HEMACARE CORP /CA/, 10-K405, 1999-03-31

HEMACARE CORP /CA/
10-K405, 1999-03-31
MISC HEALTH & ALLIED SERVICES, NEC

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K

(Mark one)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For fiscal year ended December 31, 1998

/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the transition period from _______________ to ______________

Commission file number 0-15223

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

State or other jurisdiction of I.R.S. Employer I.D.
incorporation or organization: California Number: 95-3280412
----------- ----------
4954 Van Nuys Boulevard
Sherman Oaks, California 91403
(Address of principal executive offices) (Zip Code)

-----------------

Registrant's telephone number, including area code: (818) 986-3883

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

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: YES X 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: X

As of March 26, 1999, 7,281,120 shares of Common Stock of the Registrant
were issued and outstanding. The aggregate market value of the Common Stock
held by non-affiliates of the Registrant on that date (based upon the
closing price of the Common Stock as reported by NASDAQ National Market
System was approximately $4,578,970.

Portions of the Registrant's definitive Proxy Statement for its June 17,
1999 Annual Meeting of Shareholders (which has not been filed as of the date
of this filing) are incorporated by reference into Part III. Such proxy
statement shall be filed with the Securities and Exchange Commission not
later than 120 days after the registrant's fiscal year ended December 31,
1998.

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<PAGE>

PART I

ITEM 1. BUSINESS.

General
- -------

HemaCare Corporation and its wholly owned subsidiary Coral Blood Services,
Inc. offer a full range of blood services and products to hospitals and
medical centers. HemaCare is the first publicly traded company to be
licensed by the Food and Drug Administration, which regulates the blood
industry, and accredited by the American Association Blood Banks. The
Company has been providing blood services and products in Southern
California since 1978. In October 1998, Coral Blood Services, Inc. was
formed to acquire blood products and services operations in the eastern
United States. The Company now has operations in 12 states.

During the last decade, hospitals, which spend more than $4 billion annually
on blood products and services, have experienced increasing cost containment
pressures. As a result, these institutions are continuously looking for ways
of providing more cost-effective health services. HemaCare has responded to
this need by developing customized blood services programs designed to meet
the specific requirements of each individual hospital customer.

The Company's customers include university teaching hospitals, medical
centers and regional hospitals located in California, Connecticut,
Massachusetts, Maine, New Hampshire, New Jersey, New York, North Carolina,
Rhode Island, Tennessee and West Virginia. Products and services are provided
to these customers under contractual agreements, and in some cases, under
interim arrangements while contractual agreements are being negotiated.
Each customer selects the products and services provided by the Company
which best meet its needs,including:

- - Product procurement. (Apheresis platelets and plasma and whole blood
derived components.)
- - Therapeutic apheresis. (Plasma exchange, cell depletion and
immunadsorption procedures.)
- - Stem cell collection and cryopreservation.
- - Interoperative autologous transfusion.
- - Donor center management.
- - Donor sample testing.
- - Blood management consulting.
- - Research and clinical trial protocols.

Several of the Company's customers have elected to outsource some or all of
their blood services to the Company in a blood management program
arrangement.

The Company's corporate headquarters are located in Sherman Oaks,
California, north of downtown Los Angeles. This location also serves as the
regional office for Southern California operations. Other regional offices
are located in Portland, Maine, Yonkers, New York and Chapel Hill, North
Carolina.

The HemaCare scientific advisory board, established in 1997, provides input
and counsel to the Company's board of directors and management on technical
and regulatory matters as well as participating in periodic management
meetings. Chaired by Joshua Levy, MD, the advisory board is comprised of
nationally recognized experts in the fields of blood banking, apheresis
technology and application, and regulatory compliance.

Certain medical terms included in the following discussions are further
explained in a glossary located at the end of this Item 1. HemaCare
Corporation and its wholly owned subsidiaries are collectively referred to
herein as "HemaCare" or the "Company", and Coral Blood Services, Inc. is
referred to as "CBS".

Blood Management Programs
- -------------------------

A HemaCare Blood Management Program ("BMP")is an arrangement in which a
hospital outsources some or all of its blood procurement and donor center
management functions to HemaCare while retaining the convenience and
efficiencies of an in-house program.

