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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

Commission file number: 0-15223

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

         Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. o YES    ý NO

         Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. o YES    ý NO

         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

         Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act

         Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o YES    ý NO

         The aggregate market value of the common stock held by non-affiliates of the registrant as of June 30, 2008, the last business day of the registrant's most recently completed second fiscal quarter (based upon the last sale price of the common stock as reported by the OTC Bulletin Board), was approximately $1,900,000.

         As of March 10, 2009, 10,002,339 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 2008 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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PART I

Item 1.    Business

        This 2008 Annual Report on Form 10-K contains 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, and therefore may 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 1A. Risk Factors"). 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") provides the customized delivery of blood products and services. The Company collects, processes and distributes blood products to hospitals and research related organizations. The Company operates and manages donor centers and mobile donor vehicles to collect transfusable 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 therapeutic services are usually provided to hospitals under contract 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 United States. In August 2006, the Company acquired Florida based Teragenix Corporation, subsequently renamed HemaCare BioScience, Inc. ("HemaBio"), which sourced, processed and distributed human biological specimens, manufactured quality control products and provided clinical trial management and support services. For a description of the terms of this acquisition, see the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on November 15, 2006. As a result of projected losses by HemaBio in the third and fourth quarters of 2007, and the resignations of key members of HemaBio's management, the Board of Directors of HemaBio, in consultation with, and with the approval of, the Board of Directors of the Company, determined HemaBio's business could not operate without senior management, and therefore closed all operations of HemaBio, effective November 5, 2007. See Note 3 of Notes to Consolidated Financial Statements.

        The Company's current strategy is to focus on increasing the utilization of existing blood products capacity in those markets currently served through investment in new marketing campaigns and expanded and enhanced donor recruitment programs, and to expand the market potential for therapeutic apheresis services through physician education and other marketing efforts.

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

        The Company was incorporated in the state of California in 1978.

Recent Developments

Improved Blood Products Profitability

        The Company's blood products segment generated substantially higher profits in 2008 compared to 2007. Revenue for this operation increased 10.8% as a result of an increase in the average selling price for red blood cell products and an increase in the sale of purchased blood products. Gross profit

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generated by these operations increased 30.5% in 2008, primarily due to i) an increase in gross profit margins from 12.5% in 2007 to 14.7% in 2008, mostly due to the increase in red blood cell pricing, ii) an improvement in mobile blood collection operation efficiency, and iii) an increase in the sales of purchased blood products.

Settlement of Litigation with Former Owners of HemaBio

        As part of the consideration to acquire HemaBio, the Company issued a promissory note to both of the sellers. One note for $153,800 for the benefit of Joseph Mauro required four equal annual installments of $38,450, plus accrued interest, commencing August 29, 2007 until paid. The second note for $46,200 for the benefit of Valentin Adia, required four equal annual installments of $11,550, plus accrued interest, commencing August 29, 2007 until paid. The Company failed to pay the first installment due to Mr. Mauro on August 29, 2007 of $46,000, which included $8,000 in accrued interest. The Company failed to pay the first installment due to Mr. Adia on August 29, 2007 of $15,000, which included $3,000 in accrued interest. Disputes arose between the Company and Messrs. Mauro and Adia pertaining to the Company's acquisition of HemaBio, and their management of HemaBio after the acquisition. The dispute led to the filing of a lawsuit against Mauro and Adia in the Los Angeles Superior Court (Case No. LC082173) (the "Lawsuit"). On August 29, 2008, the Company entered into a Settlement Agreement and Mutual General Release (the "Mauro/Adia Agreement") with Mauro and Adia. The Mauro/Adia Agreement resolves the disputes, including those alleged in the Lawsuit. The Mauro/Adia Agreement provides for the mutual general release of all claims between the Company and Mauro and Adia in exchange for (i) Mauro and Adia's cancellation of promissory notes, and accrued interest, received from the Company as part of the HemaBio acquisition consideration; (ii) return of 248,000 shares of the Company's common stock received by Mauro and Adia as part of the HemaBio acquisition consideration; and (iii) payment by Mauro and Adia of $50,000 to the Company. The settlement resulted in a gain of $405,000 in 2008, which was recorded on the Company's income statement in Other Income. See Note 6 of Notes to Consolidated Financial Statements.

HemaCare BioScience, Inc. Closure Activities

        On November 5, 2007, HemaBio ceased operations. See Note 3 of Notes to Consolidated Financial Statements. On December 4, 2007, HemaBio executed and delivered an Assignment for Benefit of Creditors, under Florida Statutes Section 727.101 et seq. ("Assignment"), assigning all of its assets to an assignee, who is responsible for taking possession of, protecting, preserving, and liquidating such assets and ultimately distributing the proceeds to creditors of HemaBio according to their priorities as established by Florida law. Under the terms of the Assignment, HemaBio transferred to the assignee, in trust for the benefit of each of HemaBio's creditors, all property, including (but not limited to) the assets, accounts receivable, inventory, lists of creditors, books and records, etc. Under Florida State law, the assignee has the full power and authority to dispose of the property, sue for and recover in his name everything belonging to HemaBio, compromise and settle all claims, disputes and litigations of, and review any transfers of HemaBio's property. During 2008, the assignee successfully liquidated most of HemaBio's assets, including inventory, furniture and equipment, for $194,000 more than the net book value of these assets on HemaBio's books. In addition, the assignee incurred closure related expenses of $64,000. Finally, HemaBio recognized $50,000 in interest expense related to notes payable to two of the former investors in HemaBio. For all of 2008, these activities resulted in a net gain of $80,000, which is recorded under discontinued operations on the Company's financial statements. In addition, upon closing the new financing agreement with Wells Fargo, the Company acquired $300,000 of secured debt of HemaBio previously owed to Comerica Bank. In 2008, the Company received full payment of this amount from the assignee as a full and complete distribution. As of December 31, 2008, the assignee was still engaged to complete the liquidation and closure activities, although the remaining activities are not expected to result in a material negative impact on the Company.

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Appointment of New Chief Executive Officer

        On October 1, 2008, the Board of Directors of the Company appointed Mr. John Doumitt to the position of Chief Executive Officer and as a member of the Board of Directors. Mr. Doumitt, age 45, has served since October 2007 as the Company's Executive Vice President and General Manager, Blood Products. Previously Mr. Doumitt was Vice President, Operations at Activus Healthcare Solutions from January 2007 to June 2007, Senior Director, Operations Finance, North America for Ingram Micro from 2005 to 2007 and Director, Field Services for Cardinal Health, Nuclear Pharmacy Services, formerly Syncor International Corporation, from 1998 through the end of 2004. Mr. Doumitt received his Bachelor Degree in Industrial Engineering from the University of Southern California, and his Masters Degree in Management from Purdue University, and is a registered Professional Engineer in Industrial Engineering.

Business Segments

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

Blood Products Operations

        This business segment collects, processes and distributes blood products primarily for transfusion in a hospital setting, but occasionally produces human-derived blood products utilized by health research related organizations. The Company contracts with hospitals to provide transfusable blood products, but also to conduct blood drives in the name of the hospital.

        The Company conducts whole blood collection drives at sponsor organizations, such as employers, schools or churches. The Company's recruitment staff works with the staff of the sponsor organization to encourage individuals associated with the sponsor to donate blood at a blood drive. The actual collection process is safe and simple for the donor. Whole blood collected at blood drives is tested and processed into blood products, principally red blood cells and plasma.

        The Company operates free standing donor centers where selected blood components are collected, principally platelets, utilizing a cell separator. This process, known as apheresis, allows for the collection of only selected components of a donor's blood, returning the other components to the donor's bloodstream. Apheresis platelet collection is more complex and expensive than whole blood collection. Apheresis equipment is costly and requires longer donation times, which result in higher labor costs. Recruiting donors for apheresis platelet donations is considerably more difficult than recruiting whole blood donors because of the complexity of the donation process, and longer donation times. Recruiting and retaining donors is critical to the success of the Company's blood products operations. Apheresis platelet donors are recruited from the most dedicated subset of the whole blood donor population. The Company has demonstrated a consistent track record of donor recruitment for apheresis platelet donors.

        Platelet products are generally collected using apheresis because a sufficient volume of platelets is collected from a single donation to produce a transfusable unit. These products are known as Single Donor Platelets. Platelet products can be produced from whole blood donations as well; however, to produce a transfusable unit, platelets from several whole blood donations are aggregated. These products are known as Random Platelets. Random Platelets are considered less desirable for transfusion because the recipient is exposed to pathogen risk from multiple donors, as opposed to only a single donor from Single Donor Platelets.

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        The Company also purchases blood products from other blood suppliers to satisfy customer demand whenever the Company's operations cannot produce sufficient quantity.

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

        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 or registered, regulated and inspected by various state agencies.

        The 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 blood collection operations are accredited by the AABB.

        The Company operates free standing blood collection centers and mobile blood collection operations in Southern California and Maine.

Blood Services Operations

        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 generally 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, a hospital outpatient setting or in a physician's office. The mobile therapeutic equipment includes a blood cell separator and the disposables needed to perform the procedure. Treatments are primarily administered by trained nurse-specialists, under the supervision of a 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.

        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 physician education on the benefits of therapeutic apheresis results in an increase 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, red cell exchange, cell depletion, 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 in Southern California and in several Mid-Atlantic states, including New York.

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Competition

General

        The blood products and blood services industries have many participants from small limited service providers to large full service organizations. There is competition for customers on the basis of many factors, including reputation for reliable customized quality performance, expertise and experience in specific areas, scope of service offerings, price, and customer service. The Company believes it competes favorably in these areas.

        Most U.S. transfusable blood products suppliers are organized as not-for-profit, tax-exempt entities. However, all blood suppliers charge fees for the products utilized. These fees are generally set at levels based on the supply and demand for specific products, and are influenced by the competition among blood products suppliers and federal reimbursement rates to hospital customers. 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 the Company faces, and they have access to lower cost tax-exempt debt financing. Their status as charitable institutions may also give them an advantage in recruiting volunteer donors.

        Approximately 50% of U. S. transfusable 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. 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 includes companies that market or provide many of these competing medical therapies. The Company believes that it competes in this market by offering customized quality performance, expertise and experience in specific areas, scope of service offerings, price, and customer service. 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

        The Company provides products and services to healthcare providers, hospitals and research related organizations, all of which are referred to as "customers" for purposes of identifying concentration risk in this section. During 2008, three customers each represented more than 10% of the Company's total revenue from continuing operations. One customer accounted for approximately 17.7% of total revenue, one customer for 16.5% of total revenue and the third customer accounted for 10.6%. The next largest customer accounted for approximately 6.8% of total revenue. The Company's ten largest customers accounted for 70.4% of total revenue. Other than the lease of space for a donor center at a customer's facility, the Company's only relationship with any of these customers is as a provider of blood products and services.

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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 users of blood products and services. The Company markets its products and services in the form of customized programs that meet the specific needs of individual customers. As a smaller company than the main competitors in the blood products marketplace, HemaCare offers more flexible supply arrangements and pricing structure. This flexibility, a focus on customer service, and local expertise, are the main messages communicated to potential customers.

Human Resources

        As of March 8, 2009, the Company had 254 employees, including 74 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 no difficulty 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 2008, the Company received goods and services from one major vendor that represented approximately 8.9% of the Company's total operating costs from continuing operations. This vendor provides laboratory services. The next largest vendor represents approximately 7.0% of total operating costs from continuing operations. This vendor provides products that support the Company's cell separation equipment used by both the blood products and blood services segments. The Company has no relationship with either vendor other than as a consumer of the goods and services provided by each.

        The Company's blood products consist of those produced from donated platelets and whole blood, and blood products purchased from other suppliers. The Company competes with the ARC and other blood suppliers in recruiting its 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, or purchase blood products from other suppliers.

Government Regulation

Blood Product Operations

        Blood product suppliers are subject to extensive regulation and guidelines of the FDA, AABB, and various state licensing authorities. FDA regulations are comprehensive, complex and extend to virtually all aspects of the blood products industry, including: recruiting; screening blood donors; processing, testing, labeling, storing and shipping blood products, recordkeeping, and communications with hospital customers and donors. 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.

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Employees routinely participate in training classes. Employees are evaluated at the conclusion of training 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.

        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.

        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 Van Nuys, California, Scarborough, Maine and Bangor, Maine facilities to ship selected blood products across state lines.

        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. On May 5, 2006, the Company received a warning letter from the FDA pertaining to specific observations from an inspection of the Company's California operations. In August 2007, the FDA performed another inspection of the Company's California operations. As a result of this inspection, the Company was provided with a list of observations of regulatory issues. In addition, the Company was informed that the 2006 warning letter would remain in effect. The Company believes it has either adequately addressed the issues raised by the FDA, or is in the process of addressing these issues; however, the Company does not believe the response to these issues will result in a retraction of the 2006 warning letter. The Company believes that its response and actions taken to address the FDA observations is sufficient and it is in compliance with current FDA regulations.

        Periodically, the health departments of the states in which the Company operates conduct audits of the Company's facilities and operations. These audits focus on compliance with specific state laws that cover HemaCare's operations. At the conclusion of these audits, the Company is provided with a list of observations to address. The Company believes that it is in compliance with state regulations governing the Company's operations.

