UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

FORM 10-K

|(Mark one)                                                    |                                                                                         
|------------------------------------------------------------- | ----------------------------------------------------------------------------------------
|ý                                                             | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934    
|For the fiscal year ended December 31, 2004                  
|o                                                             | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|For the transition period
from                             to

Commission file number: 0-15223

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HEMACARE CORPORATION(Exact name of registrant as specified in its charter)

|California(State or other jurisdiction of incorporation or organization)               |  | 95-3280412(I.R.S. Employer Identification Number)
|-------------------------------------------------------------------------------------- |  | -------------------------------------------------
|21101 Oxnard Street
Woodland Hills, California(Address of principal executive offices) |  | 91367(Zip code)                                  

Registrant's
telephone number, including area code:(818) 226-1968

|Securities registered pursuant to Section 12(b) of the Act: |  | None                                                               
|----------------------------------------------------------- |  | -------------------------------------------------------------------
|Securities registered pursuant to Section 12(g) of the Act: |  | Common Stock (without par value)
Rights to purchase Preferred Stock

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment
to this Form 10-K. o

The aggregate market value of the Common Stock held by non-affiliates of the registrant as of June 30, 2004, the last business day of the
registrant's most recently completed second fiscal quarter (based upon the closing bid price of the Common Stock as reported by the OTC Bulletin Board), was approximately $4,492,000.

Indicate
by check mark whether the registrant is an accelerated filer (as defined in Rule12b-2 of the
Act). o Yes    ý No

As of February 17, 2005, 8,078,060 shares of Common Stock of the registrant were issued and outstanding.

DOCUMENTS
INCORPORATED BY REFERENCE

Portions
of the registrant's definitive proxy statement relating to its 2005 annual meeting of shareholders, which will be filed with the Securities and Exchange Commission pursuant to
Regulation 14A within 120 days of the close of the registrant's last fiscal year, are incorporated by reference into Part III of this Report.



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TABLE OF CONTENTS

PART I

|                                                         |  |                                                                                                              |  | Page
Number
|-------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------ |  | -----------
|Item 1.                                                  |  | Business                                                                                                     |  | 1          
|                                                         |  | General                                                                                                      |  | 1          
|                                                         |  | Recent Developments                                                                                          |  | 1          
|                                                         |  | Blood Product Operations                                                                                     |  | 3          
|                                                         |  | Blood Services Operations                                                                                    |  | 4          
|                                                         |  | Competition                                                                                                  |  | 4          
|                                                         |  | Sales to Major Customers                                                                                     |  | 5          
|                                                         |  | Marketing                                                                                                    |  | 5          
|                                                         |  | Human Resources                                                                                              |  | 6          
|                                                         |  | Suppliers                                                                                                    |  | 6          
|                                                         |  | Government Regulation                                                                                        |  | 6          
|                                                         |  | Professional and Product Liability Insurance                                                                 |  | 7          
|                                                         |  | Additional Information                                                                                       |  | 8          
|Item 2.                                                  |  | Properties                                                                                                   |  | 8          
|Item 3.                                                  |  | Legal Proceedings                                                                                            |  | 8          
|Item 4.                                                  |  | Submission of Matters to a Vote of Security Holders                                                          |  | 9          
|PART II                                                 
|Item 5.                                                  |  | Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |  | 9          
|Item 6.                                                  |  | Selected Financial Data                                                                                      |  | 10         
|Item 7.                                                  |  | Management's Discussion and Analysis of Financial Condition and Results of Operations                        |  | 10         
|Item 7A.                                                 |  | Quantitative and Qualitative Disclosures about Market Risk                                                   |  | 25         
|Item 8.                                                  |  | Financial Statements and Supplementary Data                                                                  |  | 25         
|Item 9.                                                  |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                         |  | 25         
|Item 9A.                                                 |  | Controls and Procedures                                                                                      |  | 26         
|Item 9B.                                                 |  | Other Information                                                                                            |  | 26         
|PART III                                                
|Item 10.                                                 |  | Directors and Executive Officers of the Registrant                                                           |  | 27         
|Item 11.                                                 |  | Executive Compensation                                                                                       |  | 27         
|Item 12.                                                 |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters               |  | 27         
|Item 13.                                                 |  | Certain Relationships and Related Transactions                                                               |  | 27         
|Item 14.                                                 |  | Principal Accountant Fees and Services                                                                       |  | 27         
|PART IV                                                 
|Item 15.                                                 |  | Exhibits and Financial Statement Schedules                                                                   |  | 27         
|Signatures                                               |  | 30                                                                                                          
|Index to Consolidated Financial Statements and Schedules |  | F-1                                                                                                         

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PART I

Item 1.Business

This 2004 Annual Report on Form 10-K contains statements which constitute forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Those statements include statements regarding the intent,
belief or current expectations of the Company and its management. Prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve
risks and uncertainties, and that actual results may differ materially from those projected in the forward-looking statements (See "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of OperationsRisk Factors Affecting the Company"). The Company does not undertake to update its forward-looking statements to reflect actual events and outcomes or later
events.

General

HemaCare Corporation ("HemaCare" or the "Company") collects, processes and distributes blood products to hospitals in the United States. The Company operates and
manages donor centers and mobile donor vehicles to collect blood products from donors. Additionally, the Company provides blood related services, principally therapeutic apheresis procedures, stem
cell collection and other blood treatments to patients with a variety of disorders. Blood related services are usually provided under contract with hospitals as an outside purchased service.

The
Company has operated in Southern California since 1979. In 1998, the Company expanded operations to include portions of the eastern U.S. In 2003, new management reduced the number of
geographic regions served as part of a restructuring plan to return the Company to profitability. In 2004, the Company's earnings improved compared with 2003 as a result of the successful
implementation of management's plan. The Company's current strategy is to continue to focus on increasing the utilization of existing capacity in those markets currently served by the Company, expand
the customer base for blood products to include biopharmaceutical companies and other organizations
involved in research efforts on new treatments and therapies, and expand the market potential for therapeutic apheresis services through increased investment in physician education and other marketing
efforts.

Although
most blood suppliers are organized as not-for-profit, tax-exempt organizations, all suppliers charge fees for blood products to cover their
costs of operations. The Company believes that it is the only investor-owned and taxable organization operating as a blood supplier with significant operations in the U.S.

Recent Developments



The Company recorded income before income taxes of $1,563,000 in 2004, representing the highest annual pretax earnings in the history of the Company. This
represents a substantial change from the $1,695,000 loss before income taxes recorded in 2003. This accomplishment was due to the successful implementation in late 2003 of a restructuring plan
designed to eliminate poorly performing operations, reduce overhead costs and improve the product collection capabilities in the geographic areas served by the Company.



Blood products organizations, as well as regulatory agencies, focus significant attention and resources on improving the safety of the blood supply. Requirements
to screen potential donors for possible exposure to a variety of pathogens, including HIV, malaria and SARS, have reduced the pool

1

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of
eligible donors. In addition, regulations and industry standards require an increasing number of tests on donated blood products to detect pathogens, including a new bacterial detection quality
control test, which may negatively impact expiration rates of platelet products. The Company faces an increasing risk that these factors will increase the cost of producing blood products and reduce
the ability to generate a sufficient supply of blood products to satisfy customer demand. The inability to satisfy customer demand could result in the loss of customers, and a loss of revenue.



Multiple factors, including a decline in nursing graduates, the retirement or movement of experienced nurses out of direct patient care, and the January 1,
2004 California law that increased the nurse-to-patient staffing ratios, have created a nursing shortage. This shortage has directly affected the blood industry because certain
regulations and industry standards require a nurse's presence during donation and for therapeutic apheresis procedures. The shortage of nurses has increased the cost of recruitment and retention of
nursing staff and may limit the Company's ability to provide and expand operations. This challenge of locating qualified nurses, however, may provide additional opportunities as hospitals may choose
to outsource therapeutic services to HemaCare. If HemaCare can succeed in recruiting qualified nurses to perform these therapeutic services, the Company's market for such services could increase in
the future.



In Southern California, a major supplier of frozen plasma products converted operations to produce 24-hour frozen plasma from eight-hour
fresh frozen plasma. Many hospital customers continue to demand eight-hour fresh frozen plasma. This has created an opportunity for the Company since the Company's operations continue to
focus on the production of eight-hour fresh frozen plasma. As a result, the demand for the Company's plasma products has increased; however, the Company's production capacity may not grow
sufficiently to satisfy
the demand for this product. Therefore, some hospital customers may decide to switch to 24-hour frozen plasma in order to insure a reliable supply of this product. If a significant number
of the Company's customers switch to 24-hour frozen plasma, the Company may need to reduce the price of its plasma products in order to retain customers. This could have a negative impact
on the future profitability of the Company.



A new company recently began operations providing therapeutic apheresis services in direct competition with the Company. This new company has hired several of the
Company's former employees, and as a result is aware of the Company's customer base, business strategies and resources. In addition, this new company has hired, or attempted to hire, many of the
Company's trained apheresis nurses. This has caused the Company to incur significant recruitment costs to replace these nurses, and has caused the Company to dramatically increase the compensation to
existing nurses. This new company has successfully contracted with several of the Company's customers. Therefore, it appears likely that the introduction of this new competitor will have a negative
impact on the Company's future revenue for therapeutic apheresis services. In addition, it appears likely that the increase in costs associated with nurse retention and recruitment will negatively
impact the future profitability for the blood services business segment.



In the first quarter of 2004, management closed the donor center in Chapel Hill, North Carolina as the final step to complete the implementation of the
restructuring plan initiated in late 2003. The Company recorded revenues from this donor center of $1,190,000 in 2003, and $65,000 in the first quarter of 2004. In the second quarter of 2004, the
donor center management contracts between the

2

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Company
and Presbyterian Intercommunity Hospital, located in Whittier, California, and between the Company and Dartmouth-Hitchcock Medical Center, located in Lebanon, New Hampshire, expired and were
not renewed. The Company recorded revenues from the contract with Presbyterian Intercommunity Hospital in 2003 of $555,000, and $302,000 in the first six months of 2004. The Company recorded revenues
from the contract with Dartmouth-Hitchcock Medical Center in 2003 of $1,053,000, and $595,000 in the first six months of 2004.

Business Segments

HemaCare operates two primary business segments. The first is the blood products segment which supplies hospitals and other customers with red blood cells,
apheresis platelets and other blood products, and the second is the blood services segment which includes therapeutic apheresis procedures, stem cell collection and other blood therapies provided to
patients generally in a hospital setting.



The practice of medicine depends on the availability of safe and adequate blood products. Most blood product collections consist of single units of whole blood.
The actual collection process is simple and safe for the donor. After collection, whole blood units are tested and processed into components, and then distributed to hospitals for transfusion. These
components include red blood cells and plasma. All blood products have limited therapeutic lives.

Apheresis
collection separates blood components during the donation process through the use of a cell separator. This process allows for the collection of only the desired components of
a donor's blood and returns the other blood components to the donor's blood stream. Apheresis blood product collection, used by HemaCare to collect platelets, is considerably more complex and more
expensive than whole blood collection and processing. Automated apheresis equipment is costly and requires longer donation times, which result in higher labor costs. The complexity of the donation
process, and longer donation time, makes recruiting donors for apheresis procedures more difficult than recruiting whole blood donors.

On
average, only 5% of the United States population donates blood and a much smaller percentage are apheresis platelet donors. Recruiting and retaining donors is critical to the success
of blood product operations. Apheresis platelet donors are recruited from the most dedicated and committed subset of the whole blood donor population. On average such donors donate platelets between
four and six times a year, compared to twice a year for whole blood donors. Generally, success in donor recruitment is a major factor in success of any blood collection program. The Company has
demonstrated a consistent track record of donor recruitment for apheresis donors at the donor centers it currently operates.

In
addition, the Company's blood products operations include extensive capability to collect whole blood from donors. The Company contracts with local hospitals to serve as their whole
blood collection contractor. In this capacity, the Company solicits, on behalf of the hospital customer, sponsor organizations, such as employers, schools or churches, to conduct blood drives. The
Company's recruitment staff works with the staff of the sponsor organization to encourage the individuals associated with the sponsor to donate blood at a blood drive usually conducted at the
sponsor's
facilities. Whole blood collected at these blood drives is processed into transfusable blood products and made available to the hospital customers as needed.

Blood
products revenue depends on a number of factors, including the success of the Company's donor recruitment efforts, the success of the Company's marketing efforts to attract and
retain new customers for blood products, and the ability of the Company to properly process, store and transport blood products to customers prior to the products expiration dates.

3

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Product
safety is of paramount concern when dealing with blood products. The U.S. Food and Drug Administration ("FDA") is the agency principally responsible for the regulation of the
blood products industry in the U.S. The Company's blood products operations are either licensed or registered with the FDA and are regularly inspected by FDA personnel. Additionally, the Company's
operations are licensed, regulated and inspected by various state agencies.

The
American Association of Blood Banks ("AABB") is the blood industry sponsored organization responsible for maintaining and improving science, safety, quality and education relating to
blood. The Company is an institutional member, and the Company's operations are accredited by the AABB.

The
Company has blood collection operations in three states, California, Maine and Massachusetts. The Company operates free standing blood collection centers and mobile blood collection
operations in Southern California and Maine, and a hospital based collection center in Massachusetts.



Therapeutic apheresis is a technique for removing harmful components from a patient's blood and is used in the treatment of autoimmune diseases and other
disorders. Therapeutic services are provided upon the request of a hospital, which has received an order from a patient's physician. Therapeutic treatments are administered using mobile equipment
operated at the patient's bedside or in a hospital outpatient setting. The mobile therapeutic equipment includes a blood cell separator and the disposables needed to perform the procedure. Treatments
are administered by trained, nurse-specialists, under the supervision of a specially trained physician, and acting in accordance with documented operating procedures and quality assurance protocols
based on guidelines developed by the AABB and the Joint Commission on Accreditation of Healthcare Organizations ("JCAHO").

Since
requests for therapeutic apheresis treatments are often sporadic and unpredictable, many hospitals choose not to equip, staff and maintain an apheresis unit. The existing nurse
shortage in the U.S. has also hindered hospital efforts to adequately staff apheresis units. The Company's services enable hospitals to offer therapeutic apheresis services to their patients on an "as
needed" basis without incurring the costs associated with maintaining a full-time team of apheresis specialists. In addition, the Company's services can serve to supplement a hospital's
existing apheresis capability when demand exceeds capacity.

Blood
services revenue depends on a number of factors, including the occurrence of disease states that are appropriately treated by these services, and the perceived benefits of blood
therapies compared to alternative courses of treatment. The Company believes that education on the benefits of therapeutic apheresis results in increases in the application of such treatments in
medically appropriate circumstances. The Company's affiliated medical directors conduct educational seminars for physicians to inform them of the benefits of therapeutic apheresis relative to other
modes of patient treatment.

The
Company provides therapeutic services using all currently recognized treatment methods: plasma exchange and cell depletion; in-line immunoadsorbant columns; stem cell
collection; and photopheresis. Patients suffering from diseases such as multiple myeloma, polyneuropathy, leukemia, systemic lupus erythematosus, scleroderma, hyperviscosity syndrome, thrombocytosis,
thrombotic thrombocytopenic purpura, myasthenia gravis and Guillain-Barre syndrome may benefit from therapeutic apheresis treatments. The Company provides therapeutic apheresis services on a regional
basis in several states. Major operations are located in Southern California and New York.