HemaCare supplies the BMP customer with blood products from collections at
the customer's donation center or from collections at other HemaCare
donation sites or products purchased by HemaCare from outside suppliers.
HemaCare establishes and operates a blood donation center under the name of
the sponsoring BMP hospital. Typically, the center is staffed, operated and
managed by the Company which is also responsible for regulatory compliance.
A Blood Management Program aligns the interests of the Company and its
hospital customer, providing the customer with a "partner" in achieving its
financial, regulatory compliance and patient service goals. The BMP model
continues to evolve in response to the changing needs of the Company's
customers.

Dartmouth-Hitchcock Medical Center

Mary Hitchcock Memorial Hospital at Dartmouth-Hitchcock Medical Center ("DHMC")
outsources its apheresis platelet and plasma collections, autologous and
directed donation collection services, therapeutic apheresis and stem cell
collection services and blood related research in a BMP arrangement. Located
in Lebanon, New Hampshire, DHMC, a 430 bed hospital, is affiliated with
Dartmouth College and is the teaching hospital for Dartmouth College Medical
School. DHMAC, a major research center, serves as the tertiary care center
for New Hampshire and adjacent areas of Vermont. The Company collects apheresis
products for the hospital and provides autologous and directed donations
services and conducts a donor-retested plasma program. Therapeutic apheresis
and stem cell collection services are provided in the hospital-based donor
room or at the patient's bedside, as directed by the responsible physician.
The Company's current BMP agreement with DHMC extends through October 2001.

Maine Medical Center

Located in Portland, Maine, the Maine Medical Center ("MMC"), a 600 bed
teritiary care, teaching hospital, is the largest medical center in northern
New England. In 1994, MMC elected to outsource its apheresis platelet
collections and, in 1997, added therapeutic apheresis functions and stem
cell collections to its BMP arrangement. The Company provides substantially
all of the apheresis platelets used by MMC from products collected at its
donor facility in Portland and on mobile platelet drives conducted in the
greater Portland area. Mobile therapeutic apheresis and stem cell collection
services are provided to MMC's patients and physicians by specially trained
registered nurses. In addition, the Company offers low density lipoprotein
("LDL") therapeutic services to patients with extremely high blood
cholesterol levels which are resistant to dietary and drug treatments.

St. Vincent Hospital

Located in Worcester, Massachusetts, St. Vincent Hospital ("St. Vincent")
is a 330 bed tertiary and acute care hospital serving central Massachusetts.
In March 1998, St. Vincent outsourced its entire blood procurement and donor
room function on an exclusive basis. Services provided by the Company to
St. Vincent include procurement of blood products, whole blood and apheresis
platelet collections, autologous and directed donations services and
therapeutic apheresis services. An integral part of these services is the
operation of a donor room located in St. Vincent hospital. This facility
provides a convenient location for patients and their families to donate
blood.

University of North Carolina

The University of North Carolina's BMP arrangement designates the Company as
the primary provider of apheresis products to the UNC Hospitals in Chapel
Hill, North Carolina ("UNC"). The Company also provides apheresis platelet
plasma products to UNC. The Company collects these products in its hospital-
based donor room and on mobile blood drives. The 660 bed UNC facility is the
teaching hospital for the University of North Carolina School of Medicine
and is an active blood-banking research institution.

University of Southern California

The University of Southern California ("USC") BMP agreement established
HemaCare as the primary provider of blood products and services to the
patients and physicians of USC/Norris Comprehensive Cancer Center and
Hospital and USC University Hospital. Together these hospitals comprise
a 340 bed tertiary care and research center. An integral part of the USC
program is a blood donation center located on the USC Health Sciences
Campus. In addition, the Company provides mobile therapeutic apheresis and
stem cell collection services to USC. The BMP agreement, which was recently
renewed, is in effect until March 2002.

Citrus Valley Health System

In October 1996, Citrus Valley Health Partners named HemaCare as the
exclusive provider of blood services to its three-hospital network in the
Los Angeles metropolitan area. This program proved to be uneconomic, and in
July 1998 was terminated.

Blood Products
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General

The Company sells single donor apheresis platelet products ("apheresis
platelets" or "platelets"), apheresis plasma and whole blood derived
components ("components") such as red blood cells and fresh frozen plasma to
more than 25 hospital customers.

Blood products are collected at each of the BMP donor centers. These
products are generally sold to the BMP hospital. Components are manufactured
at the Sherman Oaks facility and at St. Vincent Hospital.