Other Matters

        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.

        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 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, product testing, record keeping and managed care that may materially impact the Company's operations.

Professional and Product Liability Insurance

        The blood product and service business is inherently 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. Based on the

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Company's recent history of claims filed for personal injury and the related monetary damages paid, the Company believes it has adequate insurance; however, there can be no assurance that potential insurance claims will not exceed present coverage or that continued or additional insurance coverage would be available and affordable. If such insurance were ineffective or inadequate for any reason, the Company could be exposed to significant liabilities.

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 100 F Street, N.E., Room 1580, 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, www.sec.gov, that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.

Item 1A    Risk Factors

        The Company's 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. The matters discussed in "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this Annual Report on Form 10-K that are not historical are forward-looking statements. These statements may also be identified by the use of words such as "anticipate," "believe," "continue," "estimate," "expect," "intend," "may," "project," "will" and similar expressions, as they relate to the Company, its management and its industry. Investors and prospective investors are cautioned that these forward-looking statements are not guarantees of future performance and involve risks and uncertainties, many of which will be beyond the control of the Company. Actual results could differ materially from those anticipated in these forward-looking statements as a result of various risks and uncertainties, including those discussed below or in other filings by the Company with the Securities and Exchange Commission. The Company does not undertake to update its forward-looking statements to reflect later events and circumstances or actual outcomes.

Costs increasing more rapidly than market prices could reduce profitability

        The cost of collecting, processing and testing blood products has risen significantly in recent years and will likely continue to increase. These cost increases are related to new and improved testing procedures, increased regulatory requirements related to blood safety, and higher staff and supply costs related to collecting and processing blood products. Competition and fixed price contracts may limit the Company's ability to maintain existing operating margins. Some competitors have greater resources than the Company to sustain periods of marginally profitable or unprofitable sales. Costs increasing more rapidly than market prices, may reduce profitability and may have a material adverse impact on the Company's business and results of operations.

Changes in demand for blood products could affect profitability

        The Company's operations are structured to produce particular blood products based on customers' existing demand, and perceived potential changes in demand, for these products. Sudden or unexpected changes in demand for 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, or purchase products from other suppliers, adequately to fill orders. This

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could result in a decrease in overall revenue 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 Company's blood products business depends on the availability of donated blood. Only a small percentage of the population donates blood, and regulations intended to reduce the risk of introducing infectious diseases in the blood supply, result in a decreased 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.

Competition may cause a loss of customers and an inability to pass on increases in costs thereby impacting profitability

        Competition in the blood products and blood services industries is primarily based on fees charged to customers. The Company's primary competition in the blood products market is the ARC, which owns a significant market share advantage over the Company in the regions the Company operates. As a result, the ARC possesses significant market power to influence prices, which can prevent the Company from passing along increases in costs to customers. In addition, hospital consolidations and affiliations allow certain customers to negotiate as a group, exerting greater price pressure on the Company. These changes may have a negative impact on the Company's future revenue, and may negatively impact future profitability.

Changing economic conditions could impact the ability of customers to pay the Company's invoices

        The Company's principal customers are hospitals that depend on payments from private insurance companies and governments to fund operations, and to pay the Company's invoices for products and services. Deteriorating economic conditions can result in higher unemployment and a related loss of medical insurance coverage for hospital patients. Reduced reimbursement for medical services can strain the financial health of the Company's hospital customers, which could impact the ability of these customers to pay the Company's invoices. The Company does not have sufficient resources to sustain operations for an extended period of time if any significant customer, or several smaller customers, failed to pay the Company's invoices as expected.

Operations depend on services of qualified professionals and competition for their services is strong

        The Company is highly dependent upon obtaining the services of qualified professionals. In particular, the Company's operations depend on the services of registered nurses, medical technologists, regulatory and quality assurance professionals, and others with knowledge of the blood industry. Nationwide, the demand for these professionals exceeds the supply and competition for their services is strong. The Company incurs significant costs to hire and retain staff. If the Company is unable to attract and retain a staff of qualified professionals, operations may be adversely affected which, in turn, may adversely impact profitability.

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Industry regulations and standards could increase operating costs or result in closure of operations

        The business of collecting, processing and distributing blood products is 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, purity and quality of products, condition of facilities and that appropriate procedures are utilized. Periodically the FDA conducts inspections of HemaCare's facilities and operations. At the conclusion of each inspection, the FDA provides the Company with a list, if any, of observations of regulatory issues discovered during the inspection. On May 5, 2006, the Company received a warning letter from the FDA pertaining to specific observations from an inspection of the Company's California operations earlier that year. In August of 2007, the FDA performed another inspection of the Company's California operations. As a result of this inspection, the Company was provided with a list of observations of regulatory issues. The Company believes it has either adequately addressed the issues raised by the FDA, or is in the process of addressing these issues; however, the Company does not believe the response to these issues will result in a retraction of the 2006 warning letter. The Company believes that its response and actions taken to address the FDA observations are sufficient that it is in compliance with current FDA regulations; however, the Company cannot insure against future FDA actions, including possible sanctions or closure of selected Company operations.

        On October 12, 2006, the AABB issued a timeline for gradual implementation of the United States Industry Consensus Standards for the Uniform Labeling of Blood and Blood Components using ISBT 128. To maintain accreditation, blood facilities would need to develop a written implementation plan by November 1, 2006 and complete full implementation by May 2008. The Company requested and received a variance from the AABB to delay the deadline for full implementation until December 31, 2008. The Company is attempting to obtain an extension of this variance, but has not yet succeeded. The Company expects the AABB will approve the variance request, but cannot insure against the AABB declining the request. If the Company's AABB accreditation is withdrawn, the Company's relationship with selected customers who require blood suppliers to be AABB accredited could be negatively impacted.

        State and federal laws include anti-kickback and self-referral prohibitions and other regulations that affect the shipment of blood products and 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; however, the possibility cannot be eliminated that interpretations of existing laws and regulations will result in findings that the Company has not complied with significant existing regulations. Such a finding could materially harm the Company's 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.

Discontinuation of the operations of the Company's Florida-based research subsidiary may hinder the Company's ability to generate profits

        The Company's Florida-based research subsidiary recorded a decrease in revenue and a related increase in operating losses throughout the first three quarters of 2007. On November 5, 2007, the Board of Directors of HemaBio closed this operation to avoid further losses. On December 4, 2007, HemaBio executed an Assignment for Benefit of Creditors, under Florida Statutes Section 727.101 et seq., assigning all of its assets to an assignee, who is responsible for taking possession of, protecting, preserving, and liquidating such assets and ultimately distributing the proceeds to creditors of HemaBio according to their priorities as established by Florida law. During 2008, the assignee successfully

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liquidated most of HemaBio's assets, including inventory, furniture and equipment. As of December 31, 2008, the assignee was still engaged to complete the liquidation and closure activities. These activities could temporarily increase costs, utilize scarce financial resources, distract management and have a material adverse impact on the Company and its results of operations. In addition, HemaBio creditors could attempt to pursue HemaCare for recovery of unpaid claims if they are not satisfied with the results of the Assignment for Benefit of Creditors process. If HemaBio's creditors are successful, HemaCare may not have sufficient liquidity to satisfy these obligations.

Decrease in reimbursement rates may affect profitability

        Reimbursement rates for blood products and services provided to Medicaid, Medicare and commercial patients, impact the fees that the Company is able to negotiate with customers. In addition, to the degree that the Company's hospital customers receive lower reimbursement for the products and services provided by the Company, these customers may reduce their demand for these goods and services, and adversely affect the Company's revenue. If the Company is unable to increase prices for goods and services, the Company's profitability may be adversely impacted.

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 inability to meet future capital needs could impact ability to operate

        The Company may not generate sufficient operating cash in the future to finance its operations for the next year. Currently the Company is utilizing its credit facility with Wells Fargo to help finance its operations. The Company may need to raise additional capital in the debt or equity markets in order to finance future operations and procure necessary equipment. 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.

Reliance on relatively few vendors for significant supplies and services could affect the Company's ability to operate

        The Company currently relies on a relatively small number of vendors to supply important supplies and services. Significant price increases, or disruptions in the ability to obtain products and services from existing vendors, may force the Company to find alternative vendors. Alternative vendors may not be available, or may not provide their products and services at favorable prices. If the Company cannot obtain the products and services it currently uses, or alternatives at reasonable prices, the Company's ability to produce products and provide services may be severely impacted, resulting in a reduction of revenue and profitability.

Potential adverse effect from changes in the healthcare industry, including consolidations, could affect access to customers

        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. There has been significant consolidation among healthcare providers seeking to enhance efficiencies, and this consolidation is expected to continue. As a result of these trends, the Company may be limited in its

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ability to increase prices for products in the future, even if costs increase. Further, customer attrition as a result of consolidation or closure of hospital facilities may adversely impact the Company.

Future technological developments or alternative treatments could jeopardize business

        As a result of the risks posed by blood-borne diseases, many companies and healthcare providers are currently seeking to develop alternative treatments for blood product transfusions. HemaCare's business consists of collecting, processing and distributing human blood products and providing blood related therapeutic services. The introduction and acceptance in the market of alternative treatments may cause material adverse harm to the future profitability for these products and to the Company's business.

Limited 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 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 that exceeds 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 impact the Company's business.

Ability to attract, retain and motivate management and other skilled employees

        The Company's success depends significantly on the continued services of key management and skilled personnel. Competition for qualified personnel is intense and there are a limited number of people with knowledge of, and experience in, the blood product and blood service industries. The Company does not have employment agreements with most key employees, nor maintain life insurance policies on them. The loss of key personnel, especially without advance notice, or the Company's inability to hire or retain qualified personnel, could have a material adverse impact on revenue and on the Company's ability to maintain a competitive advantage. The Company cannot guarantee that it can retain key management and skilled personnel, or that it will be able to attract, assimilate and retain other highly qualified personnel in the future.

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 screens donors, uses highly qualified testing service providers, and conducts selective blood testing, to test 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 impact the Company's financial condition.

Targeted partner blood drives involve higher collection costs

        Part of the Company's current operations involves conducting blood drives in partnership with hospitals. Some blood drives are conducted under the name of the hospital partner and require that all

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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 impact profitability and growth plans.

Environmental risks could cause the Company to incur substantial costs to maintain compliance

        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 could adversely impact profitability

        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. Delays or stoppages in the transportation of perishable blood products and interruptions of mail, financial or other services could have a material adverse impact 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 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 impacted by terrorist activities and potential activities. The U.S. economy in general is adversely impacted 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 impact its ability to grow its business.

Business interruption due to earthquakes could adversely impact profitability

        HemaCare's principal blood products and blood services operations, as well as the Company's corporate headquarters, are located in Southern California, which is an area known for potentially destructive earthquakes. A severe event in this location could have a substantial negative impact on the ability of the Company to continue to operate. Any significant delay in resuming operations following such an event could cause a material adverse impact on the profitability of the Company. In addition, the Company's insurance policies do not provide any coverage for damages as a result of an earthquake. Therefore, the Company would bear all of the costs incurred to resume operations after an earthquake and the Company may not have sufficient resources to do so.

Evaluation and consideration of strategic alternatives, and other significant projects, may distract management from reacting appropriately to business challenges and lead to reduced profitability

        As a publicly traded Company, management must constantly evaluate and consider new strategic alternatives, and other significant projects, in an attempt to maximize shareholder value. The Company does not possess a large management team that can both consider strategic alternatives and manage daily operations. Therefore, management distractions associated with the evaluation and consideration of strategic alternatives could prevent management from dedicating appropriate time to immediate business challenges or other significant business decisions. This may cause a material adverse impact on the future profitability of the Company.

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Strategy to acquire companies may result in unsuitable acquisitions or failure to successfully integrate acquired companies, which could lead to reduced profitability

        The Company may embark on a growth strategy through acquisitions of companies or operations that complement existing product lines, customers or other capabilities. The Company may be unsuccessful in identifying suitable acquisition candidates, or may be unable to consummate a desired acquisition. To the extent any future acquisitions are completed, the Company may be unsuccessful in integrating acquired companies or their operations, or if integration is more difficult than anticipated, the Company may experience disruptions that could have a material adverse impact on future profitability. Some of the risks that may affect the Company's ability to integrate, or realize any anticipated benefits from, acquisitions include:

•

unexpected losses of key employees or customer of the acquired company;



•

difficulties integrating the acquired company's standards, processes, procedures and controls;



•

difficulties coordinating new product and process development;



•

difficulties hiring additional management and other critical personnel;



•

difficulties increasing the scope, geographic diversity and complexity of the Company's operations;



•

difficulties consolidating facilities, transferring processes and know-how;



•

difficulties reducing costs of the acquired company's business;



•

diversion of management's attention from the management of the Company; and



•

adverse impacts on existing business relationships with customers.

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 the Company's 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' Rights Plan may inhibit a change in control and, therefore, may materially adversely impact 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 20, 2008.