Competition



Most U.S. blood suppliers are organized as not-for-profit, tax-exempt entities. However, all blood suppliers finance their
activities by charging fees to hospitals for the products they utilize. These fees

4

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are
generally set at levels based on the supply and demand for specific products, and are influenced by the potential competition from other blood suppliers. Many suppliers have greater financial,
technical and personnel resources than the Company. In addition, since many of the Company's competitors are tax-exempt, they do not bear the tax burden that the Company faces, and they
have access to lower cost tax-exempt debt financing. Their status as charitable institutions may give them an advantage in recruiting volunteer donors. The Company competes on the basis of
responsiveness to customer needs, value-based pricing and the high quality of the services and products provided.



In the United States, approximately 50% of all blood products are supplied by the American Red Cross ("ARC") through its national collection network, and
approximately 40% are supplied by local and regional blood centers, including the Company. The remainder is collected by hospitals directly.

The
Company competes in the marketplace through a strategy of offering blood product supply programs tailored to the requirements of individual customers. The Company consistently
reevaluates and revises its product supply programs to respond to marketplace factors. Some competitors have advantages over the Company as a result of established positions and relationships within
the communities they serve. In addition, the ARC's size and market dominance provides them with greater resources to sustain periods of unprofitable sales, or to adopt aggressive pricing strategies
for the purpose of defending or increasing market share.



The competition in the therapeutic blood services business is primarily regional and community blood banks, dialysis companies that also provide therapeutic blood
services, and a wide range of small blood services companies. This includes a newly established company that has hired several former HemaCare employees. In addition, since some diseases treatable
with therapeutic apheresis are also treatable by other medical therapies, the competition for the Company's blood services business also include companies that market or provide many of these
competing medical therapies. The Company believes that it competes in this market by offering highly trained and experienced nurses and greater availability for customers with immediate needs. In
addition, the Company provides education to the medical community on the benefits of therapeutic apheresis as a treatment solution for various diseases.

Sales to Major Customers

During 2004 only one customer represented any significant portion of the Company's total revenue. This customer accounted for approximately 10.6% of total
revenue. The next largest customer accounted for approximately 7.7% of total revenue. No other customer accounted for any more than 5% of total revenue. The Company has no relationship with either of
these customers other than as a provider of blood products and services.

Marketing

The Company's marketing programs include a combination of medical education, advertising and promotional programs, in-person sales and other marketing
programs directed to selected physicians and hospitals. The Company markets its products and services in the form of supply programs that meet the specific needs of individual customers. As a smaller
company than the main competitors in the marketplace, HemaCare offers more flexibility in supply arrangements and pricing structure. This flexibility and focus on customer service are the main
messages communicated throughout the marketing vehicles the Company utilizes.

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Human Resources

As of February 2, 2005, the Company had 259 employees, including 95 part-time employees. Most of the Company's professional and management
personnel possess prior experience in hospitals, medical service companies or blood banks.

None
of the Company's employees is represented by a labor union. The Company considers its relations with its employees to be good.

Suppliers

The Company maintains relationships with numerous suppliers who provide cell separator equipment, disposable supplies, replacement fluids, testing services and
blood products. Generally, the Company has not experienced difficulty in obtaining most of its equipment and supplies; however, if there were material adverse changes in the sources of its supplies,
the Company's operations could be adversely affected. In particular, in the event of a war or other international conflict or natural disaster, the availability of critical supplies could be
negatively affected and the cost of procuring these supplies could increase.

During
2004, the Company received goods and services from two major vendors that represented more than 10% of the Company's total costs. One vendor, that represents 47% of total costs,
provides products that support the Company's apheresis activities. The other vendor, that represents 37% of total costs, provides laboratory services. The Company has no relationship with either
vendor other than as a consumer of the goods and services provided by each.

The
Company relies on blood donors to provide the platelets and whole blood required to produce the blood products manufactured and sold by the Company. The Company competes with the ARC
and other blood suppliers in recruiting its volunteer donors. The growth of the Company's manufactured blood products business is dependent on the Company's ability to attract, screen and retain
qualified donors.

Government Regulation



All hospitals and blood suppliers are subject to extensive regulation by the FDA and various state licensing authorities. FDA regulations are comprehensive,
complex and extend to virtually all aspects of the blood supply industry, including: recruiting; screening blood donors; processing, testing, labeling, storing and shipping blood products;
recordkeeping; and communications with hospital customers and donors. In addition, FDA regulations also extend to the manufacturers of all critical supplies and equipment used in the blood supply
industry.

The
Company views blood product safety and compliance with governmental regulations as paramount concerns at all times. The Company has developed extensive procedures and internal
quality control programs to increase compliance with all governmental regulations and industry standards. Employees routinely participate in training classes. Employees are tested at the conclusion of
these classes to insure that the desired level of understanding of the Company's compliance and safety procedures is achieved. Finally, HemaCare's Regulatory Affairs and Quality Assurance Department
conducts periodic audits of each operating unit to identify the level of compliance with regulatory procedures.

During
the past year, the FDA conducted inspections at selected HemaCare facilities. At the conclusion of each inspection, the FDA provided the Company with a list of observations of
regulatory issues. The Company believes it has adequately addressed all of the issues raised by the FDA, and that it is in compliance with current FDA regulations.

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During
the past year, the Department of Health for the State of California conducted an audit of selected Company facilities located in California. This audit focused on compliance with
specific California laws that cover HemaCare's operations. At the conclusion of this audit, the Department of Health provided the Company with a list of observations that have since been addressed.
The Company believes that it is in compliance with California regulations governing the Company's operations within the state.

Organizations
within the blood supply industry are registered by the FDA to operate blood collection and/or blood processing facilities. All of the Company's facilities operate under an
FDA registration, with the exception of a blood collection facility within a hospital that operates under the hospital's FDA registration.

The
FDA also issues licenses to organizations within the blood supply industry to ship blood products across state lines if the qualifying organization can demonstrate adequate employee
training programs, procedure documentation and quality control systems to insure the quality of the products shipped. HemaCare holds a license for its Sherman Oaks, California and Scarborough, Maine
facilities to ship selected blood products across state lines. The Company has submitted an expanded license request to the FDA for additional blood products manufactured at Sherman Oaks, and for a
license for blood products produced by the Company's Bangor, Maine facility. These requests are pending with the FDA.



State and federal laws set forth anti-kickback and self-referral prohibitions, and otherwise regulate financial and referral relationships
between blood suppliers, hospitals, physicians and others in the blood supply industry. The Company believes its present operations comply with all currently applicable regulations in this area.

Joshua
Levy, M.D., the National Medical Director of the Company and a shareholder, through his private practice in Sherman Oaks, California, treats patients who require therapeutic
services. Sales by the Company to hospital customers for therapeutic services provided to Dr. Levy's patients amounted to approximately 2%, or less, of the Company's total revenues in each of
the three years ended December 31, 2004. There are no agreements between Dr. Levy and the Company's hospital customers that require the hospitals to select HemaCare to provide
therapeutic services to Dr. Levy's patients.

New
health care regulations are continuously under consideration by lawmakers at the federal level, and in many of the individual states in which the Company currently operates. New
regulations could have a direct impact on the Company and its operations. The Company is not aware of any specific proposed regulation that would have a material adverse impact on the Company;
however, the Company is uncertain what changes may be made in the future regarding health care policies, especially those regarding hospital reimbursements, health insurance coverage and managed care
that may materially impact the Company's operations.

Professional and Product Liability Insurance

The blood products and blood services business inherently is subject to substantial potential liabilities for personal injury claims. The Company maintains
medical professional liability insurance in the amount of $3,000,000 for a single occurrence and $5,000,000 in the aggregate per year in California, and $1,000,000 for a single occurrence and
$3,000,000 in the aggregate per year in other states. There can be no assurance that potential insurance claims will not exceed present coverage or that continued or additional insurance coverage
would be available at affordable premium costs. If such insurance were ineffective or inadequate for any reason, the Company could be exposed to significant liabilities.

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Additional Information

The Company makes available free of charge through its website, www.hemacare.com, its Annual Report on Form 10-K, Quarterly Reports on
Form 10-Q and Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) of the Securities Exchange Act of
1934, as soon as practical after those reports are filed with the Securities and Exchange Commission (the "SEC"). The Company's filings may also be read and copied at the SEC's Public Reference Room
at 450 Fifth Street, NW, Washington D.C. 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 800-SEC-0330. The SEC also
maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The address of that site is
www.sec.gov.

Item 2Properties

The Company's corporate offices and part of its distribution center are located in an 11,250 square foot facility in Woodland Hills, California. The rent for this
facility is fixed at $16,700 per month and the lease on this space expires October 31, 2006. The Company has one five-year option to extend this lease at the then current market
price.

The
Company also operates an apheresis donor center, a laboratory, a manufacturing facility for whole blood components and a distribution center in a 7,600 square foot facility in
Sherman Oaks, California. The Company currently rents this space on a month-to-month basis for a
monthly amount of approximately $22,500 while negotiating a lease for a multi-year term. Thus far the Company has been unable to negotiate a long-term lease agreement regarding
this space, please see "Management's Discussion and Analysis of Financial Condition and Results of OperationsRisk Factors Affecting the CompanyLease for Major Production
Facility has Expired."

The
Company leases space for a donor center in a 3,600 square foot facility in Scarborough, Maine. The monthly rent is approximately $4,300 per month, with an escalation clause for
changes in the Consumer Price Index. The lease term expires October 31, 2007.

The
Company also leases space for a donor center in a 2,500 square foot facility in Bangor, Maine. The monthly rent is approximately $3,900 per month. The lease term expires
December 31, 2006, and the Company has the option to extend the lease for two additional five-year terms at rates adjusted for changes in the Consumer Price Index.

In
addition, the Company leases a 1,278 square foot office space in Yonkers, New York which expires August 31, 2006, for a monthly amount of approximately $2,200 per month.

The
Company occupies space on the campus of several of its client hospitals. While the arrangements vary, certain of these facilities are formally subject to a lease agreement with the
sponsoring hospital for periods concurrent with the blood supply agreement. Other agreements grant the Company the right to utilize space and facilities on the hospital premises during the term of the
blood supply agreement at no cost.

Item 3Legal Proceedings

From time to time, the Company is involved in various routine legal proceedings incidental to the conduct of its business. Management does not believe that any of
these legal proceedings will have a material adverse impact on the business, financial condition or results of operations of the Company, either due to the nature of the claims, or because management
believes that such claims should not exceed the limits of the Company's insurance coverage.

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Item 4Submission of Matters to a Vote of Security Holders

None.

PART II

Item 5Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Effective November 2, 1998, the Company's Common Stock became quoted on the OTC Bulletin Board under the symbol HEMA. Prior to that date, the Company's
Common Stock was listed on the Nasdaq Small Cap Market ("Nasdaq") under the same symbol.

The
following table sets forth the range of high and low closing bid prices of the Common Stock, as reported by the OTC Bulletin Board, for the periods indicated. These prices reflect
inter-dealer quotations, without retail markups, markdowns, or commissions, and do not necessarily represent actual transactions. The prices appearing below were obtained from the National Quotation
Bureau.

2004

2003Quarter endedHigh

Low

High

LowMarch 31

$
0.80

$
0.46

$
0.66

$
0.42June 30

$
0.85

$
0.70

$
0.95

$
0.58September 30

$
1.68

$
0.55

$
1.20

$
0.63December 31

$
1.69

$
1.10

$
0.97

$
0.63


Shareholders
are urged to obtain current market quotations for the Company's Common Stock.

The
Company intends to retain any future earnings for use in its business, and therefore, does not anticipate declaring or paying any cash dividends in the foreseeable future.
Additionally, the Company's line of credit prohibits the payment of dividends. The declaration and payment of any cash dividends in the future will depend upon the Company's earnings, financial
condition, capital needs, line of credit requirements and other factors deemed relevant by the Board of Directors.

On
February 17, 2005, the approximate number of shareholders of record was 282 (excluding individual participants in nominee security position listings).

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Item 6Selected Financial Data

The following selected financial data should be read in conjunction with the other information and financial statements, including the notes thereto, appearing
elsewhere herein:

|                                                                     |  | Years Ended December 31, |       
|-------------------------------------------------------------------- |  | ------------------------ | ------
|
|
|Revenue                                                              |  | $                        | 26,836
|Gross profit                                                         |  |                          | 5,816 
|Income (loss) from operations                                        |  |                          | 1,396 
|Other income (expense)                                               |  |                          | 167   
|Write off of impaired goodwill                                       |  |                          |      
|Provision (benefit) for income taxes                                 |  |                          | 18    
|Net income (loss)                                                    |  | $                        | 1,545 
|Basic per share amounts:                                             |  |                          |       
|Income (loss) from operations                                        |  | $                        | 0.18  
|Net income (loss)                                                    |  | $                        | 0.20  
|Diluted per share amounts:                                           |  |                          |       
|Income (loss) from operations                                        |  | $                        | 0.17  
|Net income (loss)                                                    |  | $                        | 0.19  
|Total assets                                                         |  | $                        | 9,344 
|Long-term debt and capital lease obligations, net of current portion |  | $                        | 703   
|Shareholders' equity                                                 |  | $                        | 5,167 

Item 7Management's Discussion and Analysis of Financial Condition and Results of Operations

General

HemaCare operates two primary business segments. The first is the blood products segment which supplies hospitals and other customers with red blood cells,
apheresis platelets and other blood products. The Company operates and manages donor centers and mobile donor vehicles to collect blood products from donors.

The
earnings generated by the blood products segment improved dramatically during the past year. This was primarily the result of the successful implementation of a plan commenced in
2003 to restructure operations to return the segment to profitability. This plan included closing six donor centers, including the mobile operations associated with these centers, and a reduction in
overhead expenses. As a result, the Company was able to focus more time and resources in 2004 on improving the volume of product produced by the remaining operations, and increasing overall
efficiency.

Other
significant events for the blood products segment include increasing staff costs as a result of a growing nursing shortage in the U.S., increased regulatory requirements to screen
potential donors to reduce the risk of pathogens in the blood supply, and industry requirements to test platelet products for bacteria beginning March 2004 which increased the cost to produce
platelet products.

In
Southern California, a major supplier of frozen plasma products converted operations to produce 24-hour frozen plasma from eight-hour fresh frozen plasma. Many
hospital customers continue to demand eight-hour fresh frozen plasma. As a result, the demand for the Company's plasma products has increased; however, the Company's production capacity
may not grow sufficiently to satisfy the demand for this product. Therefore, some hospital customers may decide to switch to 24-hour frozen plasma in order to insure a reliable supply of
this product. If a significant number of the Company's

10

---



customers
switch to 24-hour frozen plasma, the Company may need to reduce the price of its plasma products in order to retain customers. This could have a negative impact on the future
profitability of the Company.

Finally,
in the second quarter of 2004, the donor center management contracts between the Company and Presbyterian Intercommunity Hospital, located in Whittier, California, and between
the Company and Dartmouth-Hitchcock Medical Center, located in Lebanon, New Hampshire expired and were not renewed.

The
second business segment is HemaCare's blood services segment which includes therapeutic apheresis procedures, stem cell collection and other blood therapies provided to patients
generally in a hospital setting. This segment fluctuates based on the occurrence rate of diseases treated with therapeutic apheresis, the degree hospitals have fully staffed apheresis units available,
and the degree of success of the Company's efforts at physician education about the potential benefits of therapeutic apheresis as a treatment alternative. Over the past few years this business
segment has been relatively stable in Southern California; however, the Company believes growth opportunities exist in the New York market. The New England market has declined recently due to
difficulties recruiting and retaining trained apheresis nurses.