Single Donor Apheresis Platelets

The Company collects single donor platelets, using automated blood
separation technology, at its Sherman Oaks, California location, each of the
BMP locations and at two sponsoring hospitals in the metropolitan New York
area.

Platelets are sold to hospitals for transfusion into cancer patients
undergoing chemotherapy, patients undergoing major surgery such as open
heart surgery or transplant procedures, and trauma or other conditions
associated with massive blood loss.

Platelet apheresis technology involves the use of a cell separator operated
by a trained clinician. The procedure removes blood from a donor through a
needle in one arm, pumping the blood through the cell separator where the
desired platelet component is retained and returning the blood, including
the red cells, to the donor. The procedure typically requires one to three
hours and may be done up to 24 times per year, since donating platelets does
not deplete donors of red blood cells. Temperature control and constant
movement (using a rotator) maintain the platelets' viability for five days.
When necessary to meet its customers' needs, the Company also purchases
platelet products for resale. Such platelet suppliers are Food and Drug
Administration ("FDA") licensed and accredited by the American Association
of Blood Banks ("AABB"). Approximately 4% of platelets sold by the Company
in 1998 were purchased from outside suppliers.

In order to attract and retain qualified donors at its Sherman Oaks,
California location, the Company reimburses these donors for their time and
commitment. As a result, the Company has developed a select group of repeat
donors who are tested regularly in connection with their frequent donations.
Cash reimbursement to donors is variable, based on the number and frequency
of donations, and includes a bonus program. Most southern California
platelets products are obtained from paid donations made at the Company's
Sherman Oaks location. Unless extended, the law enabling HemaCare to
sell apheresis platelets obtained from compensated donors in California
will expire in December 2001, which could have a material adverse affect on
the Company's revenue and net income. The Company is evaluating a number of
alternatives with regard to continuing its California based apheresis
platelet business after the year 2001. The Company also recruits non-cash
compensated donors for its BMP donor centers and hospital sponsored
collection programs.

Platelet donors who are compensated must pass the Company's stringent donor
screening standards which include a pre-donation and annual physical
examination by a physician. Volunteer and compensated donors are subject to
a prescreening interview before each donation, and all platelet donations
are subject to infectious disease testing. After each collection, the
platelets are tested, labeled and delivered to hospital customers.

Component Blood Products

HemaCare provides whole blood derived component products such as red blood
cells, fresh frozen plasma and cryoprecipitate to its BMP and other
customers. These component blood products included both purchased products
and products collected and manufactured by the Company under its FDA license
and under the registration of BMP customers. The Company began collecting
whole blood donations and manufacturing component products primarily for
sale to its BMP customers in December 1995. Whole blood donors must pass
stringent FDA and AABB endorsed screening standards. Donations are tested at
FDA licensed laboratories, including the Company's Sherman Oaks laboratory,
and component products are manufactured at the Sherman Oaks and St. Vincent
Hospital facilities. In 1998, the component products were sold primarily to
the USC Hospitals, Citrus Valley Hospitals and St. Vincent Hospital, under
the terms of the BMP agreements with these hospitals. In 1997 and 1996, a
significant volume of component sales were made to non-BMP customers in
California. Most of these component products were purchased. All purchased
components sold are acquired under contractual relationships with blood
centers located in the U.S. All such suppliers are FDA licensed and
accredited by the AABB.

Blood Services
- --------------

General

The Company provides therapeutic apheresis, interoperative autologous
transfusion and donor testing services. Since its inception, the Company has
performed more than 36,900 therapeutic apheresis procedures in the treatment
of more than 27 diseases. The Company now provides these services in 11
states on the east and west coasts.

Therapeutic Apheresis

Therapeutic apheresis ("therapeutics" or "therapeutic services") is a
technique for removing harmful components from a patient's blood and is used
in the treatment of autoimmune diseases and other disorders. Therapeutic
services are provided upon the request of a hospital which has received an
order from a patient's physician. Therapeutic treatments are
administered using mobile units operated at the patient's bedside or in a
hospital outpatient setting. The mobile therapeutics equipment includes a
state-of-the-art blood cell separator and the disposables and supplies
needed to perform the procedure. Treatments are administered by trained,
nurse-specialists, 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 Hospital Organizations ("JCAHO"),
under the supervision of a specially trained physician.