Quarterly revenue and operating results may fluctuate in future periods, and the Company may fail to meet investor expectations

        The Company's quarterly revenue and operating results have fluctuated significantly in the past, and are likely to continue to do so in the future due to a number of factors, many of which are not within the Company's control. If quarterly revenue or operating results fall below the expectations of

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investors, the price of the Company's common stock could decline significantly. Factors that might cause quarterly fluctuations in revenue and operating results include the following:

•

changes in demand for the Company's products and services, and the ability to obtain the required resources to satisfy customer demand;



•

ability to develop, introduce, market and gain market acceptance of new products or services in a timely manner;



•

ability to manage inventories, accounts receivable and cash flows;



•

ability to control costs; and



•

ability to attract qualified blood donors.

        The level of expenses incurred depends, in part, on the expectation for future revenue. In addition, since many expenses are fixed in the short term, the Company cannot significantly reduce expenses if there is a decline in revenue to avoid losses.

Stocks traded on the OTC Bulletin Board are subject to greater market risks than those of exchange-traded stocks since they are less liquid

        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 another national securities exchange. As a result, an investor may find it difficult to dispose of the Company's common stock or to obtain accurate price quotations.

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 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 could impact the price of 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. The declaration and payment of any cash dividends in the future will depend on the Company's earnings, financial

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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 management to perform an assessment of the effectiveness of the Company's internal control over financial reporting beginning with its Annual Report on Form 10-K for the fiscal year ending December 31, 2007. The Company's independent registered public accounting firm will be required to test and evaluate the design and effectiveness of such controls and publicly attest to such evaluation beginning with the Annual Report on Form 10-K for the fiscal year ending December 31, 2009.

        This process will be expensive and time consuming, and will require significant attention of management. This process has revealed material weaknesses in internal controls that will require remediation. See "Item 9A. Control and Procedures." The remediation process may also be expensive and time consuming, and management can give no assurance that the remediation effort will be completed on time or be effective. In addition, management can give no assurance that additional 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. 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.

        If the Company is unable to adequately design its internal control systems, or prepare an "internal control report" to the satisfaction of the Company's auditors, the Company's auditors may issue a qualified opinion on the Company's financial statements.

Item 1B    Unresolved Staff Comments

        None.

Item 2    Properties

        On February 24, 2006, the Company entered into a lease for approximately 19,600 square feet located in Van Nuys, California intended to house corporate offices, mobile blood drive operations, a blood component manufacturing lab and a blood products distribution operation. The Company occupied this facility in November 2006. The rent for this facility started at approximately $36,000 per month; however, the lease provides for 3% rent escalation upon the annual anniversary of the beginning of the lease term, and for increases in the cost of common area maintenance. The rent for this facility currently is approximately $38,800 per month. The lease on this space expires July 31, 2017; however, the Company has one five-year option to extend this lease at the then current market price. On April 11, 2007, the Company entered into an amendment to add approximately 7,200 square feet to this lease intended to house a donor center and supply warehouse. This amendment added $13,250 per month in rent expense, which adjusts annually by 3.9% on the anniversary of the lease commencement date. The rent for this facility currently is approximately $13,800 per month. The Company invested approximately $2.1 million in tenant improvements in the new facility. As part of the lease agreement, the Company received approximately $508,000 in tenant improvement allowance from the landlord.

        The Company leases space for offices, a laboratory, a manufacturing facility for blood components and a distribution center in a 3,600 square foot facility in Scarborough, Maine. The monthly rent is approximately $6,100, and the lease term expires October 31, 2012.

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        The Company also leases space for a donor center in a 1,300 square foot facility in Scarborough, Maine. The monthly rent is approximately $1,900. The lease term expires October 21, 2010, and the Company has the option to extend the lease for an additional two-year term at an escalated rental rate that adjusts 3.5% annually.

        The Company also leases space for a donor center in a 2,500 square foot facility in Bangor, Maine. The monthly rent is approximately $4,600. The lease term expires December 31, 2011, and the Company has the option to extend the lease for one additional five-year term at rates adjusted for changes in the Consumer Price Index.

        The Company leases a 600 square foot office space in White Plains, New York for a monthly amount of approximately $1,400. The lease expires July 31, 2009.

        Finally, the Company leases a 1,500 square foot donor center on the campus of one of its client hospitals for a monthly amount of $3,700. The lease expires June 30, 2011.

        We believe that our facilities are suitable, in good condition and adequate to meet our current and foreseeable needs.

Item 3    Legal 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.

Item 4    Submission of Matters to a Vote of Security Holders

        None.

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PART II

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

        The Company's common stock is quoted on the OTC Bulletin Board under the symbol HEMA.OB.

        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. Shareholders are urged to obtain current market quotations for the Company's common stock. Prices for the quarter ended March 31, 2009 are through March 10, 2009.

        On March 10, 2009, the closing bid price of the Company's common stock was $0.33. 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 during the term of the credit agreement. 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 March 3, 2009, the approximate number of shareholders of record was 255 (excluding individual participants in nominee security position listings).

Item 6    Selected Financial Data

        Intentionally omitted.

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

General

        HemaCare operates in two primary business segments. The first is the blood products segment which supplies hospitals and health research related organizations 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, and purchases blood products from other suppliers. Additionally, the Company operates a blood services segment, wherein the Company performs therapeutic apheresis procedures, stem cell collection and other blood treatments on patients with a variety of disorders. Blood services are usually provided under contract with hospitals as an outside purchased service.

        In November 2007, the Board of Directors of HemaBio closed the Company's Florida-based research blood products subsidiary that sourced, processed and distributed human biological specimens, manufactured quality control products and provided clinical trial management and support services. Management considered the operations of HemaBio to be similar to the Company's blood products

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business segment and previously reported the financial information for HemaBio as part of the Company's blood products business segment. With the closure of HemaBio, the Company will report the financial results for 2007 and 2008 of HemaBio, as well as the impact of the closure activities, as "Discontinued Operations" on the income statement.

Results of Operations

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

Year ended December 31, 2008 compared to the year ended December 31, 2007

Overview

        The Company generated net income in 2008 of $979,000, or $.10 basic and fully diluted earnings per share, compared to a net loss in 2007 of $7,788,000, or $.90 basic and fully diluted loss per share.

        For continuing operations, revenue increased $3,452,000, or 10.1%, to $37,618,000 in 2008 from $34,166,000 for 2007. The increase is attributable to an increase in blood products and blood services revenue of 10.8%, and 7.7%, respectively.

        Gross profit from continuing operations increased 26.0% to $6,502,000 in 2008 from $5,158,000 in 2007 due primarily to a 9.3% increase in the units sold of red blood cells, and a 6.2% increase in the average selling price for red blood cell products.

        General and administrative expenses decreased $447,000, or 7.1%, in 2008 to $5,893,000 from $6,340,000 in 2007. The majority of this is due to the $326,000 non-recurring severance expense in 2007 for the Company's former Chief Executive Officer. As a percent of total revenue, general and administrative expenses decreased from 18.6% in 2007 to 15.7% in 2008.

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        Discontinued operations produced income of $80,000 in 2008 compared to a loss of $5,960,000 for 2007. The income in 2008 pertains to the sale of inventory previously written off, netted against closure costs and asset write offs. Most of the loss in 2007 was related to a $4,259,000 charge for goodwill impairment as a result of the closure of HemaBio in November 2007.

        In 2007, the Company increased the valuation allowance for the deferred tax asset to 100%, resulting in an increase in the tax provision in 2007 of $622,000. The Company did not recognize any deferred tax asset in 2008.

Blood Products—Continuing Operations

        For this business segment, the following table summarizes the revenue and gross profit for continuing operations for 2007 and 2008:

Blood Products—Continuing Operations

        The 10.8% increase in revenue is due primarily to i) a 13.5% increase in the number of red blood cell units sold in the Company's California-based blood product operations, ii) a 12.5% increase in the number of red blood cell units sold the Company's Maine-based blood product operation, and iii) a 6.2% increase in the average selling price for red blood cell products. Mobile drive collections increased 3.5% in California, while sales of purchased products increased 32.1% compared to 2007.

        Blood products gross profit increased 30.5% in 2008 due primarily to i) an increase in the average sales price of red cell products ii) improvement in mobile blood collection operation efficiency, and iii) an increase in the sales of purchased blood products.

Blood Services

        For this business segment, the following table summarizes the revenue and gross profit for continuing operations for 2007 and 2008:

Blood Services

        The 7.7% increase in blood services revenue is primarily attributable to a 4.6% increase in the number of procedures performed, primarily in the Company's Mid-Atlantic service area. The 17.9% increase in gross profit is primarily the result of the increase in the number of procedures performed. The increase in the gross profit percentage to 26.7% is primarily the result of improved operational efficiency from better staff utilization.

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General and Administrative Expenses—Continuing Operations

        The following table summarizes general and administrative expenses for 2007 and 2008:

General and Administrative Expense

        General and administrative expenses decreased 7.1% primarily as a result of i) a decrease in severance expense of $326,000, ii) a decrease in the cost of professional and temporary personnel of $239,000, and iii) a decrease in share-based compensation of $173,000. These decreases were partially offset by i) an increase in staff compensation of $165,000 and ii) an increase in 401(k) match of $109,000. The decrease in severance expense is related to the resignation of the Company's former President and Chief Executive Officer in 2007 without any similar such expense in 2008 . The decrease in professional and temporary personnel costs was primarily due to the Company filling open staff positions in 2008 that were filled by temporary personnel in 2007. The decrease in share-based compensation was due in part to a decrease in the common stock price in 2008 compared to 2007 which is one of the components used by the Black-Scholes valuation model to calculate share-based compensation. This was offset in part by an increase in the number of options, restricted shares and restricted share units, granted to officers in 2008 compared to 2007. The increase in staff compensation was related to the Company filling open staff positions previously filled by consultants and temporary employees. Due to the Company's improved earnings performance, the Company's Board of Directors decided to match $0.35 for every eligible dollar of compensation contributed into the Company's 401(k) plan in 2008. The Company did not match any 401(k) contributions in 2007 due to the Company's poor financial results that year.

        General and administrative expenses as a percent of revenue decreased to 15.7% in 2008 due to a 7.1% decrease in these expenses while revenue increased 10.1%.

Other Income and Expense

        The Company recognized $331,000 in net other income in 2008, which was primarily the result of the Company entering into a settlement of litigation with the former owners of HemaBio.

        As part of the consideration to acquire HemaBio, the Company issued a promissory note to both of the sellers. One note for $153,800 for the benefit of Joseph Mauro required four equal annual installments of $38,450, plus accrued interest, commencing August 29, 2007 until paid. The second note for $46,200 for the benefit of Valentin Adia, required four equal annual installments of $11,550, plus accrued interest, commencing August 29, 2007 until paid.

        The Company failed to pay the first installment due to Mr. Mauro on August 29, 2007 of $46,000, which included $8,000 in accrued interest. The Company failed to pay the first installment due to Mr. Adia on August 29, 2007 of $15,000, which included $3,000 in accrued interest.

        Disputes arose between the Company and Messrs. Mauro and Adia pertaining to the Company's acquisition of HemaBio, and their management of HemaBio after the acquisition. The dispute led to the filing of a lawsuit against Mauro and Adia in the Los Angeles Superior Court (Case No. LC082173) (the "Lawsuit").

        On August 29, 2008, the Company entered into a Settlement Agreement and Mutual General Release (the "Mauro/Adia Agreement") with Mauro and Adia. The Mauro/Adia Agreement resolves the disputes, including those alleged in the Lawsuit. The Mauro/Adia Agreement provides for the

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mutual general release of all claims between the Company and Mauro and Adia in exchange for i) Mauro and Adia's cancellation of the promissory notes, and accrued interest, received from the Company as part of the HemaBio acquisition consideration; ii) return of 248,000 shares of the Company's common stock received by Mauro and Adia as part of the HemaBio acquisition consideration; and iii) payment by Mauro and Adia of $50,000 to the Company. The settlement resulted in a gain of $405,000 in 2008, which was recorded on the Company's income statement in Other Income.

        Partially offsetting this income, the Company incurred $65,000 in other expense related to an over-billing of revenue recognized prior to 2008.

Income Taxes—Continuing Operations

        For continuing operations, the Company recorded a $41,000 provision for income taxes for 2008 compared with $646,000 for 2007. The Company utilized operating loss carryforwards for 2008 to avoid any federal income taxes. State and local taxes comprised all of the tax provision for 2008. For 2007, the provision for income taxes included $622,000 from the increase in the valuation allowance for the deferred tax asset to 100%, and state and local taxes of $24,000 for continuing operations. Please see "Note 9—Income Taxes" in the Notes to Consolidated Financial Statements.