This
business segment recently encountered a new threat in the form of a new company that recently began to provide therapeutic apheresis services in some of the same markets serviced by
the Company. This new company has hired several of the Company's former employees, and as a result is aware of the Company's customer base, business strategies and resources. In addition, this new
company has hired, or attempted to hire, many of the Company's trained apheresis nurses. This has caused the Company to incur significant recruitment costs to replace these nurses, and has caused the
Company to dramatically increase the compensation to existing nurses. This new company has successfully contracted with several of the Company's customers. Therefore, it appears likely that the
introduction of this new competitor will have a negative impact on the Company's future revenue for therapeutic apheresis services. In addition, it appears likely that the increase in costs associated
with nurse retention and recruitment will negatively impact the future profitability for the blood services business segment.

11

---



Results of Operations

The following table sets forth, for the periods indicated, the percentage that certain items in the statement of operations were of net revenue and the percentage
dollar increase (decrease) of such items from period to period.

|                                     |  | Percent of Net Sales
Years Ended December 31, |   | Percentage Dollar Increase (Decrease)
Years Ended December 31, |   
|------------------------------------ |  | --------------------------------------------- | - | -------------------------------------------------------------- | --
|
|Revenues                             |  | 100.0                                         | % | 100.0                                                          | % 
|Operating costs                      |  | 78.3                                          | % | 91.8                                                           | % 
|                                     |  |                                               |   |                                                                |   
|Gross profit                         |  | 21.7                                          | % | 8.2                                                            | % 
|General and administrative expenses  |  | 16.5                                          | % | 14.4                                                           | % 
|                                     |  |                                               |   |                                                                |   
|Income (loss) from operations        |  | 5.2                                           | % | (6.2                                                           | )%
|Other income (expense)               |  | 0.6                                           | % |                                                               |   
|Write off of impaired goodwill       |  |                                              |   |                                                               |   
|Income (loss) before income taxes    |  | 5.8                                           | % | (6.2                                                           | )%
|Provision (benefit) for income taxes |  | 0.0                                           | % | 10.9                                                           | % 
|                                     |  |                                               |   |                                                                |   
|Net income (loss)                    |  | 5.8                                           | % | (17.1                                                          | )%

Year ended December 31, 2004 compared to the year ended December 31, 2003

Overview

The Company generated net income of $1,545,000, or $.20 basic and $.19 fully diluted, earnings per share for 2004, compared to a net loss of $4,679,000 or $.60,
both basic and fully diluted, loss per share in 2003. The main reasons for this material change in the earnings of the Company are the reduction in costs realized by closing blood product operations
as part of the successful implementation of management's restructuring plan in late 2003, and the lack of any increase in the deferred tax asset valuation reserve in 2004, compared to the increase in
2003.

Gross
profit increased 158.4% to $5,816,000 in 2004 from $2,251,000 in 2003 due to reduced operating costs as a result of the closure of underperforming donor centers as part of
management's restructuring plan, improved product sales volumes at the Company's remaining operations and the reclassification of professional liability insurance expense from operating costs to
general and administrative expense.

General
and administrative expenses increased 12.0% in 2004 to $4,420,000 from $3,946,000 in 2003. This is mostly attributable to a reclassification of professional liability insurance
expense to general and administrative from operating costs, higher professional liability insurance premiums, higher staff recruitment costs and an increase in management bonuses as a result of
achieving specific profitability targets.

The
Company recognized $167,000 in other income in 2004 as a result of the receipt of a refund of sales taxes previously paid to one of the Company's major suppliers.

The
Company recognized an $18,000 provision for income taxes for 2004, compared with $2,984,000 for 2003. This change was the result of an increase in the deferred tax asset valuation
reserve in 2003 to 100%. The Company recognized a relatively low provision for 2004 because of net operating loss carryforwards from previous years.

12

---



Revenue and Gross Profit



Blood products revenue for 2004 decreased by 3.4%, or $685,000, to $19,345,000 from $20,030,000 in 2004. In late 2003, the Company implemented a restructuring
plan that resulted in the closure of six donor centers in the eastern United States, which contributed $3,028,000 of revenues in 2003. In the first quarter of 2004, management closed the donor center
in Chapel Hill, North Carolina as the final step to complete the implementation of this plan. This donor center contributed $65,000 of revenue in 2004. In the second quarter of 2004, the donor center
management contracts between the Company and Presbyterian Intercommunity Hospital, located in Whittier, California, and between the Company and Dartmouth-Hitchcock Medical Center, located in Lebanon,
New Hampshire, expired and were not renewed. The Company recorded revenues from the contract with Presbyterian Intercommunity Hospital in 2003 of $555,000, and $302,000 in the first six months of
2004. The Company recorded revenues from the contract with Dartmouth-Hitchcock Medical Center in 2003 of $897,000, and $483,000 in the first six months of 2004.

Gross
profit for the blood products business segment increased $3,530,000 to $3,391,000 in 2004 from a loss of $139,000 in 2003. This is mostly attributable to the closure of
underperforming donor centers in late 2003 and higher levels of efficiency that result from higher volumes in ongoing operations.

The
following table illustrates the components included in blood products results for 2004 and 2003, and segregates that portion of blood products revenue associated with closed
operations:

For the twelve month period ended December 31,Ongoing Operations

Closed Operations

Total2004

2003

2004

2003

2004

2003(Dollars in Thousands)Revenue*

$
18,495

$
15,550

$
850

$
4,480

$
19,345

$
20,030Gross Profit

$
3,205

$
1,082

$
186

$
(1,221
)
$
3,391

$
(139
)Gross Profit Margin


17
%

7
%

22
%

(27
)%

18
%

(1
)%


---

Revenue
from ongoing operations increased $2,945,000, or 18.9%, in 2004 compared to 2003. This is mostly attributable to increased platelet collections at the Company's donor centers in
California and Maine. Following closure of underperforming donor centers in 2003, management has focused extensively on increasing collection volumes at the remaining facilities. Revenue from closed
operations declined $3,630,000, or 81.0%, in 2004 compared to 2003. This is attributable to the fact that the Company closed five donor centers in late 2003, and three donor centers in the first half
of 2004. One of the closures in early 2004 was the donor center in Chapel Hill, North Carolina that was closed as part of the restructuring plan implemented in late 2003. The other two were the donor
centers at Presbyterian Intercommunity Hospital, located in Whittier, California, and at Dartmouth-Hitchcock Medical Center, located in Lebanon, New Hampshire. Both of these were closed when the
management contracts between the Company and these hospitals expired and were not renewed.

Gross
profit from ongoing operations increased $2,123,000, or 196%, to $3,205,000 from $1,082,000 in 2003. In addition, the gross profit margin for ongoing operations improved to 17% in
2004, from 7% in 2003. This is mostly due to increased collection volume at the Company's remaining facilities. The increase in collection volume does not require a corresponding increase in many of
the costs associated with the collection effort, such as facility costs, equipment costs and staffing costs. Gross profit for closed operations was $186,000 in 2004 and a loss of $1,221,000 in 2003.
The donor centers closed in 2004 included Dartmouth-Hitchcock Medical Center and Presbyterian Intercommunity Hospital. These

13

---



facilities
were not part of management's restructuring plan as they generally operated profitably. The contracts for these facilities were not renewed by the hospital customers. The donor centers
closed in 2003 were generally underperforming operations.



Revenue for this business segment in 2004 was $7,491,000, which represents a 0.4% increase from the $7,458,000 recognized in 2003. The Company performed 13.0%
fewer procedures in 2004 compared to 2003, mostly as a result of reduced procedure volumes in the New York and New England markets. The Company experienced difficulties recruiting trained apheresis
nurses in these markets, which contributed to the decline in procedures performed. The Company was able to recognize a small increase in revenue for this segment, despite the decline in procedure
volume, mostly due to a change in procedure mix to higher average price procedures. The Company recognized a 1.5% improvement in gross profit for this business segment from $2,390,000 in 2003 to
$2,425,000 in 2004. This improvement is attributable to a change in procedure mix in 2004, the reduction in operating costs due to the reclassification of professional liability insurance expense to
general and administrative expense from operating costs. In 2003, operating costs for the blood services business segment was charged $86,000 for liability insurance.



General and administrative expenses increased $474,000, or 12%, to $4,420,000 from $3,946,000 in 2003. This is mostly attributable to the reclassification of
liability insurance in 2004, an increase in overall insurance expense, higher staff recruitment costs and an increase in management bonuses. Beginning in 2004, the Company charged general and
administrative expenses for professional liability insurance premiums which had previously been charged to operating costs, but which are not specifically attributable to any specific operation or
location. Therefore, as a result of this reclassification, insurance expense included in general and administrative expense in 2004 increased $341,000 compared to 2003. In addition, the Company
experienced an increase in the cost for all forms
of insurance coverage in 2004 of $151,000. Also in 2004, fees and other services related to nurse recruitment increased $298,000 compared to 2003. The 2004 bonus program for senior management provided
for bonuses based on the Company's achievement of specific profitability targets. The Company achieved these targets and recognized an increase of $155,000 in bonuses in 2004 compared to 2003. These
increases in general and administrative expenses were partially offset by a reduction in bad debt expense incurred in 2004. As a result of the closure of several donor centers in late 2003, the
Company recorded bad debt expense for certain hospital customers associated with these closed donor centers that would likely delay or withhold payment of outstanding invoices. In 2004, the Company
did not experience any similar risk. As a result, bad debt expense recognized in 2004 declined by $299,000 compared with 2003. In 2004, the Company changed its audit firm and recognized a $74,000
reduction in audit fees associated with the examination of the Company's 2004 financial statements.



During 2003, the Company recorded a valuation allowance of $2,984,000 against deferred tax assets. This non-cash charge reduced the net value of the
deferred tax assets on the balance sheet to zero. The assets were the result of income tax benefits that were recorded due to operating losses in prior years. Current accounting standards place
significant weight on a history of recent cumulative losses in determining whether it is more likely than not that the Company will realize the tax benefits in the near future and accordingly whether
a valuation allowance is necessary. Forecasts of future taxable income are not considered sufficient positive evidence to outweigh a history of losses. Accordingly, the assets were reserved in full,
and remain fully reserved as of the end of 2004. The Company's federal and state net operating loss carryforwards are not impacted by this change in

14

---



valuation
allowance and therefore are still available for future use for up to 20 years. In 2004, the Company utilized these carryforwards to substantially reduce income tax expense. Other than
state franchise tax, the Company expects to incur an estimated $18,000 in California alternative minimum tax for 2004.

Year ended December 31, 2003 compared to the year ended December 31, 2002

Overview

The net loss for 2003 was $4,679,000, or $.60 both basic and fully diluted loss per share, compared with a net loss of $591,000, or $.08 both basic and diluted
loss per share, for 2002. This represents a 692% increase in the loss reported between the two periods. The four main reasons for this result are the decline in therapeutic apheresis procedures, the
costs associated with closing blood product operations as part of management's restructuring plan, increased insurance costs, and the increase in the deferred tax asset valuation reserve.

Gross
profit declined 39.9% to $2,251,000 in 2003 from $3,745,000 in 2002 primarily due to the decline in therapeutic apheresis procedures, the costs incurred in 2003 associated with
management's restructuring plan and increases in insurance costs.

General
and administrative expenses decreased 3.1% in 2003 to $3,946,000 from $4,074,000 in 2002. This is mostly attributable to lower legal expenses in 2003 since the Company settled
the ARC litigation in late 2002, and severance expenses in 2002 associated with the termination of the prior Chief Executive Officer.

The
provision for income taxes for 2003 was $2,984,000 compared with a net benefit of $151,000 in 2002. This change reflects the increase in the deferred tax asset valuation reserve in
2003. In addition, ongoing operating losses in the blood products segment prior to the implementation of management's restructuring plan contributed to the net loss in 2003.

Revenue and Gross Profit



Blood products revenue for 2003 grew $586,000, or 3%, to $20,030,000 from $19,444,000. The following table illustrates the components included in blood products
revenue for 2003 and 2002, and segregates that portion of blood products revenue associated with the closed centers. The numbers shown under Ongoing Operations combine California mobile operations,
unlike the presentation included in the Company's Annual Report on Form 10-K for fiscal year ended December 31, 2003:

For the twelve month period ended December 31,Ongoing Operations

Closed Operations*

Total2003

2002

2003

2002

2003

2002(Dollars in Thousands)Revenue**

$
17,002

$
16,253

$
3,028

$
3,191

$
20,030

$
19,444Gross Profit

$
1,192

$
1,515

$
(1,331
)
$
(518
)
$
(139
)
$
997Gross Profit Margin


7
%

9
%

(44
)%

(16
)%

(1
)%

5
%


---

15

---



All
of the $749,000 increase in blood products revenue from ongoing operations in 2002 compared with 2003 came from California mobiles, despite a 0.9% decline in whole blood units
collected. This result was due to increases in contracted fees charged, passed through costs for additional pathogen testing and a change in product mix to a higher percentage of leuko-reduced red
blood cells which garner higher average prices. Closed operations revenue declined from 2002 to 2003 mostly as the result of the fact the centers closed in 2003 ceased operations in August or
September, whereas these centers operated for a full year in 2002

The
gross profit for blood products decreased from $997,000 in 2002 to negative gross profit of $139,000 in 2003. This is primarily due to the increase in operating costs at the closed
operations associated with implementing management's plan to close underperforming facilities and improve overall operations. These costs include the write-off of $214,000 in assets
previously used in the operations of the closed centers, severance payments of $77,000 to 29 terminated employees, recognition of unexpired facility lease obligations of $253,000, and other associated
costs. Gross profit for ongoing operations declined $323,000, or 21.3%, from $1,515,000 in 2002 to $1,192,000 in 2003 due to the loss of certain testing revenue of $220,000, a decrease in California
platelet volume of $698,000, increases in insurance costs of $275,000 and the write-off of certain assets related to the Sherman Oaks facility totaling $186,000.



Revenue for this business segment in 2003 declined 10.9%, compared with 2002 due to a 10.2% decline in therapeutic apheresis procedures, principally in the
Southern California and New England markets. As a result, therapeutic apheresis revenue declined $915,000, from $8,373,000 to $7,458,000. This decline in revenue contributed to a 13% decrease in gross
profit, from $2,748,000 to $2,390,000. The balance of the decrease in gross profit is attributable to increases in workers' compensation insurance and professional liability insurance costs,
especially in California.



General and administrative expenses declined from 2002 to 2003 by $128,000, or 3.1%, to $3,946,000. This decline is attributable to the elimination of litigation
expenses associated with the Company's claims against the ARC. During 2002, the Company paid $285,000 in legal expense associated with the ARC claim. Late in 2002, the Company and the ARC settled all
of the outstanding issues between them. In addition, approximately $247,000 was incurred during 2002 for severance related expenses to the Company's former Chief Executive Officer. Offsetting these
reductions in expense from 2002 to 2003 is $112,000 in increases in audit and tax preparation expenses and increases in insurance premiums.



