet still looks strong.

American CareSource (ANCI)(4/20/10). Quarterly results in line with estimates; balance sheet still looks good.

NovaBay Pharmaceuticals (NBY)(4/20/10). Impetigo program advances after trial success. Balance sheet still looks okay.

China Direct Industries (CDII)(4/5/10). Signs two new clients to advisory services contracts. Quarterly numbers show strong year-over-year revenue growth; balance sheet still looks pretty good.

Novavax (NVAX)(4/5/10). Reports positive results from pre-clinical safety study of respiratory syncytial virus (RSV) vaccine candidate. Balance sheet still looks good.

NeuroMetrix (NURO)(3/20/10). Recent balance sheet looks good.

Achillion Pharmaceuticals (ACHN)(3/5/10). Balance sheet still looks healthy.

Zagg, Inc (ZAGG)(2/20/10). Recent QT numbers show good revenue and earnings growth; balance sheet still looks good.

NIVS IntelliMedia (NIV)(1/20/10). Releases numbers showing strong revenue growth and a much stronger balance sheet.

CytRx (CYTR)(1/5/10). Balance sheet still looks strong.

Uranerz Energy (URZ)(11/20/09). Acquires extensive drill data for Powder River Basin area.

Qualstar (QBAK)(10/20/09). N2Power announces 275 watt DC-DC power supply family.

Solta Medical (SLTM)(10/5/09). Quarterly numbers show revenue and earnings growth year-over-year; balance sheet still looks pretty good.

BioSante Pharmaceuticals (BPAX)(9/20/09). Cash and cash equivalents still look strong.

Bioclinica (BIOC)(8/5/09). Partners with Axio Research and Beardsworth Consulting. Recent numbers look pretty good though net income drops a little; balance sheet still looks okay.

Salary.com (SLRY)(7/5/09). Latest QT numbers not looking real good and balance sheet weakens. Completes divestiture of payroll business.

Durect Corp (DRRX)(4/20/09). Recent balance sheet looks strong.

Ligand Pharmaceuticals (LGND)(2/20/09). Balance sheet looks so-so since long-term debt still looms.

Market Leader (LEDR)(12/20/08). Recent numbers not great; balance sheet still looks very strong.

Oilsands Quest (BQI)(10/20/08). Cancels sale of oil shale assets to Canshale.

Identive Group (INVE)(10/5/08). RockWest Technology implements INVE’s management system for first responders in El Paso County, CO. Sets earnings call for August 16, the day we post this Newsletter.

Life Quotes (QUOT)(9/5/08). Completes acquisition by LQ Acquisitions. We will be closing this position for a 25% gain and will soon post it on the Track Record page.

Applied Energetics (AERG)(7/5/08). Recent QT numbers show revenue growth and paring of losses year-over-year; balance sheet still looks good.

Energy Focus (EFOI)(6/5/08). This is no longer on the “Endangered List” as stock has made an unreal rebound probably due to eye-popping revenue numbers; balance sheet looks so-so. Receives $1 million DOE award to develop high performance Sol-Gel coatings for lighting and solar applications.

Bridgeline Digital (BLIN)(6/5/08). Quarterly numbers not great but company still ekes out a small profit; balance sheet still looks good.

Microvision (MVIS)(5/20/08). Recent numbers still show some bad losses but company claims a $20 million backlog; balance sheet still looks good.

GlobalScape (GSB)(5/20/08). Latest numbers not great but company sees growth ahead; balance sheet looks okay. Announces next-generation mail express solution.

Biolase (BLTI)(6/5/08). Sets earnings call for August 17, the day after we post this Newsletter. To present at the Southern California Investor conference on the same day.

ActivIdentity (ACTI)(3/5/08). Quarterly numbers look lousy; balance sheet still looks very strong.

Hollywood Media (HOLL)(1/5/08). Sets earnings call for August 16, the date we post this Newsletter.

Move, Inc (MOVE)(1/5/08). Recent numbers nothing to get excited about; balance sheet still looks very strong.

LRAD Corp (LRAD)(10/5/07). Revenue drops but company still reports 3rd consecutive QT of profits; balance sheet still looks good. Awarded $6.2 million order from U.S. Navy.

XATA Corp (XATA)(9/20/07). Quarterly numbers seem to be holding their own year-over-year; balance sheet still looks good.

Alliance Fiber Optic (AFOP)(7/20/07). Named by Forbes among “Most Trustworthy Companies”.

Endologix (ELGX)(1/20/07). Denies infringing on Bard patent.

YM Biosciences (YMI)(11/5/06). Granted Orphan Drug Designation for CYT387.

Inventure Group (SNAK)(3/5/06). Top retailers add Jamba All Natural smoothies to frozen aisle.

Our picks for this Newsletter are another one of those small biotechs and a home furnisher, both NASDAQ-listed.