Discontinued Operations

        In the first six months of 2007, HemaBio, the Company's wholly owned Florida-based subsidiary produced significantly lower earnings than anticipated by the Company and HemaBio's management team. In the third quarter of 2007, HemaBio's management team projected a net loss of approximately $300,000, and projected a net loss of $125,000 in the month of October 2007. On November 2, 2007, HemaBio received letters of resignation from Mr. Joseph Mauro, HemaBio's President, and Mr. Valentin Adia, HemaBio's Vice President of Business Development. Mr. Mauro and Mr. Adia both stated that their resignations were submitted under the "good reason" provisions of their employment agreements. The Board of Directors of HemaBio, in consultation with, and with the approval of, the Board of Directors of the Company, determined that HemaBio's business could not operate successfully because i) HemaBio was always operated as a separate and independent business from the Company, ii) HemaBio's employees, principally Mr. Mauro and Mr. Adia, possessed all knowledge of HemaBio's suppliers, markets and customers, iii) without senior management there were no other individuals at HemaBio who could run the business and find a pathway to future profitability, iv) none of the Company's management were available, nor possessed the knowledge, to take over the responsibility to run HemaBio, and v) the projected operating losses at HemaBio were growing, and HemaBio did not have sufficient financial resources to operate for the time period required to recruit, hire and train new management. Therefore, the Board of Directors of HemaBio decided that it was in the best interest of HemaBio's creditors to close all operations of HemaBio, effective November 5, 2007.

        On December 4, 2007, HemaBio executed an Assignment for Benefit of Creditors, under Florida Statutes Section 727.101 et seq. ("Assignment"), assigning all of its assets to an assignee, who is responsible for taking possession of, protecting, preserving, and liquidating such assets and ultimately distributing the proceeds to creditors of HemaBio according to their priorities as established by Florida law. The assignee continues to fulfill his obligations under the Assignment, but has not concluded his efforts to liquidate all of the assets or distribute all proceeds to HemaBio's creditors. See "Note 3—Discontinued Operations" in the Notes to Consolidated Financial Statements.

        Net income for discontinued operations was $80,000 in 2008 compared to a net loss of $5,960,000 in 2007. Income in 2008 was primarily the result of $194,000 in gains recognized on liquidation of inventory previously written-off offset in part by $64,000 in closure related expenses and $50,000 in

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interest expense related to notes payable to two of the former investors in HemaBio. The loss in 2007 was primarily the result of i) goodwill impairment of $4,259,000, ii) operating losses of $272,000, iii) asset valuation write downs of $424,000, iv) severance expenses of $604,000, and v) closure related expenses of $401,000. The $4,259,000 charge for goodwill impairment occurred as a result of an evaluation of the value of goodwill based on future profitability of HemaBio's business. As a result of the decision to close this business, no future profits were considered possible and goodwill was therefore fully impaired. The $272,000 in operating losses occurred as a result of a decline in revenue, without a corresponding decrease in expenses. The $424,000 write down in asset valuation was the result of the decision to close HemaBio and file an assignment for benefit of creditors action in Florida. In consultation with the Florida assignee, HemaBio determined the net recoverable asset value for the inventory, receivables and fixed assets. This process revealed that book value exceeded the net recoverable value, which resulted in the write down charge in 2007. The $604,000 severance expense occurred as a result of the resignations of the two senior HemaBio managers under the "good reason" provisions of their respective employment agreements. Under the "good reason" provision, each manager is entitled to receive severance equivalent to their full salary, plus benefits, for one year or the balance of the remaining term under their agreements, whichever is larger. Finally, the $401,000 in closure related expenses is the result of the decision to close HemaBio and file the assignment for benefit of creditors action, and included, among other things, the rent obligation for the balance of the lease term for HemaBio's facilities in Fort Lauderdale, Florida, fees to the assignee and legal expenses.

        The provision for income taxes associated with discontinued operations was $0 and $4,000 for 2008 and 2007, respectively.

2008 and 2007 Quarterly Financial Data

        The following table presents unaudited statement of (operations) income data for each of the eight quarters ended December 31, 2008. 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.

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UNAUDITED
(In Thousands, Except Share and Per Share Data)

        The Company's quarterly revenue and operating results have fluctuated significantly in the past, and are likely to continue to do so in the future, due to a number of factors, many of which are not within the Company's control. If quarterly revenue or operating results fall below the expectations of investors, the price of the Company's common stock could decline significantly. Factors that might cause quarterly fluctuations in revenue and operating results include the following:

•

changes in demand for the Company's products and services, and the ability to obtain the required resources to satisfy customer demand;



•

ability to develop, introduce, market and gain market acceptance of new products or services in a timely manner;



•

ability to manage inventories, accounts receivable and cash flows;



•

ability to control costs; and



•

ability to attract qualified blood donors.

        The level of expenses incurred depends, in part, on the expectation for future revenue. In addition, since many expenses are fixed in the short term, the Company cannot significantly reduce expenses if there is a decline in revenue to avoid losses.

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Critical Accounting Policies and Estimates

General

        Management's discussion and analysis of the Company's 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 impact the reported amounts of assets, liabilities, revenue 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.

Accounting for Share-Based Incentive Programs

        In accordance with SFAS 123R, the Company recognized compensation expense in 2008 related to stock options, restricted stock and restricted stock units granted to employees based on compensation cost for all share-based payments granted prior to, but not yet vested as of, December 31, 2008, based on the grant date fair value estimated in accordance with SFAS 123, adjusted for an estimated future forfeiture rate.

        The Company's assessment of the estimated fair value of the stock options granted is impacted by the price of the Company's common stock, as well as assumptions regarding a number of complex and subjective variables and the related tax impact. Management utilized the Black-Scholes model to estimate the fair value of share-based payments granted. Generally, the calculation of fair value for share-based payments under SFAS 123R is similar to the calculation of fair value under SFAS 123, with the exception of the treatment of forfeitures.

        The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. This model also requires the input of highly subjective assumptions including:

(a)

expected volatility of the common stock price, which was determined based on historical volatility of the Company's common stock;



(b)

expected dividends, which are not anticipated;



(c)

expected life of the stock option, which is estimated based on the historical stock option exercise behavior of employees; and



(d)

expected forfeitures.

        Starting in the third quarter of 2008, the Company no longer assumes a forfeiture rate when assessing value for options held by independent members of the Board of Directors. Since options issued to independent board members are not forfeited upon separation from the Company, management has determined it is inappropriate to assign a forfeiture rate to these options.

        In the future, management may elect to use different assumptions under the Black-Scholes valuation model or a different valuation model, which could result in a significantly different impact on net income or loss.

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Allowance for Doubtful Accounts

        The Company makes ongoing estimates on 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 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 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 expenses in the period in which such a determination is made.

Inventory and Supplies

        Inventories consist of Company-manufactured platelets, whole blood components and other blood products, 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. Management estimates the portion of inventory that might not have future value by analyzing the sales history for the twelve months prior to any balance sheet date. For each inventory type, management establishes an obsolescence reserve equal to the value of inventory quantity in excess of twelve months of historical sales quantity, using the first-in, first-out inventory valuation methodology. Therefore, the Company periodically adjusts the inventory reserve based on recent sales and inventory data, which can cause the net value of inventory to fluctuate dramatically from period to period.

Goodwill

        The Company periodically evaluates the fair value of any goodwill recognized as a result of prior acquisition activity. Goodwill is the portion of the total consideration paid to acquire a business that exceeds the fair market value of the assets acquired, less the value of the liabilities acquired. Any subsequent valuation of goodwill requires substantial estimation by management of the future profitability of any respective business unit, and an assessment of the fair value of the business. The Company uses the income approach, along with other standard analytical approaches, to estimate the fair value of goodwill. The income approach involves estimating the present value of future cash flows by using projections of the cash flows that the business is expected to generate, and discounting these cash flows at a given rate of return. This requires the use of management estimates and assumptions, such as assumptions on growth rates for revenue, expenses, earnings before interest, income taxes, depreciation and amortization, returns on working capital, returns on other assets and capital expenditures, among others. Assumptions on discount rates and terminal growth rates are also used to determine fair value. Given the subjectivity involved in deriving these estimates in the analyses, it is possible that a different valuation model and the selection of different input variables could produce a materially different estimate of the fair value of goodwill. In 2007, the Company recognized a goodwill impairment charge of $4,259,000 related to HemaCare BioScience, Inc., representing 100% of the goodwill book value.

Income Taxes

        The process of preparing the financial statements requires management estimates of income taxes in each of the jurisdictions in which the Company operates. This process involves estimating 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. Under the provisions of SFAS No. 109, Accounting for Income Taxes, the

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Company must utilize 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. Management must assess the likelihood that the deferred tax assets or liabilities will be realized for future periods, and to the extent management believes that realization 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 assets and liabilities and any valuation allowance recorded against net deferred tax assets. It is possible that different tax models, and the selection of different input variables, could produce a materially different estimate of the provision, asset, liability and valuation allowance. As a result of the net loss recognized by the Company in 2007, the Company increased the valuation allowance in 2007 to 100%, resulting in the elimination of the deferred tax asset from the Company's balance sheet as of December 31, 2007, and a related charge to the provision for income taxes in 2007. No deferred tax asset was recognized in 2008. Please see "Note 9—Income Taxes" in the Notes to Consolidated Financial Statements.

Liquidity and Capital Resources

        On December 31, 2008, the Company, including discontinued operations, had cash and cash equivalents of $1,215,000 and working capital of $688,000.

Line of Credit and Notes Payable

        For all of 2007, and through April 10, 2008, the Company's senior secured credit facility was with Comerica Bank ("Comerica"). As of December 31, 2007, the Company had borrowed $2,500,000 from Comerica. The Comerica credit facility was collateralized by substantially all of the Company's assets and required the maintenance of certain covenants. This facility provided that, in the event the Company failed to observe any such covenants, or permitted a default in any material agreement to which the Company was a party with third parties that results in an acceleration of any indebtedness, then an event of default would have occurred under the Comerica facility, and Comerica may, among other things, declare the Company's indebtedness to Comerica immediately due and payable. As of December 31, 2007, the Company was not in compliance with certain financial covenants in the Comerica facility, and Comerica did not provide a waiver of this violation as provided in the past.

        On April 10, 2008, the Company, together with the Company's subsidiary Coral Blood Services, Inc., entered into a Credit and Security Agreement ("Wells Agreement") with Wells Fargo Bank ("Wells Fargo") to provide a $4.75 million, revolving line of credit for working capital purposes, and a $250,000 capital expenditure line of credit. The Wells Agreement provides that the Company may borrow the lesser of 85% of eligible accounts receivables, or $4.75 million with respect to the revolving line of credit. The term of the Wells Agreement is three years. Interest on the working capital line of credit is payable monthly at a rate of the Wells Fargo prime rate minus 0.25%, and interest on the capital expenditure line of credit is payable monthly at the Wells Fargo prime rate. As of December 31, 2008, the Wells Fargo prime rate was 3.25%. In addition, as of December 31, 2008, the Company had utilized $2,471,000 of the Wells Fargo line of credit. The Wells Agreement is collateralized by substantially all of the Company's assets and requires the maintenance of certain covenants that, among other things, require minimum levels of profitability and prohibit the payment of dividends. As of December 31, 2008, the Company was in compliance with all of the covenants in the Wells Agreement.

        Upon closing of the Wells Agreement, the Company used the available proceeds to payoff the outstanding debt obligation to Comerica in full. In exchange, the Company and Comerica terminated the Comerica credit facility, and Comerica released the security interest in the Company's assets. In addition, upon closing the Wells Agreement, the Company acquired $300,000 of secured debt of

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HemaBio previously owed to Comerica. In 2008, the Company received $300,000 from the Florida assignee in complete satisfaction of this debt.

        As part of the consideration to acquire HemaBio, the Company issued a promissory note to both of the sellers. One note for $153,800 for the benefit of Joseph Mauro required four equal annual installments of $38,450, plus accrued interest, commencing August 29, 2007 until paid. This note paid interest at 5% annually, and was secured through a security agreement, by all of the assets of HemaBio, and was subordinate to Comerica. The second note for $46,200 for the benefit of Valentin Adia, required four equal annual installments of $11,550, plus accrued interest, commencing August 29, 2007 until paid. This note paid interest at 5% annually, was also secured by all of the assets of HemaBio, and was subordinate to Comerica.

        The Company failed to pay the first installment due to Mr. Mauro on August 29, 2007 of $46,000, which included $8,000 in accrued interest. Under the terms of the promissory note between the Company and Mr. Mauro, if an event of default occurred, the interest rate on the outstanding obligation increased to 12%. The Company's failure to pay the first installment was an event of default that triggered an increase in the interest rate. Therefore, since August 29, 2007, and until the note was cancelled, the Company accrued interest expense on the outstanding balance of this note at an interest rate of 12%.

        The Company failed to pay the first installment due to Mr. Adia on August 29, 2007 of $15,000, which included $3,000 in accrued interest. As of December 31, 2007, the Company had accrued $4,000 in interest due to Mr. Adia.

        Disputes arose between the Company and Messrs. Mauro and Adia pertaining to the Company's acquisition of HemaBio, and their management of HemaBio after the acquisition. The dispute led to the filing of a lawsuit against Mauro and Adia in the Los Angeles Superior Court (Case No. LC082173) (the "Lawsuit").

        On August 26, 2008, the Company entered into a Settlement Agreement and Mutual General Release (the "Mauro/Adia Agreement") with Mauro and Adia. The Mauro/Adia Agreement resolves the disputes, including those alleged in the Lawsuit. The Mauro/Adia Agreement provides for the mutual general release of all claims between the Company and Mauro and Adia in exchange for i) Mauro and Adia's cancellation of promissory notes, and accrued interest, received from the Company as part of the HemaBio acquisition consideration; ii) return of 248,000 shares of the Company's common stock received by Mauro and Adia as part of the HemaBio acquisition consideration; and iii) payment by Mauro and Adia of $50,000 to the Company. See Note 3 of Notes to Consolidated Financial Statements.