During 2003, the Company recorded a valuation allowance of $2,984,000 against deferred tax assets. This non-cash charge reduced the net value of the
deferred tax assets on the balance sheet to zero. The assets were created as a result of income tax benefits related to operating losses in prior years. Current accounting standards place significant
weight on a history of recent cumulative losses in determining whether it is more likely than not that the Company will realize the tax benefits in the near future and accordingly whether a valuation
allowance is necessary. Forecasts of future taxable income are not considered sufficient positive evidence to outweigh a history of losses. Accordingly, the assets were reserved in full. The Company's
federal net operating loss carryforwards are not impacted by this change in valuation allowance and therefore are still available for future use for up to 20 years.

16

---



2004 and 2003 Quarterly Financial Data

The Company generated positive net income in every quarter of 2004. Most of this positive result was due to improved gross profit margins at the remaining donor
centers, and reduced overhead expenses required to support the organization.

The
following table presents unaudited statement of operations data for each of the eight quarters ended December 31, 2004. Management believes that all necessary adjustments have
been included to fairly present the quarterly information when read in conjunction with the consolidated financial statements. The operating results for any quarter are not necessarily indicative of
the results for any subsequent quarter.

|                                  |         | 2004
Quarter Ended |       | 2003
Quarter Ended
|--------------------------------- | ------- | ------------------ | ----- | ------------------
|
|
|Revenues                          |         | $                  | 6,736 |                   
|Gross profit                      |         |                    | 1,431 |                   
|Income (loss) before income taxes |         |                    | 246   |                   
|Income tax provison (benefit)     |         |                    |      |                   
|                                  |         |                    |       |                   
|Net income (loss)                 |         | $                  | 246   |                   
|                                  |         |                    |       |                   
|Earnings (loss) per share         |         |                    |       |                   
|                                  | Basic   |                    | $     | 0.03              
|                                  | Diluted |                    | $     | 0.03              

Critical Accounting Policies and Estimates



The Company's discussion and analysis of its financial condition and results of operations are based on the Company's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the Company to make estimates and judgments
that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates its
estimates, including those related to valuation reserves, income taxes and intangibles. The Company bases its estimates on historical experience and on various other assumptions that management
believes are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates under different assumptions or conditions.



The Company makes ongoing estimates relating to the collectibility of accounts receivable and maintains a reserve for estimated losses resulting from the
inability of customers to meet their financial obligations to the Company. In determining the amount of the reserve, management considers the historical level of credit losses and makes judgments
about the creditworthiness of significant customers based on ongoing credit evaluations. Since management cannot predict future changes in the financial stability of customers, actual future losses
from uncollectible accounts may differ from the estimates. If the financial condition of customers were to deteriorate, resulting in their inability to make payments, a

17

---



larger
reserve may be required. In the event it is determined that a smaller or larger reserve is appropriate, the Company would record a credit or a charge to general and administrative expense in
the period in which such a determination is made.



As part of the process of preparing the financial statements, the Company is required to estimate income taxes in each of the jurisdictions that the Company
operates. This process involves estimating actual current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These
differences result in deferred tax assets and liabilities, which are included in the balance sheet. Management must then assess the likelihood that the deferred tax assets will be recovered from
future taxable income, and to the extent management believes that recovery is not likely, must establish a valuation allowance. To the extent a valuation allowance is created or adjusted in a period,
the Company must include an expense, or benefit, within the tax provision in the statements of operations.

Significant
management judgment is required in determining the provision for income taxes, deferred tax asset and liabilities and any valuation allowance recorded against net deferred
tax assets. Management continually evaluates if the deferred tax asset is likely to be realized. If management determines that the deferred tax asset is likely to be realized, a write-up
of that asset would be required and would be reflected as a benefit from income taxes in the accompanying period. If on the other hand management determines that a deferred tax asset is not likely to
be realized, a write-down of that asset would be required and would be reflected in the provision for taxes in the accompanying period.



During the first quarter of 2002, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets."
In accordance with SFAS 142, the Company discontinued amortizing goodwill that was recorded as part of the Coral Blood Services, Inc. acquisition in 1998. During 2002, the Company
determined that the goodwill was impaired and recorded an adjustment to write off all of the remaining goodwill in the amount of $362,000. The Company does not have any other intangible assets.

Liquidity and Capital Resources

At December 31, 2004, the Company had cash and cash equivalents of $2,082,000 and working capital of $3,068,000.

The
Company has a working capital line of credit with Comerica BankCalifornia. The amount the Company may borrow is the lesser of 75% of eligible accounts receivable less
amounts outstanding on the notes payable discussed below, or $2 million. Interest is payable monthly at a rate of prime plus 0.5% (5.75% as of December 31, 2004). As of
December 31, 2004, the Company's had no net borrowings on this line of credit. As of December 31, 2004, the unused portion of the Company's line of credit was $2,000,000. The Comerica
credit facility expires on June 30, 2005, but management has already opened negotiations to replace this facility. There is no indication that the Company will face any difficulties replacing
this facility before the existing facility expires.

This
line of credit is collateralized by substantially all of the Company's assets and requires the maintenance of certain financial covenants, including minimum levels of profitability,
quick assets to current liability ratio, and debt to equity ratio and prohibits the payment of dividends or stock repurchases. As of December 31, 2004, the Company was in compliance with all of
these covenants.

The
Company has a note payable with One Source Financial. As of December 31, 2004, the balance due on this note was $39,000, of which $37,000 is included in current obligations.
The note

18

---



requires
quarterly payments of approximately $10,000, including interest at the rate of 8.5%, and is secured by certain fixed assets.

Late
in 2003, the Company completed an asset purchase transaction for blood collection and blood treatment equipment. The Company financed this transaction as a capital lease with the
manufacturer. As of December 31, 2004, the approximate total value of the lease obligation was $789,000, of which approximately $173,000 is included in current obligations. This lease requires
monthly payments of approximately $18,500, which includes interest at a rate of 7.5%.

The
Company also has a capital equipment lease with GE Capital Healthcare Financial Services used to finance the acquisition of vehicles. As of December 31, 2004, the balance
outstanding on this lease was approximately $158,000, of which approximately $73,000 is included in current obligations. This lease is scheduled to mature in January 2007, and has a fixed
interest rate of 8.0%.

Finally,
the Company has a capital equipment lease with Dell Financial Services associated with the acquisition of computer equipment. As of December 31, 2004, the balance
outstanding on this lease was approximately $7,000, all of which is included in current obligations. This lease is scheduled to mature in August 2005, and has a fixed interest rate of 12.6%.

The
following table summarizes our contractual obligations by year (in thousands).

Payments due by yearTotal

2005

2006

2007

2008

2009

ThereafterOperating leases

$
715

$
363

$
306

$
46

$


$


$
Capitalized leases


954


253


264


205


214


18


Notes Payable


39


37


2








Totals

$
1,708

$
653

$
572

$
251

$
214

$
18

$



Net
cash provided by operating activities was $2,325,000 for 2004, and $761,000 for 2003. The increase of $1,564,000 was mainly due to the improved operating results in 2004. In
addition, payables increased by $328,000, mostly associated with the timing of vendor payments at the end of each year, and an increase in accrued management bonuses in 2004 compared with 2003. This
was offset by an increase in net accounts receivable of $259,000. The days sales outstanding statistic as of December 31, 2004 stood at 46 days, compared with 42 days as of the
end of 2003.

For
2004, net cash used in investing activities was $176,000, compared with $191,000 for 2003. The cash used in investing activities in 2004 was primarily for the acquisition of blood
testing equipment. In 2003, the cash used in investing activities was primarily for other equipment.

Cash
used by financing activities in 2004 was $1,002,000, compared with $683,000 for 2003. Most of the cash utilized in both years was to reduce or eliminate outstanding notes payable,
capitalized leases or other debt obligations.

Management
anticipates that cash on hand, availability on the bank line of credit and cash generated from operations will be sufficient to provide funding for any of the Company's for
the upcoming year, including working capital requirements, equipment purchases and lease commitments.

Factors Affecting Forward-Looking Information

The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" from liability for forward-looking statements. Certain information included in this
Form 10-K and other materials filed or to be filed by the Company with the Securities and Exchange Commission (as well as information included in oral statements or other written
statements made or to be made by or on behalf of the Company) are forward-looking, such as statements relating to operational and financing plans,

19

---



competition,
the impact of future price increases for blood products and demand for the Company's products and services. Such forward-looking statements involve important risks and uncertainties, many
of which will be beyond the control of the Company. These risks and uncertainties could significantly affect anticipated results in the future, both short-term and long-term,
and accordingly, such results may differ from those expressed in forward-looking statements made by or on behalf of the Company. These risks and uncertainties include, but are not limited to those
listed below as "Risk Factors" or in other filings by the Company with the Securities and Exchange Commission.

Risk Factors Affecting the Company

Short and long-term success is subject to many factors that are beyond management's control. Shareholders and prospective shareholders of the Company
should consider carefully the following risk factors, in addition to other information contained in this report. This Annual Report on Form 10-K contains forward-looking statements.
Actual results could differ materially from those anticipated in these forward-looking statements as a result of various risks and uncertainties, including those described below.

Market Prices for Blood Do Not Necessarily Reflect Costs

The Company depends on competitive pricing to obtain and maintain sales. As costs increase, the Company may not be able to raise prices commensurately if
competitors do not. Some competitors have greater resources than the Company to sustain periods of unprofitable sales. Cost increases may therefore have a direct negative effect on profits and a
material adverse effect on the business.

Changes in Demand for Blood Products Could Affect Profitability

The Company's operations are structured to produce particular blood products based on the existing demand, and perceived potential changes in demand, for these
products by customers. Sudden and unexpected changes in demand of these products could have an adverse impact on the Company's profitability. Increasing demand could harm relationships with customers
if the Company is unable to alter production capacity adequately to fill orders. This could result in a net decrease in overall revenues and profits. Decreases in demand may require the Company to
make sizeable investments to restructure operations away from declining products to the production of new products. Lack of access to sufficient capital, or lack of adequate time to properly respond
to such a change in demand, could result in declining revenue and profits as customers transfer to other suppliers.

Declining Blood Donations Could Affect Profitability

The business depends on the availability of donated blood. Only a small percentage of the population donates blood, and new regulations intended to reduce the
risk of introducing infectious diseases in the blood supply have decreased the pool of potential donors. If the level of donor participation declines, the Company may not be able to reduce costs
sufficiently to maintain profitability in blood products.

Increasing Costs Could Affect Profitability

The costs of collecting, processing and testing blood have risen significantly in recent years and will likely continue to increase. These cost increases are
related to new and improved testing procedures to assure that blood is free of infectious disease, increased regulatory requirements related to blood safety, and increased costs associated with
recruiting blood donors. New testing protocols have required the Company to outsource much of the required testing. Competition may limit the Company's ability to pass these increased costs to
customers. In this circumstance, the increased costs may reduce profitability and may have a material adverse effect on the business and results of operations.

20

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Operations Depend on Obtaining the Services of Qualified Medical Professionals

The Company is highly dependent upon obtaining the services of qualified medical professionals. In particular, the Company's blood services business segment
depends on the services of registered nurses and other medical technologists. Nationwide, the demand for these professionals exceeds the supply and competition for their services is strong. This
shortage could be aggravated in the event of a war or other international conflict or natural disaster. If the Company is unable to attract and retain a staff of qualified medical professionals,
operations may be adversely affected.

Impact of Reimbursement Rates

Reimbursement rates for blood products and services provided to Medicaid and Medicare patients impact the fees that the Company is able to negotiate with
hospitals. Decreases in reimbursement rates or increases which do not keep pace with higher costs, may impact the Company's profitability.

Lease for a Major Production Facility has Expired

The long-term lease for the Company's Sherman Oaks production facility has expired. The Company has been unable to negotiate a lease renewal.
Presently, the Company continues to occupy this facility with the possibility of receiving a 30-day notice to vacate at any time. The lack of a long-term lease agreement for
this facility could have an adverse impact on profitability if the Company receives a 30-day notice to vacate and is unable to locate an alternative facility. The Company's ability to
produce platelet and whole blood products for Southern California customers may be severely impacted and result in a reduction of revenue and profitability.

Potential Inability to Meet Future Capital Needs Could Affect Plans to Finance Future Expansion

Currently, the Company believes it has sufficient cash available through its cash on hand, bank credit facilities and funds from operations to finance its
operations for the next year. The Company generated $1,545,000 in net income in 2004; however, there is no assurance this performance will be sustainable, and the Company may need to raise additional
capital in the debt or equity markets. There can be no assurance that the Company will be able to obtain such financing on reasonable terms or at all. Additionally, there is no assurance that the
Company will be able to obtain sufficient capital to finance future expansion.

Targeted Partner Blood Drives Involve Higher Collection Costs

Part of the Company's current operations involves conducting blood drives in partnership with hospitals. Blood drives are conducted under the name of the hospital
partner and require that all promotional materials and other printed material include the name of the hospital partner. This strategy lacks the efficiencies associated with blood drives that are not
targeted to benefit particular hospital partners. As a result, collection costs might be higher than those experienced by the Company's competition and may affect profitability and growth plans.

Access to Insurance Could Affect Ability to Defend Against Possible Claims

The Company currently maintains insurance coverage consistent with the industry; however, if the Company experiences losses or the risks associated with the blood
products industry increase in the future, insurance may become more expensive or unavailable. The Company also cannot give assurance that as the business expands, or the Company introduces new
products and services, that additional liability insurance on acceptable terms will be available, or that the existing insurance will provide adequate coverage against any and all potential claims.
Also, the limitations on liability contained in various agreements and contracts may not be enforceable and may not otherwise protect the Company from liability for damages. The successful assertion
of one or more large claims against the Company

21

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that
exceed available insurance coverage, or changes in insurance policies, such as premium increases or the imposition of large deductibles or co-insurance requirements, may materially
and adversely affect the business.

Not-For-Profit Status Gives Advantages to Competitors

HemaCare is the only significant blood products supplier to hospitals in the U.S. that is operated for profit and investor owned. The
not-for-profit competition is exempt from federal and state taxes, and has substantial community support and access to tax-exempt financing. The Company may not be
able to continue to compete successfully with not-for-profit organizations and the business and results of operations may suffer material adverse harm.

Potential Adverse Affect from Changes in the Healthcare Industry Could Affect Access to Customers

In the U.S., a fundamental change is occurring in the healthcare system. Competition to gain patients on the basis of price, quality and service is intensifying
among healthcare providers who are under pressure to decrease the costs of healthcare delivery. A national hospital chain has announced plans to sell 19 of its facilities in California, many of which
are customers of the Company. In addition, there has been significant consolidation among healthcare providers as providers seek to enhance efficiencies, and this consolidation is expected to
continue. As a result of these trends, the Company may be limited in its ability to increase prices for products in the future, even if costs increase. Further, the Company may be adversely affected
by customer attrition as a result of consolidation or closure of hospital facilities.

Future Technological Developments Could Jeopardize Business

As a result of the risks posed by blood-borne diseases, many companies are currently seeking to develop synthetic substitutes for human blood products. HemaCare's
business consists of collecting, processing and distributing human blood and blood products. The introduction and acceptance in the market of synthetic blood substitutes may cause material adverse
harm to the business.

Heavily Regulated Industry Could Increase Operating Costs

The business of collecting, processing and distributing blood and blood products are all subject to extensive and complex regulation by the state and federal
governments. The Company is required to obtain and maintain numerous licenses in different legal jurisdictions regarding the safety of products, facilities and procedures, and regarding the purity and
quality of blood products. In addition, state and federal laws include anti-kickback and self-referral prohibitions and other regulations that affect the relationships between
blood banks, hospitals, physicians and other persons who refer business to each other. Health insurers and government payers, such as Medicare and Medicaid, also limit reimbursement for products and
services, and require compliance with certain regulations before reimbursement will be made.