The Company provides therapeutic services using all currently recognized
treatment methods: 1) plasma exchange and cell depletion, 2) in-line
immunoadsorbant columns, and 3) stem cell rescue and cryopreservation.

Plasma Exchange and Cell Depletion

The primary blood services provided by the Company, accounting for 88% of
therapeutics procedures in 1998, were conventional plasma exchange and
cell depletion therapy. These procedures involve removing harmful
substances from a patient's blood, using automated blood separation
equipment. As the patient's blood flows through the cell separator,
abnormal or excess proteins or components associated with the disease
being treated are selectively removed. The remaining blood components
are returned to the patient.

Most treatments involve the removal of two to four liters of abnormal plasma
or certain cellular components. Replacement fluids, most commonly albumin,
are used to maintain the patient's blood volume. In late 1996, a shortage of
albumin arose when a major U.S. manufacturer was required by regulatory
agencies to temporarily cease operations. This manufacturer has not yet
fully resumed operation. As a result, the price of albumin more than doubled
during 1997, and demand for albumin continues to exceed the supply. Although
HemaCare has increased the price charged to its customers for albumin, the
Company has not been able to recover the full amount of the cost increase.

Patients suffering from diseases such as multiple myeloma, HIV-
polyneuropathy, leukemia, systemic lupus erythematosus, scleroderma,
hyperviscosity syndrome, thrombocytosis, myasthenia gravis and Guillain-Barre
syndrome may benefit from therapeutic apheresis treatments. A patient may
require from four to twenty treatments over a period of time ranging from a
few days to several months. Each treatment may last from two to four hours.

Immunoadsorption

Since 1988, the Company has provided a second-generation therapeutic
treatment which uses an in-line immunoadsorption column to modify the immune
response. Recently, the FDA approved this procedure for the treatment of
moderate to severe rhemuatoid arthritis ("RA"). This application may
significantly increase the demand for immunasdsorption column procedures.
It is anticipated that additional research will demonstrate the efficacy of
further of immunadsorption therapy in additional applications.

Stem Cell Rescue and Cryopreservation

Since 1990, the Company has been providing peripheral stem cell
collection services in California. In this application, stem cells
(those cells which mature into all the different cellular components of
blood) are collected from a cancer patient using apheresis technology.
The patient then receives a series of intensive chemotherapy treatments
followed by reinfusion of the patient's own stem cells. In 1994, the
Company added cryopreservation (processing, freezing and short-term
storage of stem cells) to stem cell collection to provide a full-service
program. This program consists of mobile, peripheral stem cell
collection for certain cancer patients, followed by cryopreservation of
the stem cells prior to reinfusion into the treated patient. The addition
of cryopreservation capability enables the Company to provide a full-
service stem cell program to community hospitals which may choose not to
establish their own in-house capabilities in the early development of
this technology.

The Company's cryopreservation service capacity is currently under-
utilized because of the reluctance of third party payors to reimburse
community hospital customers for this procedure. The procedure is
generally reimbursed only to larger hospitals with established in-house
programs. The Company believes that increasing pressure from physicians
and patients may, in the future, result in greater acceptance of the
procedure for reimbursement by third party payors to community hospitals
and that the Company will be well positioned to perform the service with
its experienced and qualified personnel.

Joshua Levy, M.D., a shareholder, founder and medical director of the
Company, through his private practice, treats patients who require
therapeutic services. The Company's ability to provide these services
may be limited by Federal self-referral laws and regulations.
(See "Government Regulation.")

Interoperative Autologous Transfusion

Interoperative autologous transfusions ("IAT") services offer an alternative
to allogeneic transfusion, providing important benefits to the patient. The
Company offers IAT services primarily in California and West Virginia.

An IAT procedure involves recovery of blood lost during surgery, cleaning of
this blood and reinfusion of the recovered blood into the surgery patient.
IAT may eliminate the risk of alloimmunizaton, hepatitis and AIDS from
transfused blood.

The Company provides IAT services using standard operating procedures
designed to insure strict adherence to the highest quality standards.
HemaCare's IAT procedures are based on guidelines developed by the AABB and
the JCAHO and comply with the requirements of applicable federal and state
regulatory agencies.