        As a result of the cancellation of the promissory notes, and other consideration received by the Company from the Mauro/Adia Agreement, the Company recognized a gain of $405,000, which is reported on the Company's income statement as a component of other income.

        When the Company acquired HemaBio, two former HemaBio investors, Dr. Lawrence Feldman and Dr. Karen Raben, each held a $250,000 note from HemaBio. Both of these notes require four equal annual installments of $62,500, plus accrued interest, commencing August 29, 2007, until paid and pay interest at 7% annually, and are secured by all of the assets of HemaBio, and were subordinate to Comerica.

        HemaBio failed to pay the first installments due to Drs. Feldman and Raben on August 29, 2007 of $160,000, which included $35,000 in accrued interest. Under the terms of the promissory notes between HemaBio and Drs. Feldman and Raben, failure to pay any of the scheduled payments when due causes the entire unpaid balance, including unpaid interest, to become immediately due and payable, and causes the stated interest rate on both notes to increase to 10% per annum. Therefore,

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since August 29, 2007, HemaBio, now shown as discontinued operations, recognized accrued interest expense on the outstanding balance on both notes at an interest rate of 10%.

        The foregoing descriptions of the notes, the Comerica credit facility and the Mauro/Adia Agreement are qualified in their entirety by the copies of those agreements filed as exhibits to the Company's Current Reports on Form 8-K filed with the SEC on September 5, 2006, September 29, 2006, March 28, 2007 and September 5, 2008.

        As of December 31, 2008, HemaBio's default on the notes to Drs. Feldman and Raben remain unresolved.

        Net cash provided by operating activities from continuing operations was $599,000 for 2008, compared with net cash used of $143,000 for 2007, representing an increase of $742,000. The increase was due to net income for continuing operations in 2008 of $899,000 compared to a loss of $1,828,000 from continuing operations in 2007, and a $250,000 increase in accounts payable, accrued expenses and deferred rent in 2008 compared to a $1,629,000 decrease in 2007. Partially offsetting these changes was a $1,126,000 increase in accounts receivable in 2008 compared to a $1,082,000 decrease in 2007, and no change in deferred taxes in 2008 compared to a $622,000 increase in 2007. The increase in accounts payable, accrued expenses and deferred rent was partially due to an accrual for 401(k) match in 2008, which was not recognized in 2007 due to operating losses that year. The increase in accounts receivable was partially due to the increase in revenue in 2008. HemaCare's DSO for continuing operations stood at 56 days as of December 31, 2008, compared to 53 as of December 31, 2007. Management established a 100% reserve against the deferred tax asset of $622,000 on December 31, 2007 due to the operating loss recorded in 2007. There was no change in the deferred tax asset valuation reserve in 2008.

        Cash used in investing activities from continuing operations was $564,000 in 2008 compared with $1,219,000 for 2007, and is primarily due to a decrease in investment in capital expenditures in 2008 compared to 2007.

        Cash provided by financing activities from continuing operations in 2008 was $448,000 compared with $502,000 for 2007. In 2008, the Company received $433,000 from the sale of common stock through the 2004 Employee Stock Purchase Plan. In 2007, the Company utilized $475,000 of the Comerica credit facility to provide operating cash needed as a result of operating losses during the year.

        Net cash provided by operating activities from discontinued operations in 2008 was $176,000 compared with $292,000 in 2007. No net cash was used in investing activities from discontinued operations in 2008 compared with $12,000 in 2007. The majority of the cash generated from discontinued operations in 2008 was a result of the sale of inventory previously written-off.

        In December 2006, the Company signed a contract with Haemonetics Corporation, Software Solutions Division, for a license agreement, support and implementation services associated with a new information technology project to enhance the automation of the Company's blood product operations. This project is expected to take approximately three years to complete, and will involve considerable financial and managerial resources. Management expects the project to cost a total of $2 million, and portions of this project are scheduled for completion in mid-2009 ..The Company incurred $276,000 in 2008 associated with this project, which is included in plant and equipment on the balance sheet as of December 31, 2008.

        Management anticipates that cash on hand, availability on the Wells Fargo bank line of credit and cash generated by operations will be sufficient to provide funding for the Company's needs during the next year, including working capital requirements, equipment purchases, operating lease commitments and to fund the new information technology project.

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        The Company's primary sources of liquidity include cash on hand and cash generated from operations. Liquidity depends, in part, on timely collections of accounts receivable. Any significant delays in customer payments could adversely affect the Company's liquidity. Liquidity also depends on maintaining compliance with the various loan covenants. Presently, HemaBio is in default on the two notes related to the acquisition.

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 SEC (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, competition, the impact of future price increases for blood products and demand for the Company's products and services. These statements may also be identified by the use of words such as "anticipate," "believe," "continue," "estimate," "expect," "intend," "may," "project," "will" and similar expressions, as they relate to the Company, its management and its industry. Investors and prospective investors are cautioned that these forward-looking statements are not guarantees of future performance and involve risks and uncertainties, many of which will be beyond the control of the Company. Actual results could differ materially from those anticipated in these forward-looking statements as a result of various risks and uncertainties, including those above in "Item 1A—Risk Factors" or in other filings by the Company with the SEC. The Company does not undertake to update its forward-looking statements to reflect later events and circumstances or actual outcomes.

Item 7A    Quantitative 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.

        At December 31, 2008, for continuing operations, the Company had $2,471,000 of debt all of which is from the Wells Fargo working capital line of credit. The interest rate payable on this line of credit is based upon the prime interest rate. Accordingly, interest rate expense will fluctuate with rate changes in the U.S. If interest rates were to increase or decrease by 1% for the year, the Company's interest expense would increase or decrease by approximately $25,000. As of December 31, 2008, HemaBio had $500,000 of debt from notes payable with a fixed interest rate.

        In the normal course of business, the Company also faces risks that are either non-financial or not quantifiable, including those risks described above in "Item 1A—Risk Factors."

Item 8    Financial Statements and Supplementary Data

        The Index to Financial Statements and Schedules appears on page F-1. The Report of Independent Public Accountants appears on F-2, and the Consolidated Financial Statements and Notes to Consolidated Financial Statements appear on pages F-3 to F-27.

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

        None.

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Item 9A(T)    Controls and Procedures

(a)

Evaluation of Disclosure Controls 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). At the conclusion of this evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that, as of the end of the period covered by this report, the Company's disclosure controls and procedures are ineffective to provide reasonable assurance that information required to be disclosed in this report is:

a.

Recorded, processed, summarized and reported within the time period specified in the SEC's rules and forms; and



b.

Accumulated and communicated to our management, including our principal executive and principal financial officer, to allow timely decisions regarding required disclosure.

        Management is not aware any specific control weakness that resulted in a material misstatement in the Company's financial statements, and management does not believe any of its financial statements contain any material misstatements.

(b)

Management's Annual Report on Internal Control Over Financial Reporting

        Management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed by, or under the supervision of, the Company's Chief Executive Officer and the Chief Financial Officer and implemented by the Company's Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States of America ("GAAP").

        The Company's internal control over financial reporting includes those policies and procedures that: i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures of the Company are made only in accordance with authorizations of management and directors of the Company; and iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company's assets that could have a material impact on the financial statements.

        The Company's management, including the Chief Executive Officer, does not expect that the Company's disclosure controls and procedures, or the Company's internal controls over financial reporting, will necessarily prevent all fraud and material errors. An internal control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations on all internal control systems, the Company's internal control system can provide only reasonable assurance of achieving its objectives and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of internal control is also based in part upon certain assumptions about the likelihood of future events, and can provide only reasonable, not absolute, assurance that any design will succeed in achieving its stated

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goals under all potential future conditions. Over time, controls may become inadequate because of changes in circumstances, or the degree of compliance with the policies and procedures may deteriorate.

        A significant deficiency is a control deficiency, or combination of control deficiencies, that adversely affects the Company's ability to initiate, authorize, record, process, or report external financial data reliably in accordance with GAAP such that there is more than a remote likelihood that a misstatement of the Company's annual or interim financial statements that is more than inconsequential will not be prevented or detected. An internal control material weakness is a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected.

        Management of the Company, including the Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the Company's internal control over financial reporting for 2008. In making this assessment, management used the criteria set forth in the Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The evaluation began with the identification and review of its company-level controls including the control environment, risk assessment process, monitoring results of operations and period-end financial reporting processes. Additionally, the evaluation included a complete risk assessment of all the Company's business processes and financial statement account categories based on the following weighted risk categories:

•

Potential impact on the accuracy of the financial statements (30%)



•

Nature and complexity (20%)



•

Degree of subjectivity (20%)



•

Potential for fraud (20%)



•

Previously identified errors (10%)

        Each financial statement account category was assigned a risk score of 1, 2 or 3, based on if an error might have no material impact on either the balance sheet or income statement, might have a material impact on either the balance sheet or income statement, or might have a material impact on both the balance sheet and income statement. A calculation was then performed for each financial statement account category to weight the score for each risk category. At the conclusion of this analysis, management identified those financial statement account categories that were perceived to be either high risk, medium risk or low risk for material error. Those categorized as high risk were selected for further evaluation of the related internal control structure.

        The Company's management, with the assistance of outside consultants, performed an evaluation of all of the internal controls related to the high and medium risk account categories including a review of the related business processes, review of related Company policies, interviews with key personnel and, where applicable, an assessment of related information technology controls. Management then designed and executed a testing plan to determine if any of these significant controls were effective or ineffective. In addition, management evaluated the Company's information technology general controls and automated application controls, including the design and execution of a testing plan to determine if these controls were effective.

        As a result of this evaluation, the Company identified the following material internal control weaknesses over financial reporting: (a) the Company failed to institute all elements of an effective program to help prevent and detect fraud by Company employees; (b) the Company did not maintain adequate segregation of duties for staff members responsible for recording revenue; and (c) the Company failed to provide adequate controls over the use of spreadsheets used to record certain accounting entries and used to produce the Company's financial statements.

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        Therefore, the Chief Executive Officer and the Chief Financial Officer of the Company concluded that, as of the end of the period covered by this report, the Company's internal control over financial reporting was ineffective.

        Management does not believe any of its financial statements contain a material error as a result of any material weakness in internal controls.

        This Annual Report does not include an attestation report of the Company's independent registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the Company's independent registered public accounting firm pursuant to temporary rules of the SEC that permit the Company to provide only management's report in this annual report.

(c)

Remediation of Material Weakness in Internal Control Over Financial Reporting

        Once management identified the specific internal controls that were deficient, management engaged in, and will continue to engage in, remediation efforts to address the material weakness in its internal control over financial reporting. Specific actions which have been or will be taken are outlined below:

        The Company has:

•

developed a list of identified control weaknesses;



•

developed action plans to correct each identified weakness;



•

held meetings to discuss the allocation of resources and timelines to complete each action plan;



•

instituted other mitigating controls over revenue recognition and over the use of spreadsheets to enhance the control environment pertaining to these areas of material weakness; and



•

evaluated and standardized SOX testing and controls.

        The Company will assess the need to take additional actions including, but not limited, to the following:

•

evaluate accounting and control systems to identify opportunities for enhanced controls;



•

recruit and hire additional staff to provide greater segregation of duty;



•

evaluate the need for other employee changes;



•

expand executive management's ongoing communications regarding the importance of adherence to internal controls and company policies;



•

implement an internal auditing function at HemaCare and its subsidiaries; and



•

evaluate such other actions as the Company's advisors may recommend.



(d)

Changes in Internal Control Over Financial Reporting

        Other than the remedial actions discussed in the preceding section (c), 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, 2008 that has materially impacted, or is reasonably likely to materially impact, the Company's internal control over financial reporting.

Item 9B    Other Information

        None.

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PART III

Item 10    Directors, Executive Officers and Corporate Governance

        The information concerning the directors and executive officers of the Company and corporate governance 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 11    Executive 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 12    Security 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 13    Certain Relationships And Related Transactions, and Director Independence

        The information concerning certain relationships and related transactions and director independence 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 14    Principal 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 "Proposal 2—Ratification of the Appointment of Independent Registered Public Accounting Firm" in the Proxy Statement.

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PART IV

Item 15    Exhibits and Financial Statement Schedules

        The following are filed as part of this Report:

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*

Management contracts and compensatory plans and arrangements.

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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.

        KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints John Doumitt, Chief Executive Officer, and Robert S. Chilton, Executive Vice President, Chief Financial Officer and Corporate Secretary, his true and lawful attorneys-in-fact and agents, with full power of substitution, to sign and execute on behalf of the undersigned any and all amendments to this report, and to perform any acts necessary in order to file the same, with all exhibits thereto and other documents in connection therewith with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requested and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or their or his or her substitutes, shall do or cause to be done by virtue hereof.

        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-sixth day of March, 2009.