The
Company devotes substantial resources to complying with laws and regulations, and believes it is currently in compliance; however, the possibility cannot be eliminated that
interpretations of existing laws and regulations will result in a finding that the Company has not complied with significant existing regulations. Such a finding could materially harm the business.
Moreover, healthcare reform is continually under consideration by regulators, and the Company does not know how laws and regulations will change in the future. Some of these changes may require costly
compliance efforts or expensive outsourcing of functions which may cause some of the Company's operations prohibitively expensive or impossible to continue.

22

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Product Safety and Product Liability Could Provide Exposure to Claims and Litigation

Blood products carry the risk of transmitting infectious diseases, including but not limited to hepatitis, HIV and Creutzfeldt-Jakob disease. HemaCare carefully
screens donors, uses highly qualified testing service providers to test its blood products for known pathogens in accordance with industry standards, and complies with all applicable safety
regulations. Nevertheless, the risk that screening and testing processes might fail or that new pathogens may be undetected by them cannot be completely eliminated. There is currently no test to
detect the pathogen responsible for Creutzfeldt-Jakob disease. If patients are infected by known or unknown pathogens, claims may exceed insurance coverage and materially and adversely affect the
Company's financial condition. Furthermore, healthcare regulations are constantly changing and certain changes may require costly compliance or make some of our operations impossible to continue.

Environmental Risks

HemaCare's operations involve the controlled use of bio-hazardous materials and chemicals. Although the Company believes that its safety procedures
for handling and disposing of such materials comply with the standards prescribed by state and federal regulations, the risk of accidental contamination or injury from these materials cannot be
completely eliminated. In the event of such an accident, the Company could be held liable for any damages that result, and any such liability could exceed the resources of the Company and its
insurance coverage. The Company may incur substantial costs to maintain compliance with environmental regulations as it develops and expands its business.

Business Interruption Due to Terrorism and Increased Security Measures in Response to Terrorism

HemaCare's business depends on the free flow of products and services through the channels of commerce and freedom of movement for patients and donors. The 2001
response to terrorist activities slowed or stopped transportation, mail, financial and other services for a period of time. Further delays or stoppages in transportation of perishable blood products
and interruptions of mail, financial or other services could have a material adverse effect on the Company's results of operations and financial condition. Furthermore, the Company may experience an
increase in operating costs, such as costs for transportation, insurance and security, as a result of the terrorist activities and potential activities, which may target health care facilities or
medical products. The Company may also experience delays in receiving payments from payers that have been affected by terrorist activities and potential activities. The U.S. economy in general is
adversely affected by terrorist activities, and potential activities, and any economic downturn may adversely impact the Company's results of operations, impair its ability to raise capital or
otherwise adversely affect its ability to grow its business.

Articles of Incorporation and Rights Plan Could Delay or Prevent an Acquisition or Sale of HemaCare

HemaCare's Articles of Incorporation empower the Board of Directors to establish and issue a class of preferred stock, and to determine the rights, preferences
and privileges of the preferred stock. This gives the Board of Directors the ability to deter, discourage or make more difficult for a change in control of HemaCare, even if such a change in control
would be in the interest of a significant number of shareholders or if such a change in control would provide shareholders with a substantial premium for their shares over the
then-prevailing market price for our common stock.

In
addition, the Board of Directors has adopted a Shareholder's Rights Plan designed to require a person or group interested in acquiring a significant or controlling interest in
HemaCare to negotiate with the Board. Under the terms of our Shareholders' Rights Plan, in general, if a person or group acquires more than 15% of the outstanding shares of common stock, all of the
other shareholders would have the right to purchase securities from the Company at a discount to the fair market value of the common stock, causing substantial dilution to the acquiring person or
group. The Shareholders'

23

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Rights
Plan may inhibit a change in control and, therefore, may materially adversely affect the shareholders' ability to realize a premium over the then-prevailing market price for the
common stock in connection with such a transaction. For a description of the Shareholders' Rights Plan see the Company's Current Report on Form 8-K filed with the SEC on
March 5, 1998.

Stocks Traded on the OTC Bulletin Board are Subject to Greater Market Risks than Those of Exchange-Traded and Nasdaq Stocks

HemaCare's common stock was delisted from the Nasdaq Small Cap Market on October 29, 1998 because of the failure to maintain Nasdaq's requirement of a
minimum bid price of $1.00. Since November 2, 1998 the common stock has traded on the OTC Bulletin Board, an electronic, screen-based trading system operated by the National Association of
Securities Dealers, Inc. Securities traded on the OTC Bulletin Board are, for the most part, thinly traded and generally are not subject to the level of regulation imposed on securities listed
or traded on the Nasdaq Stock Market or on a national securities exchange. As a result, an investor may find it difficult to dispose of our common stock or to obtain accurate quotations as to its
price.

Stock Price Could Be Volatile

The price of HemaCare's common stock has fluctuated in the past and may be more volatile in the future. Factors such as the announcements of government
regulation, new products or services introduced by the Company or by the competition, healthcare legislation, trends in the health insurance, litigation, fluctuations in operating results and market
conditions for healthcare stocks in general could have a significant impact on the future price of HemaCare's common stock. In addition, the stock market has from time to time experienced extreme
price and volume fluctuations that may be unrelated to the operating performance of particular companies. The generally low volume of trading in HemaCare's common stock makes it more vulnerable to
rapid changes in price in response to market conditions.

Future Sales of Equity Securities Could Dilute the Company's Common Stock

The Company may seek new financing in the future through the sale of its securities. Future sales of common stock or securities convertible into common stock
could result in dilution of the common stock currently outstanding. In addition, the perceived risk of dilution may cause some shareholders to sell their shares, which may further reduce the market
price of the common stock.

Lack of Dividend Payments

The Company intends to retain any future earnings for use in its business, and therefore does not anticipate declaring or paying any cash dividends in the
foreseeable future. The declaration and payment of any cash dividends in the future will depend on the Company's earnings, financial
condition, capital needs and other factors deemed relevant by the Board of Directors. In addition, the Company's credit agreement prohibits the payment of dividends during the term of the agreement.

Evaluation of Internal Control and Remediation of Potential Problems will be Costly and Time Consuming and could Expose Weaknesses in Financial
Reporting

The regulations implementing Section 404 of the Sarbanes-Oxley Act of 2002 require an assessment of the effectiveness of the Company's internal control
over financial reporting beginning with our Annual Report on Form 10-K for the fiscal year ending December 31, 2006. The Company's independent auditors will be required to
confirm in writing whether management's assessment of the effectiveness of the internal control over financial reporting is fairly stated in all material respects, and

24

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separately
report on whether they believe management maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006.

This
process will be expensive and time consuming, and will require significant attention of management. Management can give no assurance that material weaknesses in internal controls
will not be discovered. Management also can give no assurance that the process of evaluation and the auditor's attestation will be completed on time. If a material weakness is discovered, corrective
action may be time consuming, costly and further divert the attention of management. The disclosure of a material weakness, even if quickly remedied, could reduce the market's confidence in the
Company's financial statements and harm the Company's stock price, especially if a restatement of financial statements for past periods is required.

Item 7aQuantitative And Qualitative Disclosures About Market Risk

In the normal course of business, the Company's operations are exposed to risks associated with fluctuations in interest rates. The Company manages its risks
based on management's judgment of the appropriate trade-off between risk, opportunity and costs. Management does not believe that interest rate risks are material to the results of
operations or cash flows of the Company, and, accordingly, does not generally enter into interest rate hedge instruments.

The
Company has $993,000 of debt, all of which is from notes payable and capitalized leases with fixed interest rates. The interest rate payable on the Company's working capital line of
credit is based upon the prime interest rate. At December 31, 2004, no amount was outstanding on this line of credit.

In
the normal course of business, the Company also faces risks that are either non-financial or not quantifiable, including those risks described earlier "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of OperationsRisk Factors Affecting the Company."

Item 8Financial Statements and Supplementary Data

The Index to Financial Statements and Schedules appears on page F-1. The Reports of Independent Public Accountants appears on F-2 and
F-3, and the Consolidated Financial Statements and Notes to Consolidated Financial Statements appear on pages F-4 to F-15.

Item 9Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

On April 5, 2004, the Company dismissed Ernst & Young LLP, an independent registered public accounting firm ("E&Y"), as the independent accountants
of the Company. On April 8, 2004 appointed Stonefield Josephson, Inc., an independent registered public accounting firm ("Stonefield"), as the independent accountants of the Company for
the fiscal year ended December 31, 2004. The determination to dismiss E&Y and to appoint Stonefield was made by the Board of Directors of the Company upon the recommendation of the Audit
Committee.

The
reports of E&Y on the financial statements of the Company for the fiscal years ended December 31, 2003 and 2002 did not contain any adverse opinion, disclaimer of opinion, or
qualification or modification as to uncertainty, audit scope or accounting principles.

During
the Company's fiscal years ended December 31, 2003 and 2002, and the interim period from January 1, 2004 through April 8, 2004, there were no disagreements
with E&Y on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of E&Y, would have
caused them to make reference to the subject matter of the disagreement in connection with their reports on the Company's financial statements for such years.

25

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During
the Company's fiscal years ended December 31, 2003 and 2002, and the interim period from January 1, 2004 through April 8, 2004, no reportable event (as
defined in Item 304(a)(1)(v) of Regulation S-K) has occurred.

During
the Company's fiscal years ended December 31, 2003 and 2002, and the interim period from January 1, 2003 through April 8, 2004, the Company did not consult
with Stonefield on the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on the Company's financial
statements, or any matter which was the subject of any disagreement or any reportable event (as defined in Items 304(a)(1)(iv) and 304(a)(1)(v), respectively, of
Regulation S-K).

E&Y
was provided with a copy of the disclosures contained herein. A letter from E&Y confirming its agreement with the statements contained herein is attached as Exhibit 16.1 to
the Company's Form 8-K dated April 9, 2004.

Item 9AControls And Procedures

The Chief Executive Officer and the Chief Financial Officer of the Company, with the participation of the Company's management, carried out an evaluation of the
effectiveness of the Company's disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b). Based on that evaluation, the Chief Executive Officer and the Chief
Financial Officer believe that, as of the end of the period covered by this report, the Company's disclosure controls and procedures are effective in making known to them material information relating
to the Company (including its consolidated subsidiaries) required to be included in this report.

Disclosure
controls and procedures, no matter how well designed and implemented, can provide only reasonable assurance of achieving an entity's disclosure objectives. The likelihood of
achieving such objectives is affected by limitations inherent in disclosure controls and procedures. These include the fact that human judgment in decision-making can be faulty and that breakdowns in
internal control can occur because of human failures such as simple errors or mistakes or intentional circumvention of the established process.

There
was no change in the Company's internal control over financial reporting known to the Chief Executive Officer or the Chief Financial Officer, that occurred during the Company's
fiscal quarter ended December 31, 2004 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

Item 9bOther Information

None.

26

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PART III

Item 10Directors and Executive Officers of the Registrant

The information concerning the directors and executive officers of the Company is incorporated herein by reference from the section entitled
"Proposal 1Election of Directors" contained in the definitive proxy statement of the Company to be filed pursuant to Regulation 14A within 120 days after the end of
the Company's last fiscal year (the "Proxy Statement").

Item 11Executive Compensation

The information concerning executive compensation is incorporated herein by reference from the section entitled "Proposal 1Election of
Directors" contained in the Proxy Statement.

Item 12Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information concerning the security ownership of certain beneficial owners and management and related stockholder matters is incorporated herein by reference
from the section entitled "General InformationSecurity Ownership of Principal Stockholders and Management" and "Proposal 1Election of Directors" contained in the Proxy
Statement.

Item 13Certain Relationships and Related Transactions

The information concerning certain relationships and related transactions is incorporated herein by reference from the section entitled
"Proposal 1Election of DirectorsCertain Relationships and Related Transactions" contained in the Proxy Statement.

Item 14Principal Accountant Fees and Services

The information concerning the Company's principal accountant's fees and services is incorporated herein by reference from the section entitled "Independent
Registered Public Accounting Firm" in the Proxy Statement.

PART IV

Item 15Exhibits and Financial Statement Schedules

The following are filed as part of this Report:





27

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3.1

Restated Articles of Incorporation of the Registrantincorporated by reference to Exhibit 3.1 to form 10-K of the Registrant for the year ended December 31, 2002.3.2

Amended and Restated Bylaws of the Registrant, as amendedincorporated by reference to Exhibit 3.1.0 to Form 8-K of the Registrant dated February 19, 2003.4.1

Warrant Agreement between the Registrant and Alan C. Darlington, dated January 15, 2003incorporated by reference to Exhibit 4.4 to Form 10-K of the Registrant for the year ended December 31, 2002.4.2

Warrant Agreement between the Registrant and Alan C. Darlington, dated January 15, 2003incorporated by reference to Exhibit 4.5 to Form 10-K of the Registrant for the year ended December 31, 2002.4.3

Rights Agreement between the Registrant and U.S. Stock Transfer Corporation dated March 3, 1998incorporated by reference to Exhibit 4 to Form 8-K of the Registrant dated March 5, 1998.10.1

1996 Stock Incentive Plan, as amended, of the Registrantincorporated by reference to Exhibit 4.1 to Form 10-Q of the Registrant for the quarter ended September 30, 1996.10.2**

2004 Stock Purchase Plan of the Registrant.10.3

Loan and Security Agreement between the Registrant, Coral Blood Services, Inc. and Comerica Bank dated November 19, 2002incorporated by reference to Exhibit 10.2 to Form 10-K of the Registrant for the year ended December 31,
2002.10.4

First Modification to Loan and Security Agreement between the Registrant, Coral Blood Services, Inc. and Comerica Bank dated March 22, 2004incorporated by reference to Exhibit 10.1 of Form 10-Q of the Registrant for the quarter-ended
March 31, 2004.10.5*

Employment Agreement between the Registrant and Joshua Levy dated March 22, 2000incorporated by reference to Exhibit 10.12 of Form 10-K of the Registrant for the year ended December 31, 2000.10.6*

Employment Letter between the Registrant and Judi Irving, dated December 6, 2002incorporated by reference to Exhibit 10.8 to Form 10-K of the Registrant for the year ended December 31, 2002.10.7

Master Security Lease Agreement between the Registrant and GE Capital Healthcare Financial Services dated December 26, 2002incorporated by reference to Exhibit 10.10 to Form 10-K of the Registrant for the year ended December 31,
2002.10.8*

Employment Letter between the Registrant and Robert S. Chilton, dated October 3, 2003incorporated by reference to Exhibit 10.1 to Form 10-Q of the Registrant for the quarter ended September 30, 2003.10.9

Lease Agreement between the Registrant and Gambro BCT, dated December 30, 2003incorporated by reference to Exhibit 10.12 to Form 10-K of the Registrant for the year ended December 31, 2003.


28

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11.**

Computation of earnings (loss) per common equivalent share.14.**

Code of Ethics.16.