COMBIMATRIX CORPORATION (NASDAQ: CBMX) – $2.80. Twelve-month hi-low has been $7.80 – $2.11. Based near Irvine, CA, with about 65 employees, this biotech has 7.6 million shares outstanding, $15.56 million in total current assets, $37.34 million in total assets (of which $16.9 million is goodwill), little debt, and $2.44 million in total liabilities. Institutional ownership is around 16%. www.combimatrix.com

And, yes, CombiMatrix Corporation is another one of those biotechs with a decent balance sheet and a pipeline of interesting products. For a while, recently, the company was shopping itself, but has now decided to focus on building its diagnostics services business.

Founded in 1995, and public for over eight years, CombiMatrix is developing products and services in the areas of drug development, genetic analysis, molecular diagnostics, nanotechnology, and defense and homeland security. Its technologies include a platform to produce user-defined, in-situ synthesized, and oligonucleotide arrays for use in identifying and determining roles of genes, gene mutations, and proteins. The company’s products include CustomArray platform, an oligonucleotide array for genetic studies; DNA Array Synthesizer, an instrument that enables researchers to fabricate DNA arrays to their specifications; stripping reagents, which allow researchers to re-use microarrays; ElectraSense reader, an electrochemical scanning instrument; and comparative genomic hybridization arrays, which are used for research and molecular diagnostic applications.

CombiMatrix also offers proprietary molecular synthesis and screening methods for discovering new drugs; operates a diagnostics reference laboratory, which provides genetic diagnostics services through the use of arrays that utilize bacterial artificial chromosomes that enable genetic analyses to physicians, hospitals, and clinics; and is developing a series of compounds to address various oncology-related diseases. Also, the company is developing biosensor systems for use in national defense and homeland security.

In mid-June CombiMatrix announced that its laboratory services subsidiary had received the final licensure documentation and approvals from Medicare in order to begin billing for its suite of array-based diagnostic tests; such as HemeScan, a high-resolution, genome-wide analysis of hematologic malignancies like chronic lymphocytic leukemia, that has now been successfully run in over 1000 patients.

Here we go again. CombiMatrix is another of those small biotechs that chalk up big losses and have little revenue. During FY2009, ending 12/31/09, revenue was $4.89 million with $17.64 million in losses.

One thing in the company’s favor is an aging population. Also, the Medicare approval could help the top line down the road.

Our 24-month target for the stock is $4.50 to $5.00.

For more information, contact CBMX’ Amit Kumar at 425-493-2000.

U.S. HOME SYSTEMS, INC. (NASDAQ: USHS) – $3.00. Twelve-month hi-low has been $3.97 – $1.86. Based in Lewisville, TX, with about 920 employees, this home furnisher has 7.1 million shares outstanding, $22.61 million in total current assets, $31.6 million in total assets, and $12.87 million in total liabilities, of which $1.25 million is long-term debt. Institutional ownership is around 31%. One analyst gives the stock a “moderate Buy”. www.ushomesystems.com

When many of you just saw the name U.S. Home Systems, Inc., the first thought was probably “huh?”. Yes, the home industry is in the dumper, but this is one company that could see improvement in the months and years ahead.

Founded in 1980, and public for over 20 years, U.S. Home Systems makes, sells, and installs custom specialty home improvement products. There isn’t any rocket science or atom splitting going on here. This is as basic a business as one can find. Its principal product lines include custom kitchen and bathroom cabinet refacing products, and organizational storage systems for closets and garages. The company’s kitchen refacing products include cabinet refacing systems, cabinet doors, drawers, drawer fronts, and boxes, as well as matching valances, molding, space organizers, lazy susans, and slide-out shelving countertops, which include laminate and solid-surface tops. Its bathroom refacing products comprise acrylic tub liners and wall surrounds, vanity cabinetry refacing products, and shower doors.

USHS markets its products under the brand name of The Home Depot Kitchen and Bathroom Refacing. Its business serves Home Depot in 42 markets and 27 states and its products are available 1660 Home Depot stores, with 567 of those carrying the company’s bath products and 944 carrying organizational systems.

For FY2009, ending 12/31/09, revenue was $110.9 million with $4 million in losses. During the 1stQT of the current FY, ending 3/31/10, revenue was $33.12 million with income of $365,000.

Our thinking here is that since home sales are still falling like a rock, home improvements should pick up. The Leading Indicator of Remodeling Activity (LIRA) – yes, there really is one – predicts double-digit growth by year end.

Our 24-month target for the stock is $5.00 to $5.50.

For more information, contact USHS’ Murray Gross at 214-488-6300; mgross@ushomesystems.com

Look for the September 5, 2010 Newsletter to be posted on 9/1 or 9/2.

Thank you,
George