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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders of HemaCare Corporation:

        We have audited the accompanying consolidated balance sheets of HemaCare Corporation and subsidiaries, as of December 31, 2008 and 2007, and the related consolidated statements of (operations) income, shareholders' equity and cash flows for each of the two years in the period ended December 31, 2008. 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, 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of HemaCare Corporation and subsidiaries as of December 31, 2008 and 2007, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2008 in conformity with accounting principles generally accepted in the United States of America.

/s/ STONEFIELD JOSEPHSON, INC.  

Los Angeles, California
March 25, 2009

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HEMACARE CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

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

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HEMACARE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (OPERATIONS)

For the Two Years Ended December 31,

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

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HEMACARE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

For the Years Ended December 31, 2008 and 2007

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

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HEMACARE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Years Ended Decmber 31,

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

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HEMACARE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2008

Note 1—Organization

        HemaCare Corporation ("HemaCare or the "Company"), along with its wholly-owned subsidiary Coral Blood Services, Inc., collects, processes and distributes blood products to hospitals and research related organizations in the United States, and has operations in Southern California, Maine and Mid-Atlantic United States. In 2006, HemaCare acquired 100% of the capital stock of Teragenix Corporation, subsequently renamed HemaCare BioScience, Inc. ("HemaBio"). On November 5, 2007, the Board of Directors of HemaBio decided to close all operations of HemaBio.

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 impact the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Estimates also impact 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.

        On January 1, 2008, the Company adopted certain provisions of SFAS 157, Fair Value Measurements ("SFAS 157") which provides guidance on how to measure assets and liabilities that use fair value. SFAS 157 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosures about fair value measurements. In February 2008, the Financial Accounting Standards Board ("FASB") issued Staff Position No 157-2 which delays the effective date of SFAS 157 one year for all nonfinancial assets and nonfinancial liabilities, except those recognized or disclosed at fair value in the financial statements on a recurring basis. The partial adoption of SFAS 157 did not have a material impact on our financial statements. The Company adopted the provisions of SFAS 157 as it relates to nonfinancial assets and liabilities that are not recognized or disclosed at fair value on a recurring basis on January 1, 2009, and the Company is evaluating the impact, if any, the full adoption will have on its financial statements.

        On January 1, 2008, the Company adopted SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities—Including an Amendment of FASB Statement No. 115 ("SFAS 159"). SFAS 159 permits entities to choose, at specified election dates, to measure many financial instruments and certain other items at fair value. Subsequent unrealized gains and losses on items for which the fair value option has been elected will be reported in earnings. As the Company did not elect fair value treatment for qualifying instruments that existed as of January 1, 2008, the adoption of SFAS 159 did not have an impact on its financial statements. The Company may elect to measure qualifying instruments at fair value in the future.

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HEMACARE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008

Note 2—Summary of Accounting Policies (Continued)

        Revenue and Accounts Receivable:    Revenue is recognized upon acceptance of the blood products or the performance of blood services. Occasionally the Company receives advance payment against future delivery of blood products or services. Until the related products or services are delivered, the Company records advance payments as deferred revenue, which appears as a current liability on the balance sheet. Blood services revenue consists primarily of mobile therapeutics sales, while blood products revenue consists primarily of sales of single donor platelets, whole blood components or other blood products that are manufactured or purchased and distributed by the Company. Accounts receivable are reviewed periodically for collectability.

        Inventories and Supplies:    Inventories consist of Company-manufactured platelets, whole blood components and other blood products, 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. Management estimates the portion of inventory that might not have future value by analyzing historical sales history for the twelve months prior to any balance sheet date. For each inventory type, management establishes an obsolescence reserve equal to the value of inventory quantity in excess of twelve months of historical sales quantity, using the first-in, first-out inventory valuation methodology. The Company did not record any reserves for obsolete inventory for continuing operations in either 2008 or 2007. The Company recorded reserves for obsolete inventory for discontinued operations of $1,341,000 as of December 31, 2007.

        Inventories are comprised of the following as of December 31,

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

        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.

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HEMACARE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008

Note 2—Summary of Accounting Policies (Continued)

        Income Taxes:    The process of preparing the financial statements requires management estimates of income taxes in each of the jurisdictions that the Company operates. This process involves estimating 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. Under the provisions of SFAS No. 109, Accounting for Income Taxes, the Company must utilize 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. Management must assess the likelihood that the deferred tax assets or liabilities will be realized for future periods, and to the extent management believes that realization 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. It is possible that different tax models, and the selection of different input variables, could produce a materially different estimate of the provision, asset, liability and valuation allowance. The Company determined that it was unlikely to realize any future benefit from the deferred tax asset in 2008 and 2007 and therefore booked a 100% valuation allowance both years resulting in the elimination of the deferred tax asset from the Company's balance sheet as of December 31, 2008 and December 31, 2007, and in 2007 a related charge to the provision for income taxes.

        On January 1, 2007, the Company adopted FASB Interpretation ("FIN") No. 48, Accounting for Uncertainty in Income Taxes—an Interpretation of FASB Statement 109 ("FIN No. 48"). FIN No. 48 clarifies the accounting for uncertainty in income taxes by prescribing rules for recognition, measurement and classification in financial statements of tax positions taken or expected to be taken in a tax return. FIN No. 48 prescribes a two-step process for the financial statement measurement and recognition of a tax position. The first step involves the determination of whether it is more likely than not (greater than 50 percent likelihood) that a tax position will be sustained upon examination, based on the technical merits of the position. The second step requires that any tax position that meets the more-likely-than-not recognition threshold be measured and recognized in the financial statements at the largest amount of benefit that is greater than 50 percent likelihood of being realized upon ultimate settlement. FIN No. 48 also provides guidance on the accounting for related interest and penalties, financial statement classification and disclosure. The Company has determined that there is no material impact on the consolidated financial position, results of operations or cash flows from the adoption of FIN No. 48. The oldest tax year that remains open to possible evaluation and interpretation of the Company's tax position is 1995.

        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, restricted stock, restricted stock units and warrants.

        Interest Expense:    During the years ended December 31, 2008 and 2007, the Company incurred interest expense of $164,000 and $197,000, for continuing operations and $50,000 and $55,000 for discontinued operations, respectively.

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HEMACARE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008

Note 2—Summary of Accounting Policies (Continued)

        Share-Based Compensation:    In accordance with SFAS No. 123R, Share-based Payment: An amendment of FASB Statements No. 123 and 95 ("SFAS 123R"), the Company records compensation expense related to share-based compensation awards granted to employees. For 2008, the Company recognized compensation expense related to stock options, restricted stock units and restricted stock, granted to employees prior to December 31, 2008, based on the grant date fair value estimated in accordance with SFAS No. 123, Accounting for Stock-Based Compensation ("SFAS 123").

        The Company's assessment of the estimated fair value of the stock options granted is affected by the price of the Company's common stock, as well as assumptions regarding a number of complex and subjective variables and the related tax impact. Management utilized the Black-Scholes model to estimate the fair value of share based payments granted. Generally, the calculation of fair value under SFAS 123R is similar to the calculation of fair value under SFAS 123, with the exception of the treatment of forfeitures.

        The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. This model also requires the input of highly subjective assumptions including:

(a)

expected volatility of the common stock price, which was determined based on historical volatility of the Company's common stock;



(b)

expected dividends, which are not anticipated;



(c)

expected life of the stock option, which is estimated based on the historical stock option exercise behavior of employees; and



(d)

expected forfeitures.

        Starting in the third quarter of 2008, the Company no longer assumes a forfeiture rate when assessing value for options held by independent members of the Board of Directors. Since options issued to independent board members are not forfeited upon separation from the Company, management has determined it is inappropriate to assign a forfeiture rate to these options.

        In the future, management may elect to use different assumptions under the Black-Scholes valuation model or a different valuation model, which could result in a significantly different impact on net income or loss.

Recent Accounting Pronouncements:

        In December 2007, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin ("SAB") No. 110 ("SAB 110"), which expresses the views of the SEC staff regarding the use of a simplified method, as discussed in the previously issued SAB 107, in developing an estimate of expected term of "plain vanilla" share options in accordance with SFAS No. 123R. In particular, the SEC staff indicated in SAB 107 that it will accept a company's election to use the simplified method, regardless of whether the company has sufficient information to make more refined estimates of expected term. At the time SAB 107 was issued, the SEC staff believed that more detailed external information about employee exercise behavior (e.g., employee exercise patterns by industry and/or other categories of companies) would, over time, become readily available to companies. Therefore, the

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HEMACARE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008

Note 2—Summary of Accounting Policies (Continued)

SEC staff stated in SAB 107 that it would not expect a company to use the simplified method for share option grants after December 31, 2007. The SEC staff understands that such detailed information about employee exercise behavior may not be widely available by December 31, 2007. Accordingly, the SEC staff will continue to accept, under certain circumstances, the use of the simplified method beyond December 31, 2007. Upon our adoption of SFAS No. 123R, the Company elected to use, and is currently using, the simplified method to estimate the expected term. The Company is evaluating whether or not to continue to use the simplified method, which will depend upon whether or not sufficient exercise history exists upon which to base an estimate, in addition to how easily peer group information may be obtained. The issuance of SAB 110 did not impact the Company's consolidated financial statements for fiscal 2007 and 2008.

        In December 2007, the FASB issued SFAS No. 141R, Business Combinations ("SFAS No. 141R"), which replaces SFAS No. 141, Business Combinations ("SFAS No. 141"). SFAS No. 141R establishes principles and requirements for how an acquiring entity in a business combination would recognize and measure in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree; recognizes and measures any goodwill acquired in the business combination or a gain from a bargain purchase; and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS No. 141R retains certain fundamental requirements of SFAS No. 141, but also clarifies the definition of an acquirer in a business combination, and expands its scope to apply to all transactions and events in which one entity obtains control over one or more other businesses. SFAS No. 141R applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Company does not expect that the issuance of SFAS No. 141R will have an impact on its consolidated financial statements.

        In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51 ("SFAS No. 160"), which establishes accounting and reporting for noncontrolling interests, referred to in current GAAP as minority interests, in a subsidiary and for the deconsolidation of a subsidiary. Under SFAS No. 160, noncontrolling interests shall be reported as equity in the consolidated financial statements. On the statement of operations, SFAS No. 160 requires disclosure of the amounts of consolidated net income attributable to the parent and to the noncontrolling interest, thereby eliminating diversity in practice and providing transparency in disclosure. SFAS No. 160 also simplifies accounting standards by establishing a single method of accounting for changes in a parent's ownership interest in a subsidiary that do not result in deconsolidation; and requires that, when a subsidiary is deconsolidated, a parent will recognize gain or loss in net income. SFAS No. 160 further requires expanded disclosures surrounding the interests of the parent's owners and the interests of the non-controlling owners of a subsidiary. SFAS No. 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. SFAS No. 160 shall be applied prospectively as of the beginning of the fiscal year in which it is initially applied, except for the presentation and disclosure requirements. The presentation and disclosure requirements shall be applied retrospectively for all periods presented. The Company does not expect that the issuance of SFAS No. 160 will have an impact on its consolidated financial statements.

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HEMACARE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008

Note 2—Summary of Accounting Policies (Continued)

        In June 2008, the FASB issued FSP EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities ("FSP EITF"), which will be effective beginning with the Company's first quarter 2009 financial reporting. The FSP EITF provides that unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and should be included in the computation of earnings per share pursuant to the two-class method. Upon adoption, retrospective adjustment to earnings per share data (including any amounts related to interim periods, summaries of earnings, and selected financial data) is required to conform to the provisions of the FSP EITF. The Company does not expect the adoption of the FSP EITF will have a material impact on the results or operations, financial position or cash flows.

        In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles ("SFAS No. 162"), which identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements for nongovernmental entities that are presented in conformity with GAAP. SFAS 162 will be effective 60 days following the SEC's approval. The Company does not expect the adoption of SFAS No. 162 will have a material impact on the results or operations, financial position or cash flows.

        In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities ("SFAS No. 161"), an amendment of FASB Statement No. 133. SFAS No. 161 requires enhanced disclosures about a company's derivative and hedging activities. These enhanced disclosures will discuss (a) how and why a company uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under FASB Statement No. 133 and its related interpretations and (c) how derivative instruments and related hedged items affect a company's financial position, results of operations and cash flows. SFAS No. 161 is effective for fiscal years beginning on or after November 15, 2008, with earlier adoption allowed. The Company does not expect the adoption of SFAS No. 161 will have a material impact on the results or operations, financial position or cash flows.

        In September 2006, the FASB issued SFAS No. 158, Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans ("SFAS No.158"), which requires employers to fully recognize the obligations associated with single-employer defined benefit pension, retiree healthcare and other postretirement plans in their financial statements. The Company does not expect the adoption of SFAS No. 158 will have a material impact on the results or operations, financial position or cash flows.

        In April 2008, the FASB issued Staff Position No. 142-3, Determination of the Useful Life of Intangible Assets ("SFAS No. 142-3"), which amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142, Goodwill and Other Intangible Asset, ("SFAS No. 142"). The intent of SFAS 142-3 is to improve the consistency between the useful life of a recognized intangible asset under Statement 142 and the period of expected cash flows used to measure the fair value of the asset under FASB Statement No. 141 (revised 2007), Business Combinations and other U.S. GAAP. SFAS 142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early adoption is prohibited. The Company does not expect the adoption of SFAS 142-3 will have a material impact on the results or operations, financial position or cash flows.