Letter from Ernst & Young LLP, Independent Registered Public Accounting Firm, regarding change in independent accountantsincorporated by reference to Exhibit 16.1 to Form 8-K of the Registrant dated April 9, 2004.21.**

Subsidiaries of the Registrant.23.1**

Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm.23.2**

Consent of Stonefield Josephson, Inc., Independent Registered Public Accounting Firm.31.1**

Certification Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2**

Certification Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1**

Certification Pursuant to 18 U.S.C. 1350, Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


---

29

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SIGNATURES

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

|Dated: March 25, 2005 |  | HEMACARE CORPORATION
|--------------------- |  | --------------------
|                      |  | By:                 

Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant in the capacities indicated on
the twenty-fifth day of March, 2005.

|Signature                                       |  | Title                                                                                            
|----------------------------------------------- |  | -------------------------------------------------------------------------------------------------
|                                                |  |                                                                                                  
|/s/JULIAN L. STEFFENHAGENJulian L. Steffenhagen |  | Chairman of the Board                                                                            
|/s/JUDI IRVINGJudi Irving                       |  | President and Chief Executive Officer and Director (Principal Executive Officer)                 
|/s/ROBERT S. CHILTONRobert S. Chilton           |  | Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)
|/s/STEVEN GERBERSteven Gerber                   |  | Director                                                                                         
|/s/ROBERT L. JOHNSONRobert L. Johnson           |  | Director                                                                                         
|/s/TERRY VAN DER TUUKTerry Van Der Tuuk         |  | Director                                                                                         

30

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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES

|                                                                                    |                                                 | Page
Number
|----------------------------------------------------------------------------------- | ----------------------------------------------- | -----------
|Report of Stonefield Josephson, Inc., Independent Registered Public Accounting Firm |                                                 | F-2        
|Report of Ernst & Young LLP, Independent Registered Public Accounting Firm          |                                                 | F-3        
|Consolidated balance sheets at December 31, 2004 and December 31, 2003              |                                                 | F-4        
|For the years ended December 31, 2004, 2003 and 2002:                               |                                                 |            
|                                                                                    | Consolidated statements of operations           |            
|                                                                                    | Consolidated statements of shareholders' equity |            
|                                                                                    | Consolidated statements of cash flows           |            
|Notes to consolidated financial statements                                          |                                                 | F-8        

All
schedules are not submitted because either they are not applicable, not required or because the information required is included in the Consolidated Financial Statements, including
the notes thereto.

F-1

---



REPORT OF STONEFIELD JOSEPHSON, INC., INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders of HemaCare Corporation:

We
have audited the accompanying consolidated balance sheet of HemaCare Corporation and subsidiaries, as of December 31, 2004, and the related consolidated statements of
operations and shareholder's equity and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion
on these financial statements based on our audit.

We
conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our opinion.

In
our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of HemaCare Corporation and subsidiaries as of
December 31, 2004, and the results of its operations and its cash flows for the year then ended in conformity with U.S. generally accepted accounting principles.

/s/
Stonefield Josephson, Inc.
CERTIFIED PUBLIC ACCOUNTANTS

Santa
Monica, California
February 8, 2005

F-2

---



REPORT OF ERNST & YOUNG LLP, INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders of HemaCare Corporation:

We
have audited the accompanying consolidated balance sheet of HemaCare Corporation (a California Corporation) and subsidiaries as of December 31, 2003, and the related
consolidated statements of operations, shareholders' equity, and cash flows for each of the two years in the period ended December 31, 2003. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We
conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company's internal control over financial
reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly we express no such opinion. An audit also includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In
our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of HemaCare Corporation at December 31,
2003, and the consolidated results of its operations and its cash flows for each of the two years in the period ended December 31, 2003, in conformity with U.S. generally accepted accounting
principles.

/s/
ERNST & YOUNG LLP
Los Angeles, California
February 17, 2004

F-3

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HEMACARE CORPORATION AND SUBSIDIARIES        CONSOLIDATED BALANCE SHEETS

|                                                                                                                   |                                                                                                                         | December 31,
2004          |           | December 31,
2003 |          
|------------------------------------------------------------------------------------------------------------------ | ----------------------------------------------------------------------------------------------------------------------- | -------------------------- | --------- | ----------------- | ---------
|Assets                                                                                                             |                                                                                                                         |                            |           |                   |          
|Current assets:                                                                                                    |                                                                                                                         |                            |           |                   |          
|                                                                                                                   | Cash and cash equivalents                                                                                               |                            | $         | 2,082,000         |          
|                                                                                                                   | Accounts receivable, net of allowance for doubtful accounts of $153,000 in 2004 and $351,000 in 2003                    |                            |           | 3,378,000         |          
|                                                                                                                   | Product inventories and supplies                                                                                        |                            |           | 566,000           |          
|                                                                                                                   | Prepaid expenses                                                                                                        |                            |           | 401,000           |          
|                                                                                                                   | Note and other receivables                                                                                              |                            |           | 110,000           |          
|                                                                                                                   |                                                                                                                         |                            |           |                   |          
|                                                                                                                   |                                                                                                                         | Total current assets       |           |                   | 6,537,000
|Plant and equipment, net of accumulated depreciation and amortization of $3,470,000 in 2004 and $2,919,000 in 2003 |                                                                                                                         |                            | 2,778,000 |                   |          
|Other assets                                                                                                       |                                                                                                                         |                            | 29,000    |                   |          
|                                                                                                                   |                                                                                                                         |                            |           |                   |          
|                                                                                                                   |                                                                                                                         | $                          | 9,344,000 |                   | $        
|                                                                                                                   |                                                                                                                         |                            |           |                   |          
|Liabilities and Shareholders' Equity                                                                               |                                                                                                                         |                            |           |                   |          
|Current liabilities:                                                                                               |                                                                                                                         |                            |           |                   |          
|                                                                                                                   | Accounts payable                                                                                                        |                            | $         | 1,730,000         |          
|                                                                                                                   | Accrued payroll and payroll taxes                                                                                       |                            |           | 1,175,000         |          
|                                                                                                                   | Other accrued expenses                                                                                                  |                            |           | 274,000           |          
|                                                                                                                   | Current obligations under capital leases                                                                                |                            |           | 253,000           |          
|                                                                                                                   | Current obligations under notes payable                                                                                 |                            |           | 37,000            |          
|                                                                                                                   |                                                                                                                         |                            |           |                   |          
|                                                                                                                   |                                                                                                                         | Total current liabilities  |           |                   | 3,469,000
|Obligations under capital leases, net of current portion                                                           |                                                                                                                         |                            | 701,000   |                   |          
|Notes payable, net of current portion                                                                              |                                                                                                                         |                            | 2,000     |                   |          
|Other long-term liabilities                                                                                        |                                                                                                                         |                            | 5,000     |                   |          
|Shareholders' equity:                                                                                              |                                                                                                                         |                            |           |                   |          
|                                                                                                                   | Common stock, no par value20,000,000 shares authorized, 8,064,000 issued and outstanding in 2004 and 7,756,000 in 2003 |                            |           | 13,530,000        |          
|                                                                                                                   | Accumulated deficit                                                                                                     |                            |           | (8,363,000        | )        
|                                                                                                                   |                                                                                                                         |                            |           |                   |          
|                                                                                                                   |                                                                                                                         | Total shareholders' equity |           |                   | 5,167,000
|                                                                                                                   |                                                                                                                         |                            |           |                   |          
|                                                                                                                   |                                                                                                                         | $                          | 9,344,000 |                   | $        
|                                                                                                                   |                                                                                                                         |                            |           |                   |          

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

F-4

---





HEMACARE CORPORATION AND SUBSIDIARIES  CONSOLIDATED STATEMENTS OF OPERATIONS  For the Years Ended December 31,

|                                            |                   | 2004                               |           | 2003       |            | 2002       |           
|------------------------------------------- | ----------------- | ---------------------------------- | --------- | ---------- | ---------- | ---------- | ----------
|Revenues                                    |                   |                                    |           |            |            |            |           
|                                            | Blood products    |                                    | $         | 19,345,000 |            | $          | 20,030,000
|                                            | Blood services    |                                    |           | 7,491,000  |            |            | 7,458,000 
|                                            |                   |                                    |           |            |            |            |           
|                                            |                   | Total revenue                      |           |            | 26,836,000 |            |           
|Operating costs and expenses                |                   |                                    |           |            |            |            |           
|                                            | Blood products    |                                    |           | 15,954,000 |            |            | 20,169,000
|                                            | Blood services    |                                    |           | 5,066,000  |            |            | 5,068,000 
|                                            |                   |                                    |           |            |            |            |           
|                                            |                   | Total operating costs and expenses |           |            | 21,020,000 |            |           
|                                            |                   |                                    |           |            |            |            |           
|                                            |                   | Gross profit                       |           |            | 5,816,000  |            |           
|General and administrative expenses         |                   |                                    | 4,420,000 |            |            | 3,946,000  |           
|                                            |                   |                                    |           |            |            |            |           
|Income (loss) from operations               |                   |                                    | 1,396,000 |            |            | (1,695,000 | )         
|Other income (expense)                      |                   |                                    | 167,000   |            |            |           |           
|Write-off of impaired goodwill              |                   |                                    |          |            |            |           |           
|                                            |                   |                                    |           |            |            |            |           
|Income (loss) before income taxes           |                   |                                    | 1,563,000 |            |            | (1,695,000 | )         
|Provision (benefit) for income taxes        |                   |                                    | 18,000    |            |            | 2,984,000  |           
|                                            |                   |                                    |           |            |            |            |           
|                                            | Net income (loss) |                                    | $         | 1,545,000  |            | $          | (4,679,000
|                                            |                   |                                    |           |            |            |            |           
|Income (loss) per share                     |                   |                                    |           |            |            |            |           
|                                            | Basic             |                                    | $         | 0.20       |            | $          | (0.60     
|                                            |                   |                                    |           |            |            |            |           
|                                            | Diluted           |                                    | $         | 0.19       |            | $          | (0.60     
|                                            |                   |                                    |           |            |            |            |           
|Weighted average shares outstandingbasic   |                   |                                    | 7,831,000 |            |            | 7,753,000  |           
|                                            |                   |                                    |           |            |            |            |           
|Weighted average shares outstandingdiluted |                   |                                    | 8,237,000 |            |            | 7,753,000  |           
|                                            |                   |                                    |           |            |            |            |           

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

F-5

---





HEMACARE CORPORATION AND SUBSIDIARIES        CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY        For the Years Ended December 31, 2004, 2003, and 2002

|                                                                       |  | Common Stock |  |   |            |  |  
|---------------------------------------------------------------------- |  | ------------ |  | - | ---------- |  | -
|
|
|Balance as of December 31, 2001                                        |  | 7,591,000    |  | $ | 13,065,000 |  | $
|Issuance of common stock for employee 401(k) and incentive bonus plans |  | 76,000       |  |   | 122,000    |  |  
|Extension of stock options                                             |  |             |  |   | 56,000     |  |  
|Warrants issued                                                        |  |             |  |   | 20,000     |  |  
|Stock options exercised                                                |  | 84,000       |  |   | 53,000     |  |  
|Net Loss                                                               |  |             |  |   |           |  |  
|                                                                       |  |              |  |   |            |  |  
|Balance as of December 31, 2002                                        |  | 7,751,000    |  | $ | 13,316,000 |  | $
|Stock options exercised                                                |  | 5,000        |  |   | 3,000      |  |  
|Net Loss                                                               |  |             |  |   |           |  |  
|                                                                       |  |              |  |   |            |  |  
|Balance as of December 31, 2003                                        |  | 7,756,000    |  | $ | 13,319,000 |  | $
|Stock options exercised                                                |  | 153,000      |  |   | 81,000     |  |  
|Issuance of common stock through                                       |  |              |  |   |            |  |  
|Employee Stock Purchase Plan                                           |  | 155,000      |  |   | 130,000    |  |  
|Net Income                                                             |  |             |  |   |           |  |  
|                                                                       |  |              |  |   |            |  |  
|Balance as of December 31, 2004                                        |  | 8,064,000    |  | $ | 13,530,000 |  | $
|                                                                       |  |              |  |   |            |  |  

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

F-6

---





HEMACARE CORPORATION AND SUBSIDIARIES        CONSOLIDATED STATEMENTS OF CASH FLOWS        For the Years Ended December 31,

|                                                 |                                                                                             | 2004                                                  |           | 2003       |            | 2002      |           
|------------------------------------------------ | ------------------------------------------------------------------------------------------- | ----------------------------------------------------- | --------- | ---------- | ---------- | --------- | ----------
|Cash flows from operating activities:            |                                                                                             |                                                       |           |            |            |           |           
|                                                 | Net income (loss)                                                                           |                                                       | $         | 1,545,000  |            | $         | (4,679,000
|                                                 | Adjustments to reconcile net income to net cash provided by (used in) operating activities: |                                                       |           |            |            |           |           
|                                                 |                                                                                             | Provision for bad debts                               |           |            | 9,000      |           |           
|                                                 |                                                                                             | Use (recognition) of deferred tax assets              |           |            |           |           |           
|                                                 |                                                                                             | Depreciation and amortization                         |           |            | 651,000    |           |           
|                                                 |                                                                                             | (Gain) loss on disposal of assets                     |           |            | 25,000     |           |           
|                                                 |                                                                                             | Impairment of assets                                  |           |            |           |           |           
|                                                 |                                                                                             | Impairment of goodwill                                |           |            |           |           |           
|                                                 |                                                                                             | Issuance of common stock and options for compensation |           |            |           |           |           
|Changes in operating assets and liabilities:     |                                                                                             |                                                       |           |            |            |           |           
|                                                 | Decrease (increase) in accounts receivable, net                                             |                                                       |           | (259,000   | )          |           | 1,495,000 
|                                                 | Decrease (increase) in inventories, supplies and prepaid expenses                           |                                                       |           | 103,000    |            |           | 338,000   
|                                                 | Decrease (increase) in other assets                                                         |                                                       |           | (77,000    | )          |           | 31,000    
|                                                 | Increase (decrease) in accounts payable, accrued expenses and other liabilities             |                                                       |           | 328,000    |            |           | (869,000  
|                                                 |                                                                                             |                                                       |           |            |            |           |           
|                                                 |                                                                                             | Net cash provided by operating activities             |           |            | 2,325,000  |           |           
|Cash flows from investing activities:            |                                                                                             |                                                       |           |            |            |           |           
|                                                 | Proceeds from sale of plant and equipment                                                   |                                                       |           | 17,000     |            |           | 79,000    
|                                                 | Proceeds from note receivable                                                               |                                                       |           | 20,000     |            |           |          
|                                                 | Purchase of plant and equipment                                                             |                                                       |           | (213,000   | )          |           | (270,000  
|                                                 |                                                                                             |                                                       |           |            |            |           |           
|                                                 |                                                                                             | Net cash used in investing activities                 |           |            | (176,000   | )         |           
|Cash flows from financing activities:            |                                                                                             |                                                       |           |            |            |           |           
|                                                 | Proceeds from exercise of stock options                                                     |                                                       |           | 80,000     |            |           | 3,000     
|                                                 | Proceeds from sale of common stock                                                          |                                                       |           | 130,000    |            |           |          
|                                                 | Principal payments on debt and capitalized leases                                           |                                                       |           | (1,212,000 | )          |           | (686,000  
|                                                 | Other debt borrowings                                                                       |                                                       |           |           |            |           |          
|                                                 | Borrowings on line of credit                                                                |                                                       |           |           |            |           |          
|                                                 |                                                                                             |                                                       |           |            |            |           |           
|                                                 |                                                                                             | Net cash (used in) provided by financing activities   |           |            | (1,002,000 | )         |           
|                                                 |                                                                                             |                                                       |           |            |            |           |           
|Increase (decrease) in cash and cash equivalents |                                                                                             |                                                       | 1,147,000 |            |            | (113,000  | )         
|Cash and cash equivalents at beginning of period |                                                                                             |                                                       | 935,000   |            |            | 1,048,000 |           
|                                                 |                                                                                             |                                                       |           |            |            |           |           
|Cash and cash equivalents at end of period       |                                                                                             | $                                                     | 2,082,000 |            | $          | 935,000   |           
|                                                 |                                                                                             |                                                       |           |            |            |           |           
|Supplemental disclosure:                         |                                                                                             |                                                       |           |            |            |           |           
|                                                 | Interest paid                                                                               |                                                       | $         | 95,000     |            | $         | 79,000    
|                                                 |                                                                                             |                                                       |           |            |            |           |           
|                                                 | Income taxes paid                                                                           |                                                       | $         | 117,000    |            | $         | 18,000    
|                                                 |                                                                                             |                                                       |           |            |            |           |           
|Items not impacting cash flows:                  |                                                                                             |                                                       |           |            |            |           |           
|                                                 | Purchase of equipmentCapital lease                                                         |                                                       | $         |           |            | $         | 932,000   
|                                                 |                                                                                             |                                                       |           |            |            |           |           
|                                                 | Purchase of equipmentNotes                                                                 |                                                       | $         |           |            | $         |          
|                                                 |                                                                                             |                                                       |           |            |            |           |           
|                                                 | Issuance of warrants                                                                        |                                                       | $         |           |            | $         |          
|                                                 |                                                                                             |                                                       |           |            |            |           |           
|                                                 | Insurance premiums financed                                                                 |                                                       | $         | 188,000    |            | $         | 130,000   
|                                                 |                                                                                             |                                                       |           |            |            |           |           

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

F-7

---





HemaCare Corporation  Notes to Consolidated Financial Statements  December 31, 2004

Note 1Organization

HemaCare Corporation is in the business of providing blood products and blood services to hospitals and medical centers primarily in California and on the East
Coast.