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HEMACARE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008

Note 2—Summary of Accounting Policies (Continued)

        In May 2008, the FASB issued FSP No. APB 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement) ("FSP APB 14-1"). FSP APB 14-1 addresses instruments commonly referred to as Instrument C from Emerging Issues Task Force No. 90-19, which requires the issuer to settle the principal amount in cash and the conversion spread in cash or net shares at the issuer's option. FSP APB 14-1 requires that issuers of these instruments account for their liability and equity components separately by bifurcating the conversion option from the debt instrument, classifying the conversion option in equity, and then accreting the resulting discount on the debt as additional interest expense over the expected life of the debt. FSP APB 14-1 is effective for fiscal years beginning after December 15, 2008 and interim periods within those fiscal years, and requires retrospective application to all periods presented. Early application is not prohibited. The Company does not expect the adoption of FSP APB 14-1 will have a material impact on the results or operations, financial position or cash flows.

Note 3—Discontinued Operations

        In the first six months of 2007, HemaBio, produced significantly lower earnings than anticipated by the Company and HemaBio's management team. In the third quarter of 2007, HemaBio's management team projected a net loss from operations of approximately $300,000, and projected further losses for the fourth quarter of 2007 as well. On November 2, 2007, HemaBio received letters of resignation from Mr. Joseph Mauro, HemaBio's President, and Mr. Valentin Adia, HemaBio's Vice President of Business Development. Mr. Mauro and Mr. Adia both stated that their resignations were submitted under the "good reason" provisions of their employment agreements. The Board of Directors of HemaBio, in consultation with, and with the approval of, the Board of Directors of the Company, determined that HemaBio's business could not operate successfully because i) HemaBio was always operated as a separate and independent business from the Company, ii) HemaBio's employees, principally Mr. Mauro and Mr. Adia, possessed all knowledge of HemaBio's suppliers, markets and customers, iii) without senior management there were no other individuals at HemaBio who could run the business and find a pathway to future profitability, iv) none of the Company's management were available, nor possessed the knowledge, to take over the responsibility to run HemaBio, and v) the projected operating losses at HemaBio were growing, and HemaBio did not have sufficient financial resources to operate for the time period required to recruit, hire and train new management. Therefore, the Board of Directors of HemaBio decided that it was in the best interest of HemaBio's creditors to close all operations of HemaBio, effective November 5, 2007.

        On December 4, 2007, HemaBio executed an Assignment for Benefit of Creditors, under Florida Statutes Section 727.101 et seq. ("Assignment"), assigning all of its assets to an assignee, who is responsible for taking possession of, protecting, preserving, and liquidating such assets and ultimately distributing the proceeds to creditors of HemaBio according to their priorities as established by Florida law.

        During 2008, the assignee successfully liquidated HemaBio's assets, including inventory, furniture and equipment, for $194,000 more than the net book value of these assets on HemaBio's books. In addition, the assignee incurred closure related expenses of $64,000. Finally, HemaBio recognized $50,000 in interest expense related to notes payable to two of the former investors in HemaBio. For all of 2008, these activities resulted in a net gain of $80,000, which is recorded under discontinued

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HEMACARE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008

Note 3—Discontinued Operations (Continued)

operations on the Company's financial statements. In addition, upon closing the new financing agreement with Wells Fargo, the Company acquired $300,000 of secured debt of HemaBio previously owed to Comerica Bank. In 2008, the Company received full payment of this amount from the assignee as a full and complete distribution. The assignee continues to fulfill his obligations under the Assignment, but has not concluded his efforts to liquidate all of the assets or complete a final distribution of all proceeds to HemaBio's creditors.

        Per Statement of Financial Accounting Standards No. 144, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, the results of operations of HemaBio, along with an estimate of all closure related costs were recorded in 2007. The following is the breakdown of the assets held for sale and the liabilities related to the assets held for sale for the discontinued operations as of December 31, 2007 and December 31, 2008:

HEMACARE CORPORATION
Discontinued Operations

        Per the American Institute of Certified Public Accountants Statements of Position 90-7 Financial Reporting by Entities in Reorganization under the Bankruptcy Code ("SOP 90-7"), an entity in some form of reorganization, such as the assignment for benefit of creditors action filed for HemaBio in Florida, an entity shall not recognize any gain from the relief of any obligation until relief is ordered by the courts, or a settlement of creditors is finalized. Since there has been no complete conveyance of assets, final settlement with creditors or court action granting HemaBio relief from any creditors claims, HemaBio's liabilities remain, and will remain, recorded at full value on the financial statements of the Company as "liabilities related to assets held for sale" until such conveyance, settlement or court action is complete.

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HEMACARE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008

Note 4—Allowance for Doubtful Accounts

        The Company periodically reviews the outstanding balances owed by its customers. Generally, the Company recognizes an allowance for doubtful accounts for any balances owed that are 90 days or more past due based on the invoice date, unless substantial evidence exists that the receivable is collectable, such as subsequent cash collection. In addition, balances less than 90 days past due are reserved based on the Company's recent bad debt experience.

        A decrease of $93,000, and an increase of $184,000, were recorded to the allowance for doubtful accounts for continuing operations for 2008 and 2007, respectively. In 2008, the decrease was due to collection of customer balances previously included in the allowance. In 2007 the increase was as a result of i) a delay in the approval of the California State budget, which resulted in slow payments from customers with a high concentration of Medi-Cal patients, and ii) turnover in the credit and collections staff of the Company which slowed collections during the second half of the 2007. Write-offs against the allowance for doubtful accounts totaled $93,000 and $13,000 for the years ended December 31, 2008 and 2007, respectively. The Company will write-off a receivable when collection efforts are terminated and the probability of collection is very low.

Note 5—Plant and Equipment

        Plant and equipment consists of the following:

        Depreciation expense for continuing operations for 2008 and 2007 was $1,002,000 and $1,004,000 respectively, and for discontinued operations, $0 and $116,000 respectively.

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Table of Contents

HEMACARE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008

Note 6—Line of Credit and Notes Payable

        On March 26, 2007, the Company's agreement with Comerica Bank ("Comerica"), an Amended and Restated Loan and Security Agreement ("Comerica Agreement"), originally entered into on September 26, 2006, was amended by the First Modification which increased the line of credit from $3 million to $4 million. The Comerica Agreement provided that interest was payable monthly at a rate of prime minus 0.25%. In addition, the Company had the option to draw against this facility for thirty, sixty or ninety days using LIBOR as the relevant rate of interest. The Comerica Agreement was collateralized by substantially all of the Company's assets and required the maintenance of certain covenants that, among other things, required minimum levels of profitability and prohibited the payment of dividends.

        The Comerica Agreement provided, among other things, that in the event the Company failed to observe any covenants, or permitted a default in any material agreement to which the Company was a party with third parties that results in an acceleration of any indebtedness, then an event of default could have occurred under the Comerica Agreement, and Comerica could, among other things, declare the Company's indebtedness to Comerica immediately due and payable. As of December 31, 2007, the Company was not in compliance with certain financial covenants in the Comerica Agreement, and Comerica did not provide a waiver of this violation as they had provided in the past.

        On April 10, 2008, the Company, together with the Company's subsidiary Coral Blood Services, Inc., entered into a Credit and Security Agreement ("Wells Agreement") with Wells Fargo Bank ("Wells Fargo") to provide a $4.75 million, revolving line of credit for working capital purposes, and a $250,000 capital expenditure line of credit. The Wells Agreement provides that the Company may borrow the lesser of 85% of eligible accounts receivables, or $4.75 million with respect to the revolving line of credit. The term of the Wells Agreement is three years. Interest on the working capital line of credit is payable monthly at a rate of the Wells Fargo prime rate minus 0.25%, and interest on the capital expenditure line of credit is payable monthly at the Wells Fargo prime rate. As of December 31, 2008, the Wells Fargo prime rate was 3.25%. In addition, as of December 31, 2008, the Company utilized $2,471,000 of the Wells Fargo line of credit. The Wells Agreement is collateralized by substantially all of the Company's assets and requires the maintenance of certain covenants that, among other things, require minimum levels of profitability and prohibit the payment of dividends. As of December 31, 2008, the Company was in compliance with all of the covenants in the Wells Agreement.

        Upon closing of the Wells Agreement, the Company used the available proceeds to payoff the outstanding debt obligation to Comerica in full. In exchange, the Company and Comerica terminated the Comerica Agreement, and Comerica released the security interest in the Company's assets. In addition, upon closing the Wells Agreement, the Company acquired $300,000 of secured debt of HemaBio previously owed to Comerica. Subsequently the Company received $300,000 from the Florida assignee as a complete and final distribution.

        As part of the consideration to acquire HemaBio, the Company issued a promissory note to both of the sellers. One note for $153,800 for the benefit of Joseph Mauro required four equal annual installments of $38,450, plus accrued interest, commencing August 29, 2007 until paid. This note paid interest at 5% annually, and was secured through a security agreement, by all of the assets of HemaBio, and was subordinate to Comerica. The second note for $46,200 for the benefit of Valentin Adia, required four equal annual installments of $11,550, plus accrued interest, commencing August 29,

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Table of Contents

HEMACARE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008

Note 6—Line of Credit and Notes Payable (Continued)

2007 until paid. This note paid interest at 5% annually, was also secured by all of the assets of HemaBio, and was subordinate to Comerica.

        The Company failed to pay the first installment due to Mr. Mauro on August 29, 2007 of $46,000, which included $8,000 in accrued interest. Under the terms of the promissory note between the Company and Mr. Mauro, if an event of default occurred, the interest rate on the outstanding obligation increased to 12%. The Company's failure to pay the first installment was an event of default that triggered an increase in the interest rate. Therefore, since August 29, 2007, and until the note was cancelled, the Company accrued interest expense on the outstanding balance of this note at an interest rate of 12%.

        The Company failed to pay the first installment due to Mr. Adia on August 29, 2007 of $15,000, which included $3,000 in accrued interest.

        Disputes arose between the Company and Messrs. Mauro and Adia pertaining to the Company's acquisition of HemaBio, and their management of HemaBio after the acquisition. The dispute led to the filing of a lawsuit against Mauro and Adia in the Los Angeles Superior Court (Case No. LC082173) (the "Lawsuit").

        On August 26, 2008, the Company entered into a Settlement Agreement and Mutual General Release (the "Mauro/Adia Agreement") with Mauro and Adia. The Mauro/Adia Agreement resolves the disputes, including those alleged in the Lawsuit. The Mauro/Adia Agreement provides for the mutual general release of all claims between the Company and Mauro and Adia in exchange for (i) Mauro and Adia's cancellation of promissory notes, and accrued interest, received from the Company as part of the HemaBio acquisition consideration; (ii) return of 248,000 shares of the Company's common stock received by Mauro and Adia as part of the HemaBio acquisition consideration; and (iii) payment by Mauro and Adia of $50,000 to the Company.

        As a result of the cancellation of the promissory notes, and other consideration received by the Company from the Mauro/Adia Agreement, the Company recognized a gain of $405,000, which is reported on the Company's income statement as a component of other income.

        When the Company acquired HemaBio, two former HemaBio investors, Dr. Lawrence Feldman and Dr. Karen Raben, each held a $250,000 note from HemaBio. Both of these notes require four equal annual installments of $62,500, plus accrued interest, commencing August 29, 2007, until paid and pay interest at 7% annually, and are secured by all of the assets of HemaBio, and were subordinate to Comerica.

        HemaBio failed to pay the first installments due to Drs. Feldman and Raben on August 29, 2007 of $160,000, which included $35,000 in accrued interest. Under the terms of the promissory notes between HemaBio and Drs. Feldman and Raben, failure to pay any of the scheduled payments when due causes the entire unpaid balance, including unpaid interest, to become immediately due and payable, and causes the stated interest rate on both notes to increase to 10% per annum. Therefore, since August 29, 2007, HemaBio, now shown as discontinued operations, recognized accrued interest expense on the outstanding balance on both notes at an interest rate of 10%.

        The foregoing descriptions of the notes, the Comerica Agreement and the Mauro/Adia Agreement are qualified in their entirety by the copies of those agreements filed as exhibits to the Company's

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Table of Contents

HEMACARE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008

Note 6—Line of Credit and Notes Payable (Continued)

Current Reports on Form 8-K filed with the SEC on September 5, 2006, September 29, 2006, March 28, 2007 and September 5, 2008.

        As of December 31, 2008, HemaBio's default on the notes to Drs. Feldman and Raben remain unresolved.

        Future minimum payments under the line of credit and notes payable are as follows:

Note 7—Leases

        The Company leases its facilities and certain equipment under operating leases that expire through the year 2017.

        Future minimum rentals under operating leases for continuing operations are as follows:

        For continuing operations total rent expense under all operating leases was $685,000 and $893,000 for the years ended December 31, 2008 and 2007, respectively. For discontinued operations, total rent expense was $0 for the year ended December 31, 2008, and $493,000, including disposal costs of $327,000, for the year ended December 31, 2007.