Note 2Summary of Accounting Policies

Principles of Consolidation:The accompanying consolidated financial statements include the accounts of the Company and its
subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates:The preparation of financial statements in conformity with accounting principles generally accepted in the
United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the
financial statements. Estimates also affect the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

Cash and Cash Equivalents:The Company considers all highly liquid investments with an original maturity of three months or
less to be cash equivalents.

Financial Instruments:Cash and cash equivalents, accounts receivable and accounts payable are carried at cost, which
approximates fair value. The interest rate applied to capital leases is based upon the Company's borrowing rate, and therefore their carrying value approximates fair value.

Revenues and Accounts Receivable:Revenues are recognized upon acceptance of the blood products or the performance of blood
services. Blood services revenues consist primarily of mobile therapeutics sales, while blood products revenues consist primarily of sales of single donor platelets and whole blood components that are
manufactured or purchased and distributed by the Company. Accounts receivable are reviewed periodically for collectibility.

Inventories and Supplies:Inventories consist of Company-manufactured platelets and whole blood components as well as
component blood products purchased for resale. Supplies consist primarily of medical supplies used to collect and manufacture products and to provide therapeutic services. Inventories are stated at
the lower of cost or market and are accounted for on a first-in, first-out basis.

Inventories
are comprised of the following as of December 31,

2004

2003Blood products

$
120,000

$
61,000Supplies


446,000


433,000$
566,000

$
494,000


Plant and Equipment:Plant and equipment are stated at original cost. Furniture, fixtures, equipment and vehicles are
depreciated using the straight-line method over two to ten years. Leasehold improvements are amortized over the lesser of their useful life or the length of the lease, ranging from three
to five years. The cost of normal repairs and maintenance are expensed as incurred.

Goodwill:During the first quarter of 2002, the Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 142, "Goodwill and Other Intangible Assets." In accordance with SFAS No. 142, the Company discontinued amortizing goodwill. During 2002, the Company determined

F-8

---



that
the goodwill was impaired and recorded an adjustment to write off all of the remaining goodwill in the amount of $362,000. The Company does not have any other intangible assets.

Long-lived Assets:All long-lived assets are reviewed for impairment in value when changes in
circumstances dictate, based upon undiscounted future operating cash flows, and appropriate losses are recognized and reflected in current earnings, to the extent the carrying amount of an asset
exceeds its estimated fair value determined by the use of appraisals, discounted cash flow analyses or comparable fair values of similar assets.

Income Taxes:Income taxes are computed under the provisions of SFAS No. 109, "Accounting for Income Taxes." SFAS
No. 109 provides for an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been
recognized in the Company's financial statements or tax returns. In estimating future tax consequences, SFAS No. 109 generally considers all expected future events other than enactments of
changes in the tax law or rates. In 2003, the Company determined that it was more likely than not that the deferred tax assets on the balance sheet would not be used against future possible income.
Therefore, the Company recorded a valuation reserve equivalent to 100% of the value of the available deferred tax assets. This resulted in a charge to the provision for income taxes of $2,984,000 in
2003. As of December 31, 2004, the Company maintained a 100% valuation reserve on the available deferred tax assets.

Per Share Data:Earnings per share-basic is computed by dividing net income by the weighted average shares outstanding.
Earnings per share-diluted is computed by dividing net income by the weighted average number of shares outstanding including the diluted effect of options and warrants.

Interest Expense:During the three years ended December 31, 2004, 2003, and 2002, the Company incurred interest
expense of $95,000, $79,000, and $61,000, respectively.

Reclassification:Certain prior year amounts have been reclassified to conform to the current year presentation.

Employee Stock Option Plan:The Company accounts for its employee stock option plan under the recognition and measurement
principles of Accounting Principles Board ("APB") No. 25, "Accounting
for Stock Issued to Employees," and related Interpretations. Under APB No. 25, no stock-based compensation is reflected in net income, as all options granted under the plans had an exercise
price equal to the market value of the underlying common stock on the date of grant and the related number of shares granted is fixed at that point in time.

The
Company has elected to adopt SFAS No. 123, "Accounting for Stock-Based Compensation," for disclosure purposes only and applies the provisions of APB Opinion No. 25. The
Company did not recognize any compensation expense related to the issuance of stock options in 2004, 2003 or 2002. Had compensation expense for all options granted to employees been recognized in
accordance with SFAS No. 123, the Company's net income and net income per share would have been as follows:

|                                              |  | Years ended December 31, |          
|--------------------------------------------- |  | ------------------------ | ---------
|
|Net income (loss) as reported                 |  | $                        | 1,545,000
|Pro forma net income (loss)                   |  | $                        | 1,497,000
|Basic income (loss) per share as reported     |  | $                        | 0.20     
|Diluted income (loss) per share as reported   |  | $                        | 0.19     
|Pro forma basic net income (loss) per share   |  | $                        | 0.19     
|Pro forma diluted net income (loss) per share |  | $                        | 0.18     

F-9

---



The
above pro forma amounts were calculated by estimating the fair value of each option or warrant granted on the date of grant using the Black-Scholes option-pricing model as follows:

Years ended December 31,2004

2003

2002Expected life

6 Years

4 Years

4 YearsExpected volatility

107%

113%

113%Interest rate

4.0%

3.6%

3.6%Dividend yield

0%

0%

0%


Recent Accounting Pronouncements:

In
November 2004, the FASB issued SFAS No. 151, "Inventory Costs, an amendment of ARB No. 43, Chapter 4." The amendments made by SFAS No. 151 clarify that
abnormal amounts of idle facility expense, freight, handling costs, and wasted materials (spoilage) should be recognized as current period charges and require the allocation of fixed production
overheads to inventory based on the normal capacity of the production facilities. The guidance is effective for inventory costs incurred during fiscal years beginning after June 15, 2005.
Earlier application is permitted for inventory costs incurred during fiscal years beginning after November 23, 2004. HemaCare Corporation has evaluated the impact of the adoption of SFAS
No. 151, and does not believe the impact will be significant to the Company's overall results of operations or financial position.

In
December 2004, the FASB issued SFAS No. 152, "Accounting for Real Estate Time-Sharing Transactions, an amendment of FASB Statements No. 66 and 67
(SFAS 152)." The amendments made by SFAS No. 152 amend FASB Statement No. 66, Accounting for Sales of Real Estate, to reference the financial accounting and reporting guidance for
real estate time-sharing transactions that is provided in AICPA Statement of Position ("SOP") 04-2, "Accounting for Real Estate Time-Sharing Transactions." SFAS
No. 152 also amends SFAS No. 67, "Accounting for Costs and Initial Rental Operations of Real Estate Projects," to state that the guidance for (a) incidental operations and
(b) costs incurred to sell real estate projects does not apply to real estate time-sharing transactions. The accounting for those operations and costs is subject to the guidance in
SOP 04-2. This Statement is effective for financial statements for fiscal years beginning after June 15, 2005, with earlier application encouraged. HemaCare Corporation has
evaluated the impact of the adoption of SFAS No. 152, and does not believe the impact will be significant to the Company's overall results of operations or financial position.

In
December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions." The
amendments made by SFAS No. 153 are based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. Further, the amendments
eliminate the narrow exception for nonmonetary exchanges of similar productive assets and replace it with a broader exception for exchanges of nonmonetary assets that do not have commercial substance.
Previously, Opinion No. 29 required that the accounting for an exchange of a productive asset for a similar productive asset or an equivalent interest in the same or similar productive asset
should be based on the recorded amount of the asset relinquished. Opinion No. 29 provided an exception to its basic measurement principle (fair value) for exchanges of similar productive
assets. The Board believes that exception required that some nonmonetary exchanges, although commercially substantive, be recorded on a carryover basis. By focusing the exception on exchanges that
lack commercial substance, the Board believes this Statement produces financial reporting that more faithfully represents the economics of the transactions. The Statement is effective for nonmonetary
asset exchanges occurring in fiscal periods beginning after June 15, 2005. Earlier application is permitted for nonmonetary asset exchanges occurring in fiscal periods beginning after the date
of issuance. The provisions of this Statement shall

F-10

---



be
applied prospectively. HemaCare Corporation has evaluated the impact of the adoption of SFAS No. 152, and does not believe the impact will be significant to the Company's overall results of
operations or financial position.

In
December 2004, the FASB issued SFAS No.123 (revised 2004), "Share-Based Payment." SFAS No. 123(R) will provide investors and other users of financial statements with
more complete and neutral financial information by requiring that the compensation cost relating to share-based payment transactions be recognized in financial statements. That cost will be measured
based on the fair value of the equity or liability instruments issued. SFAS No. 123(R) covers a wide range of share-based compensation arrangements including share options, restricted share
plans, performance-based awards, share appreciation rights, and employee share purchase plans. SFAS No. 123(R) replaces SFAS No. 123, Accounting for Stock-Based Compensation, and
supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees. SFAS No. 123, as originally issued in 1995, established as preferable a fair-value-based method of
accounting for share-based payment transactions with employees. However, that Statement permitted entities the option of continuing to apply the guidance in Opinion No. 25, as long as the
footnotes to financial statements disclosed what net income would have been had the preferable fair-value-based method been used. Public entities (other than those filing as small business
issuers) will be required to apply SFAS No. 123(R) as of the first interim or annual reporting period that begins after June 15, 2005. HemaCare Corporation has not calculated the impact
of the adoption of SFAS No. 123(R), but does not believe the impact will be significant to the Company's overall results of operations or financial position.

In
December 2004, the FASB issued two Staff Positions, FSP FAS 109-1, "Application of FASB Statement 109 "Accounting for Income Taxes" to the Tax Deduction on
Qualified Production Activities Provided by the American Job Creation Act of 2004," and FSP FAS 109-2 "Accounting and Disclosure Guidance for the Foreign Earnings Repatriation
Provision within the American Jobs Creation Act of 2004." Neither of these pronouncements had a significant effect as the Company does not participate in the related activities.

Note 3Plant and Equipment

Plant and equipment consists of the following:

Years ended December 31,2004

2003Furniture, fixtures and equipment

$
5,778,000

$
5,704,000Leasehold improvements


470,000


474,0006,248,000


6,178,000Less accumulated depreciation and amortization


(3,470,000
)

(2,919,000
)$
2,778,000

$
3,259,000


Depreciation
expense for 2004, 2003, and 2002 was $651,000, $717,000, and $426,000, respectively.

Note 4Line of Credit and Notes Payable

The Company has a working capital line of credit with Comerica BankCalifornia. The amount the Company may borrow is the lesser of 75% of eligible
accounts receivable, less amounts outstanding on the note payable discussed below, or $2 million. Interest is payable monthly at a rate of prime plus 0.5% (5.75% as of December 31,
2004). The Company had net borrowings on this line of credit of $450,000 and $0 as of December 31, 2003 and December 31, 2004, respectively. The line of credit is included in "current
obligations under notes payable" on the balance sheet. As of December 31, 2004,

F-11

---



the
unused portion of the Company's line of credit was $2,000,000. The line of credit matures in June 2005.

This
line of credit is collateralized by substantially all of the Company's assets and requires the maintenance of certain financial covenants, including minimum levels of profitability,
quick assets to current liability ratio, debt to equity ratio and prohibits the payment of dividends or stock repurchases. As of December 31, 2004, the Company was in compliance with all of
these covenants.

In
addition, the Company has a note payable with One Source Financial. As of December 31, 2004, the balance due on this note was $39,000. The note requires quarterly payments of
approximately $10,000 including interest at the rate of 8.5% and is secured by certain fixed assets.

Future
maturities under this note are as follows:

Years ended December 31,2005

$
37,0002006


2,000$
39,000


As
of December 31, 2003, the Company also had various other notes payable with Comerica BankCalifornia that were secured by equipment. As of December 31, 2003,
the total amount outstanding under these notes was $245,000. All of the Comerica loans were collateralized by substantially all of the Company's assets and were cross-defaulted.

As
of December 31, 2003, the Company also had a note payable related to financing certain insurance premiums, and the balance due on this note was $65,000.

Note 5Leases

The Company has entered into various capital leases for equipment, expiring on various dates through 2009.

Years Ended December 31,2004

2003Equipment

$
1,317,000

$
1,317,000Accumulated Depreciation


(181,000
)

(107,000
)$
1,136,000

$
1,210,000


Late
in 2003, the Company completed an asset purchase transaction for blood collection and blood treatment equipment. The Company financed this transaction as a capital lease with the
manufacturer. As of December 31, 2004, the total value of the lease obligation was $789,000, of which approximately $173,000 is included in current obligations. This lease requires monthly
payments of approximately $18,000, which includes interest at a rate of 7.5%.

The
Company also has a capital equipment lease with GE Capital Healthcare Financial Services used to finance the acquisition of vehicles. As of December 31, 2004, the balance
outstanding on this lease was $158,000, of which approximately $73,000 is included in current obligations. This lease is scheduled to mature in January 2007, and has a fixed interest rate of
8.0%.

Finally,
the Company has a capital equipment lease with Dell Financial Services associated with the acquisition of computer equipment. As of December 31, 2004, the balance
outstanding on this lease was approximately $7,000, all of which is included in current obligations. This lease is scheduled to mature in August 2005, and has a fixed interest rate of 12.6%.

F-12

---



The
Company leases its facilities and certain equipment under operating leases that expire through the year 2007. Future minimum rentals under capitalized and operating leases are as
follows:

Capital

OperatingYears ending December 31,2005

$
312,000

$
363,0002006


305,000


306,0002007


229,000


46,0002008


222,000


Thereafter


18,000


Total:


1,086,000

$
715,000Less: Interest


(132,000
)Principal value and taxes


954,000Less: Current portion


(253,000
)$
701,000


Total
rent expense under all operating leases was $645,000, $971,000, and $796,000 for the years ended December 31, 2004, 2003, and 2002, respectively.