        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. In most cases, management expects that in the normal course of business, leases will be renewed or replaced by other leases.

        On February 24, 2006, the Company entered into a lease for approximately 19,600 square feet located in Van Nuys, California intended to house corporate offices, mobile blood drive operations, a blood component manufacturing lab and a blood products distribution operation. The Company occupied this facility in November 2006. The rent for this facility started at approximately $36,000 per month; however, the lease provides for 3% rent escalation upon the annual anniversary of the beginning of the lease term and for increases in the cost of common area maintenance. The lease on this space expires July 31, 2017; however, the Company has one five-year option to extend this lease at the then current market price. On April 11, 2008, the Company entered into an amendment to add approximately 7,200 square feet to this lease intended to house a donor center and supply warehouse.

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Table of Contents

HEMACARE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008

Note 7—Leases (Continued)

This amendment added $13,250 per month in rent expense, which adjusts annually by 3.9% on the anniversary of the lease commencement date. The Company invested approximately $2.1 million in tenant improvements in the new facility. As part of the lease agreement, the Company received approximately $508,000 in tenant improvement allowance from the landlord.

        The Company recognizes the total rent obligation for this facility, net of the tenant improvement allowance, as rent expense on a straight line basis over the term of the lease. The Company allocates on a straight-line basis the total lease payments, including rent escalation, abated rent, and tenant improvement reimbursement, over the term of the lease. As a result, the Company will recognize approximately $41,000 in monthly rent expense over the term of the lease. As of December 31, 2008, the Company recognized $25,000 in deferred rent associated with this lease to be utilized over the twelve month period ended December 31, 2009. This amount is included in other accrued expenses on the balance sheet. As of December 31, 2008, the Company recognized $645,000 representing the balance of the deferred rent associated with this lease, included in other long-term liabilities on the balance sheet.

Note 8—Goodwill

        The Company periodically evaluates the fair value of any goodwill recognized as a result of prior acquisition activity. Goodwill is the portion of the total consideration paid to acquire a business that exceeds the fair market value of the assets acquired, less the value of the liabilities acquired. Any subsequent valuation of goodwill requires substantial estimation by management of the future profitability of any respective business unit, and an assessment of the fair value of the business. The Company uses the income approach, along with other standard analytical approaches, to estimate the fair value of goodwill. The income approach involves estimating the present value of future cash flows by using projections of the cash flows that the business is expected to generate, and discounting these cash flows at a given rate of return. This requires the use of management estimates and assumptions, such as assumptions on growth rates for revenue, expenses, earnings before interest, income taxes, depreciation and amortization, returns on working capital, returns on other assets and capital expenditures, among others. Assumptions on discount rates and terminal growth rates are also used to determine fair value. Given the subjectivity involved in deriving these estimates in the analyses, it is possible that a different valuation model and the selection of different input variables could produce a materially different estimate of the fair value of goodwill. In 2007, the Company recognized a goodwill impairment charge of $4,259,000 related to the closure of HemaBio, representing 100% of the goodwill book value.

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Table of Contents

HEMACARE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008

Note 9—Income Taxes

        The provision for income taxes for the years ended December 31, 2008 and 2007 are as follows:

        For continuing operations, the Company recorded a $41,000 provision for income taxes for 2008 compared with a $646,000 provision for income taxes for 2007. In 2008, state taxes represented the entire tax provision. In 2007, the provision for income taxes included $622,000 from the increase in the valuation allowance for the deferred tax asset to 100%, and state taxes of $24,000 for continuing operations.

        Differences between the provision for income taxes and income taxes at statutory federal income tax rate for the years ended December 31, 2008 and 2007 are as follows:

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Table of Contents

HEMACARE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008

Note 9—Income Taxes (Continued)

        The Company recognized no net deferred tax asset as of December 31, 2008 and 2007. The components of the net deferred tax asset at December 31, 2008 and 2007 are as follows:

        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. Management performed an extensive analysis of the future trends, risks and uncertainties associated with the business. Some of the factors considered included: i) possible changes in government regulation, ii) possible changes in Medicare reimbursement for the blood products or services provided by the Company, iii) changes in strategies employed by the Company's competition, and iv) changes is medical technology that could alter the utilization patterns for the Company's products and services.

        The Company determined at the end of 2008 and 2007 that, based on recent operating results, it was unlikely that the Company would realize any of the deferred tax assets. Therefore, the Company recorded a 100% valuation reserve against all of the deferred tax assets as of December 31, 2008 and December 31, 2007.

        As of December 31, 2008, the value of the Company's federal and state net operating loss carryforwards were $3.8 million and $4.1 million, respectively. The ability for the Company to utilize the available federal net operating loss is scheduled to expire over time starting in 2011 and ending in 2027. The ability for the Company to utilize the available state net operating loss is scheduled to expire over time starting in 2017 and ending 2028.

        Utilization of our net operating loss may be subject to substantial annual limitation as a result from a change in ownership as provided by the Internal Revenue Code and similar state provisions. Such a limitation could result in the expiration of the net operating loss before utilization.

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Table of Contents

HEMACARE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008

Note 10—Shareholders' Equity

Stock Options

        In 1996, the Board of Directors, with shareholder approval, adopted the Company's 1996 Stock Incentive Plan (the "1996 Plan"). The purposes of the 1996 Plan were to i) enable the Company to attract, motivate and retain top-quality directors, officers, employees, consultants and advisors, ii) provide substantial incentives for such persons to act in the best interests of the shareholders of the Company, and iii) reward extraordinary effort by such persons on behalf of the Company. The 1996 Plan provided for awards in the form of stock options, which may be either "incentive stock options" within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), or non-qualified stock options, or restricted stock. The total number of shares of common stock available for distribution under the 1996 Plan was 2,500,000; provided, however, that no award may be made at any time if, after giving effect to such award, the total number of shares of common stock issuable upon exercise of all outstanding options and warrants of the Company (whether or not under the 1996 Plan) plus the total number of shares of common stock called for under any stock bonus or similar plan of the Company (including shares of common stock underlying awards under the 1996 Plan) would exceed 30% of the total number of shares of common stock outstanding at the time of such award.

        On May 24, 2006, the shareholders approved the 2006 Equity Incentive Plan ("2006 Plan") since the 1996 Plan expired in July 2006. The following is a summary of the 2006 Plan:

        Background and Purpose.    The primary purpose of the 2006 Plan is to encourage ownership in the Company by key personnel whose long-term service is considered essential to the Company's continued progress, thereby linking these employees directly to stockholder interests through increased stock ownership.

        Eligible Participants.    Awards may be granted under the 2006 Plan to any of the Company's employees, directors, or consultants or Company affiliates. An incentive stock option may be granted under the 2006 Plan only to a person who, at the time of the grant, is an employee of the Company or a related corporation.

        Number of Shares of Common Stock Available.    A total of 1,200,000 shares of common stock have been reserved for issuance under the 2006 Plan. The maximum aggregate number of shares that may be issued under the 2006 Plan is 1,200,000. If an award is cancelled, terminates, expires, or lapses for any reason without having been fully exercised or vested, or is settled for less than the full number of shares of common stock represented by such award actually being issued, the unvested, cancelled, or unissued shares of common stock generally will be returned to the available pool of shares reserved for issuance under the 2006 Plan. In addition, if the Company experiences a stock dividend, reorganization, or other change in capital structure, the administrator may, in its discretion, adjust the number of shares available for issuance under the 2006 Plan and any outstanding awards as appropriate to reflect the stock dividend or other change. The share number limitations included in the 2006 Plan will also adjust appropriately upon such event.

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Table of Contents

HEMACARE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008

Note 10—Shareholders' Equity (Continued)

        The table below summarizes stock option activity for 2008 and 2007:

        As of December 31, 2008, the total aggregate intrinsic value of all fully vested stock options, and of all stock options outstanding, is $11,000 and $16,000, respectively.

        The table below summarizes restricted stock activity for 2008 and 2007:

        The table below summarizes restricted stock unit activity for 2007 and 2008:

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Table of Contents

HEMACARE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008

Note 10—Shareholders' Equity (Continued)

        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, 2008:

        In December 2004, the FASB issued SFAS 123R. This statement requires that the cost resulting from all share-based payment transactions be recognized in the Company's consolidated financial statements. In addition, in March 2005 the SEC released SEC Staff Accounting Bulletin No. 107, Share-Based Payment ("SAB 107"). SAB 107 provides the SEC's staff's position regarding the application of SFAS 123R and certain SEC rules and regulations, and also provides the staff's views regarding the valuation of share-based payment arrangements for public companies. Generally, the approach in SFAS 123R is similar to the approach described in SFAS 123. However, SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the statement of income based on their fair values.

        For 2008, the Company recognizes compensation expense related to stock options, restricted stock units and restricted stock, granted to employees based on compensation cost for all share-based payments granted prior to December 31, 2008, based on the grant date fair value estimated in accordance with SFAS No. 123.

        The Black-Scholes option pricing model is used by the Company to determine the weighted average fair value of share-based payments. The fair value of options at date of grant and the assumptions utilized to determine such values are indicated in the following table:

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Table of Contents

HEMACARE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008

Note 10—Shareholders' Equity (Continued)

        For the twelve months ended December 31, 2008, the Company recognized non-cash share-based compensation costs of $136,000, as a result of the adoption of SFAS 123R, reducing the income before taxes and net income by this amount.

        The following summarizes the activity of the Company's stock options that have not vested for the year ended December 31, 2008:

        As of December 31, 2008, the unrecognized compensation cost related to nonvested awards is $166,000 with a weighted-average period over which such unrecognized compensation is expected to be recognized of 2.9 years.

        As of December 31, 2008, there are 1,313,000 fully vested stock options outstanding with a weighted average fair value of $.46 and an average contractual term of 5.5 years.

Employee Stock Purchase Plan

        On May 25, 2004, the Board of Directors of the Company approved the Company's 2004 Stock Purchase Plan, (the "ESPP"), which initially provided for the issuance of up to 1,000,000 shares of the Company's Common Stock (subject to adjustment). The Company registered 1,000,000 such shares on a Registration Statement on Form S-8 (File No. 333-116405) filed with the Commission on June 10, 2004. On August 6, 2008, the Board of Directors of the Company increased the number of shares which may be issued and sold under the ESPP from 1,000,000 to 2,000,000 (subject to adjustment). On August 19, 2008, the Company filed a Registration Statement on Form S-8 with the SEC to register 1,000,000 additional shares of the Company's Common Stock for issuance pursuant to the ESPP, and such indeterminate number of additional shares as may become available under the ESPP as a result of the adjustment provisions thereof.

        During 2008, the Company issued 1,195,000 shares under the ESPP to Directors and Officers for $433,000. As of December 31, 2008, there are 570,000 remaining shares in the ESPP.

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Table of Contents

HEMACARE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008

Note 11—Earnings per Share

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

Note 12—Concentration of Credit Risk

        The Company maintains cash balances at various financial institutions. Deposits not exceeding $250,000 for each institution are insured by the Federal Deposit Insurance Corporation at December 31, 2008, and deposits not exceeding $100,000 for each institution were insured by the Federal Deposit Insurance Corporation at December 31, 2007. At December 31, 2008 and December 31, 2007, the Company had uninsured cash and cash equivalents of $712,000 and $337,000, respectively.

Note 13—401(k) Profit Sharing Plan

        The HemaCare Corporation 401(k) Profit Sharing Plan qualifies, in form, under Section 401(k) of the Code. The Company did not pay a matching contribution in 2008 for the 2007 plan year due to the losses sustained in 2007. Due to the improved earnings performance in 2008, the Company accrued $109,000 in 2008 for a matching contribution to be paid in 2009.

Note 14—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.

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Table of Contents

HEMACARE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008

Note 14—Commitments and Contingencies (Continued)

        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 15—Concentration Risk

        The Company provides products and services to healthcare providers, hospitals and research related organizations, all of which are referred to as "customers" for purposes of identifying concentration risk in this section. During 2008, three customers each represented more than 10% of the Company's total revenue from continuing operations. One customer accounted for approximately 17.7% of total revenue, one customer for 16.5% of total revenue and the third customer accounted for 10.6%. The next largest customer accounted for approximately 6.8% of total revenue. The Company's ten largest customers accounted for 70.4% of total revenue. Other than the lease of space for a donor center at a customer's facility, the Company's only relationship with any of these customers is as a provider of blood products and services.

        In addition, consolidations and affiliations within the hospital industry have changed the environment for the blood products segment. The newly consolidated or affiliated hospitals have started to negotiate with the Company as a group, and therefore exert greater pressure on the Company for price discounts. This may force the Company to offer price discounts to retain sales volume that previously would not have been granted if the hospitals were not negotiating as a group.

        During 2008, the Company received goods and services from one major vendor that represented approximately 8.9% of the Company's total operating costs from continuing operations. This vendor provides laboratory services. The next largest vendor represents approximately 7.0% of total operating costs from continuing operations. This vendor provides products that support the Company's cell separation equipment used by both the blood products and blood services segments. The Company has no relationship with either vendor other than as a consumer of the goods and services provided by each.

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