Most
of the operating leases for facilities include options to renew the lease at the then current fair market value for periods of one to five years. Additionally, the Company's
facility in Sherman Oaks is currently operating on a month-to-month basis while contract negotiations are ongoing. In most cases, management expects that in the normal course
of business, leases will be renewed or replaced by other leases.

Note 6Income Taxes

The provision (benefit) for income taxes for the years ended December 31, 2004, 2003, and 2002 are as follows:

2004

2003

2002Current taxes:Federal

$
19,000

$


$
State


9,000


2,000


(50,000
)$
28,000

$
2,000


(50,000
)Deferred taxes:Federal





2,647,000


(87,000
)State


(10,000
)

335,000


(14,000
)(10,000
)

2,982,000


(101,000
)Provision (benefit) for income taxes

$
18,000

$
2,984,000

$
(151,000
)


F-13

---



Differences between the provision (benefit) for income taxes and income taxes at statutory federal income tax rate for the years ended December 31, 2004, 2003, and 2002 are as
follows:

|                                             |  | 2004 |          | 2003 |   | 2002      |  
|-------------------------------------------- |  | ---- | -------- | ---- | - | --------- | -
|Income tax expense at federal statutory rate |  | $    | 536,000  |      | $ | (576,000  | )
|State income taxes, net of federal benefit   |  |      | 53,000   |      |   | (18,000   | )
|Change in valuation allowance                |  |      | (71,000  | )    |   | 3,540,000 |  
|Permanent differences                        |  |      | 7,000    |      |   | 9,000     |  
|Change in deferred tax asset and other       |  |      | (507,000 | )    |   | 29,000    |  
|                                             |  |      |          |      |   |           |  
|Income tax expense (benefit)                 |  | $    | 18,000   |      | $ | 2,984,000 |  
|                                             |  |      |          |      |   |           |  

The
Company has recorded a net deferred tax asset of $0 at December 31, 2004 and 2003. The components of the net deferred tax asset at December 31, 2004 and 2003 are as
follows:

2004

2003Current:Accounts receivable reserve

$
60,000

$
80,000Accrued expenses and other


276,000


238,000Total deferred tax asset


336,000


318,000Noncurrent:Net operating loss carryforward


2,513,000


2,825,000Depreciation and amortization


138,000


(15,000
)Tax credit carryforward


1,332,000


844,000Other (Tax effect of State Benefit ($348,000) in 2004)


(308,000
)

110,000Valuation allowance


(4,011,000
)

(4,082,000
)(336,000
)

(318,000
)$
0

$
0


A
valuation allowance is recorded if the weight of available evidence suggests it is more likely than not that some portion or the entire deferred tax asset will not be recognized. The
Company determined in the third quarter of 2003 that, based on recent historical and expected future operating results, it is more likely than not that the Company will not be able to realize a
significant portion of its deferred
tax assets. Therefore, the Company recorded a 100% valuation reserve against all of the deferred tax assets.

At
December 31, 2004, the Company had net operating loss carryforwards available for federal and state income tax purposes totaling $10,266,000, which are not subject to
expiration until 2012. At December 31, 2004, the Company had federal and state income tax credit carryforwards of approximately $547,000 and $785,000, respectively, which are not subject to
expiration until 2010.

Acquisitions
of common stock, which result in changes in equity ownership in the Company, could result in an "ownership change" within the meaning of Section 382 of the Internal
Revenue Code of 1986, as amended (the "Code"), thereby imposing an annual limitation (the "Section 382 Limitation") on the Company's ability to utilize its net operating loss carryforwards to
reduce future taxable income. In the event of a Section 382 Limitation, the Company's utilization of its net operating loss carryforwards would be restricted.

F-14

---



Note 7Shareholders' Equity

Stock Options

In July 1996, the Company's Board of Directors approved and adopted a stock incentive plan, which provides for grants of both stock options and shares of
restricted stock. A total of 2,000,000 shares may be granted under the terms of the 1996 Plan. The term of the options granted is determined by the Company's Board of Directors, but in no event may be
longer than ten years. The exercise price of options granted generally is required to be not less than the fair market value of the common stock on the date of grant. Options granted to employees
generally vest at a rate of at least 20% per year.

The
table below summarizes stock option transactions.

|                                 |  | 2004      |   | 2003 |       | 2002 |          
|-------------------------------- |  | --------- | - | ---- | ----- | ---- | ---------
|
|Outstanding at beginning of year |  | 1,379,000 |   | $    | 0.91  |      | 1,264,000
|Granted                          |  | 200,000   |   | $    | 0.46  |      | 330,000  
|Exercised                        |  | (153,000  | ) | $    | (0.53 | )    | (5,000   
|Canceled                         |  | (210,000  | ) | $    | (0.96 | )    | (210,000 
|                                 |  |           |   |      |       |      |          
|Outstanding at end of year       |  | 1,216,000 |   | $    | 0.85  |      | 1,379,000
|                                 |  |           |   |      |       |      |          
|Exercisable at end of year       |  | 896,000   |   | $    | 0.95  |      | 915,000  
|                                 |  |           |   |      |       |      |          

The
following table summarizes the range of exercise price, weighted average remaining contractual life ("Life") and weighted average exercise price ("Price") for all stock options
outstanding as of December 31, 2004:

|               |  | Options Outstanding |  | Options Exercisable
|-------------- |  | ------------------- |  | -------------------
|
|
|$0.32 to $0.75 |  | 731,000             |  | 6.5 years          
|$0.76 to $1.50 |  | 355,000             |  | 6.5 years          
|$1.51 to $2.44 |  | 130,000             |  | 4.5 years          
|               |  |                     |  |                    
|               |  | 1,216,000           |  |                    
|               |  |                     |  |                    

Warrants

At December 31, 2004, 2003, and 2002, the Company had a total of 270,000, 270,000, and 760,000 warrants to purchase common stock outstanding, at weighted
average exercise prices of $0.64, $0.64 and $3.23, respectively. All of the warrants outstanding for all periods were exercisable. The weighted average lives for warrants outstanding at
December 31, 2004 are 1.75 years.

In
2002, as part of the severance with the former Chief Executive Officer, the Company cancelled 350,000 stock options with a weighted average exercise price of $0.64 per share. In 2002,
the Company issued 270,000 warrants to the former Chief Executive Officer with an average exercise price of $0.64 per share. These warrants are fully vested and expire in 2006.

Stock Repurchase

In 2000, the Company announced its intention to repurchase up to 15% of its outstanding common stock, or up to 1.1 million shares. Purchases were made in
the open market or in private transactions depending on price and availability. In 2000, the Company purchased 439,558 shares at an average price of $1.58 per share. In 2001, the Company purchased
332,300 shares at an average price of $1.18

F-15

---



per
share. No purchases were made in 2002, 2003 or 2004, and the Company has terminated this program.

Note 8Earnings per Share

The following table provides the calculation methodology for the numerator and denominator for earnings per share:

Years Ended December 31,2004

2003

2002Net income (loss)

$
1,545,000

$
(4,679,000
)
$
(591,000
)Weighted average shares outstanding


7,831,000


7,753,000


7,673,000Net effect of diluted options and warrants


406,000





Weighted average dilutive shares outstanding


8,237,000


7,753,000


7,673,000Earnings (loss) per share diluted

$
0.19

$
(0.60
)
$
(0.08
)


Warrants
and options to purchase 1,649,000 and 2,024,000 shares of common stock were excluded from the 2003 and 2002 computation of diluted earnings per share because the Company
incurred a loss in those years. They were anti-dilutive.

Note 9Goodwill

During 2002, the Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets." In accordance with SFAS No. 142, the Company discontinued
amortizing goodwill that was recorded as part of the acquisition. As of December 31, 2001, the Company had $530,000 of goodwill and accumulated amortization of $168,000. During 2002, management
determined that the goodwill was impaired and recorded an adjustment to write-off all of the remaining goodwill in the amount of $362,000. The Company does not have any other intangible
assets other than goodwill.

The
following table presents net income (loss) on a comparable basis after adjustment for amortization of goodwill:

2004

2003

2002Reported net income (loss)

$
1,545,000

$
(4,679,000
)
$
(591,000
)Goodwill amortization, net of taxes








Goodwill impairment, net of taxes








217,000Adjusted net income (loss)

$
1,545,000

$
(4,679,000
)
$
(374,000
)Income (loss) per shareBasicReported net income (loss)

$
0.20

$
(0.60
)
$
(0.08
)Goodwill amortization








Goodwill impairment








0.03Adjusted net income (loss)

$
0.20

$
(0.60
)
$
(0.05
)DilutedReported net income (loss)

$
0.19

$
(0.60
)
$
(0.08
)Goodwill amortization








Goodwill impairment








0.03Adjusted net income (loss)

$
0.19

$
(0.60
)
$
(0.05
)


F-16

---



Note 10-401(k) Profit Sharing Plan

HemaCare's 401(k) Profit Sharing Plan (the "401(k) Plan") qualifies, in form, under Section 401(k) of the Internal Revenue Code. For 2001 and 2000, the
Company elected to match 50% of each participant's contribution, up to 5% of the participants' annual salary, with HemaCare common stock. During 2002 and 2001, HemaCare issued 76,365 shares ($122,000)
and 92,848 shares ($93,000) of common stock as matching contributions for the 2001 and 2000 plan years, respectively. For the 2002 plan year, the Company contributed cash in the amount of $124,000 in
2003 as matching contributions. The Company did not make any contributions to the 401(k) Plan in 2003 pertaining to the 2003 plan year. For the 2004 plan year, the Company contributed cash in the
amount of $89,000 in 2005 as matching contributions.

Note 11Commitments and Contingencies

State and federal laws set forth anti-kickback and self-referral prohibitions and otherwise regulate financial relationships between blood
banks and hospitals, physicians and other persons who refer business to them. While the Company believes its present operations comply with applicable regulations, there can be no assurance that
future legislation or rule making, or the interpretation of existing laws and regulations will not prohibit or adversely impact the delivery by HemaCare of its services and products.

Healthcare
reform is continuously under consideration by lawmakers, and it is not certain as to what changes may be made in the future regarding health care policies. However, policies
regarding
reimbursement, universal health insurance and managed competition may materially impact the Company's operations.

The
Company is party to various claims, actions and proceedings incidental to its normal business operations. The Company believes the outcome of such claims, actions and proceedings,
individually and in the aggregate, will not have a material adverse effect on the business and financial condition of the Company.

Note 12Segment Information

The Company operates in two business segments as follows:



Management
uses more than one criterion to measure segment performance. However, the dominant measurements are consistent with the Company's consolidated financial statements which

F-17

---



present
revenue from external customers and operating profit income for each segment. Supplemental data are as follows:

Blood Products

Blood Services2004Depreciation and amortization

$
437,000

$
85,000Expenditures for fixed assets


132,000


28,0002003Depreciation and amortization

$
918,000

$
51,000Expenditures for fixed assets


828,000


291,0002002Depreciation and amortization

$
226,000

$
19,000Expenditures for fixed assets


1,300,000





Management
evaluates segment performance based primarily on operating income. Other revenue and expenses are not allocated to the segments. The accounting policies of the segments are
the same as those described in the significant accounting policies.

Note 13Allowance for Doubtful Accounts

Increases to the allowance for doubtful accounts totaled $10,000, $309,000, and $0 for the years ended December 31, 2004, 2003 and 2002, respectively.
Write-offs against the allowance for doubtful accounts totaled $208,000, $165,000 and $4,000 for the years ended December 31, 2004, 2003 and 2002, respectively.

Note 14Exit and Disposal Activities

As the result of an evaluation of the overall operations of the Company, management implemented a plan to cease operations at several donor centers, including the
mobile operations associated with these centers beginning in the third quarter of 2003. The donor centers included in this plan were Albany, New York; Chicago, Illinois; three centers in North
Carolina; and Williston, Vermont. As of December 31, 2004, all of these donor centers were closed. Costs associated with the closures that were completed as of December 31, 2003 are
reflected in the Company's 2003 results in accordance with generally accepted accounting principles. Costs associated with the closures completed in 2004 are reflected in the Company's 2004 results in
accordance with generally accepted accounting principles.

As
a result of the implementation of management's plan to close certain locations as described above, the Company's blood products segment incurred certain expenses associated with
closing these centers. These expenses included the write-off of $214,000 of certain assets previously used in the operations of the closed donor centers, severance payments of $77,000 to
29 terminated employees, recognition of unexpired facility lease obligations of $253,000, and other associated costs of $54,000. Of all these costs, $27,000 remained accrued as of December 31,
2003, and this accrual was fully utilized in 2004.

Note 15Concentration Risk

During 2004, only one customer represented more than 10% of the Company's total revenue. This customer accounted for approximately 10.6% of total revenue. As of
December 31, 2004, the gross accounts receivable balance for this customer was $472,000. The Company has no relationship with this customer other than as a provider of blood products and
services.

F-18

---



During
2004, the Company received goods and services from two major vendors that represented more than 10% of the Company's total costs. One vendor, that represents 47% of total costs,
provides products that support the Company's apheresis activities. As of December 31, 2004, the Company owed this vendor $492,000. The other vendor, that represents 37% of total costs, provides
laboratory services. As of December 31, 2004, the Company owed this vendor $345,000. The Company has no relationship with either vendor other than as a consumer of the goods and services
provided by each.

Note 16Severance

During 2002, the Company's President and Chief Executive Officer left the Company. In accordance with the terms of his employment contract, he was entitled to
severance in the amount of $247,000. This amount is being paid over a period of one year from the date of separation. As of December 31, 2003, the unpaid severance was $50,000. Pursuant to the
terms of his employment contract, he previously received an option to purchase up to 250,000 shares of the Company's Common Stock at a price of $0.41 per share. In 2001, the former Chief Executive
Officer was granted stock options to purchase 100,000 shares of the Company's Common Stock at the market price of $1.20 on the date of grant, subject to certain vesting requirements. All of the
250,000 stock options issued pursuant to the employment agreement and 20,000 stock options from the 2001 option grant were vested as of his separation date. In partial consideration for canceling
these options, the former Chief Executive Officer received 250,000 warrants to purchase shares of the Company's Common Stock at $0.60 per share. Additionally, he received 20,000 warrants to purchase
shares of the Company's Common Stock at $1.20 per share. All warrants have four-year lives. If the former Chief Executive Officer decided to exercise these warrants, the severance would be
reduced by $20,000, which was approximately equal to the fair market value on the date of grant. During 2003, the former Chief Executive Officer did exercise these warrants, and his severance was
reduced by $20,000. During 2002, the Company also extended the stock options of a former officer and accounted for the difference between the fair market value on the date of the extension and the
exercise price as additional compensation in the amount of $56,000. This was accounted for in general and administrative expenses as employee compensation in 2002.

Note 17Other Income

In third quarter of 2004, the Company received a refund from Gambro BCT ("Gambro"), one of the Company's largest suppliers, as a result of an audit by the
California Board of Equalization of Gambro's sales tax records. Gambro communicated to the Company that the results of this audit indicated that the Company over paid previously paid sales taxes. The
amount of this refund is $167,000 and is included in the Consolidated Statement of Operations as Other Income.

F-19

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