Discontinued Operations

From 1990 through 1995, the Company, through its wholly-owned subsidiary
HemaBiologics, Inc., conducted research and development activities relating
to Immupath, an anti-HIV hyperimmune plasma product. In November 1995, the
Company's Board of Directors decided to terminate the research and
development activities. As a result of this decision, the Company
established a $1 million reserve for losses during the disposal period,
including $600,000 for a contingent liability related to a dispute with
Medicorp, Inc. ("Medicorp"), a licensor of the research product. In July
1996, the Medicorp dispute was settled without any payment by the Company.
As a result, the Company recognized a $600,000 gain on disposal of
discontinued operations in the third quarter of 1996.

In June 1996, the Company agreed to sell most of its research and
development assets, including its FDA plasma licenses and a plasma
collection center for which the Company received cash and a promissory note,
collateralized by certain of the assets sold. The note was repaid in March
1997, resulting in a gain of $120,000 on disposal of discontinued operations
in the first quarter of 1997.

During the wind down of the research and development operations, the Company
manufactured a supply of Immupath sufficient for the patients still
receiving treatment for a limited period of time. There are currently two
patients receiving Immupath treatments. In the fourth quarter of 1997, the
Company reviewed and revised its estimate of the remaining costs of
discontinued operations, including the costs to treat remaining patients and
the other continuing liabilities of the discontinued operations, and
recognized an additional gain on disposal of $173,000. The Company does not
expect discontinued operations to have a material impact on its future
operating performance.

Sales to Major Customers

Sales of products and services to USC/Norris Comprehensive Cancer Center and
Hospital and USC University Hospital (the "USC Hospitals") comprised 16%,
18% and 16% of the Company's revenues in 1998, 1997 and 1996, respectively.
Although the USC Hospitals are not under common ownership, the Company's
agreements with these hospitals are interrelated. Loss of sales to the USC
Hospitals could have a material, adverse impact on the Company's net income.
The Citrus Valley Health Partners Hospitals accounted for approximately 13%
of the Company's total 1997 sales.

Competition
- ------------

General

The Company competes on the basis of its responsiveness to customer needs,
value-based pricing and the high quality of its services and products. The
Company's competitors are generally not for profit entities including the
American Red Cross ("ARC"), and regional and community blood banks. Many of
these competitors have greater financial, technical and personnel resources
than the Company, and additional companies may enter the field, increasing
competition. In addition, some larger hospitals have in-house blood
collection and therapeutic apheresis service capabilities which do not
compete directly with the Company, but do reduce the market for its
services.

To date, the ARC has aggressively responded to competition from the Company,
and management believes that such competition will continue. An example is
the Company's experience in St. Louis. Prior to the opening of Gateway, a
blood management program initiated by the Company in late 1995, the ARC
provided virtually all blood products to hospitals in the greater St. Louis
area. Immediately following the opening of Gateway, the ARC decreased its
price for red blood cells in excess of 10%. This price decrease materially
impacted Gateway's ability to market its products and services profitably,
and Gateway was subsequently sold in August 1997.

In Southern California, the Los Angeles Region Blood Service of the American
Red Cross (the "Los Angeles ARC") employed pricing practices which the
Company alleged were in violation of antitrust laws. These pricing practices
may have compelled Los Angeles ARC customers to purchase certain blood
products from the ARC at higher prices than those offered by the Company,
unfairly limiting the Company's ability to market its products in this
region. In December 1995, the Company filed an antitrust and unfair
competition complaint against the ARC with the United States District Court
in the Central District of California to recover damages and secure
injunctive relief. In June 1997, this suit was settled. Although the terms
of the settlement are confidential, the Company believes that the settlement
has improved its ability to obtain and retain blood product customers.

The Company has developed several blood product and service programs in
response to the needs of its customers. These include a depot system and,
most recently, its BMP outsourcing program. The Company believes that its
strategy of offering blood product and service programs tailored to the
requirements of individual customers favorably differentiates it from other
suppliers of blood products and services and that outsourcing programs
provide opportunities for expansion of the Company's businesses. Management
consistently reevaluates and revises its outsourcing programs to meet
competitive demand. However, there can be no assurance that the Company's
future outsourcing programs will be well received by hospital customers or
be profitable, or that others will not successfully introduce similar
programs that will compete with those of the Company. In addition, further
growth may require that the Company obtain additional financing or partner
with other blood product and service providers. Accordingly, there can be no
assurance that the Company will be successful in marketing revised
outsourcing programs or that, if successful, it will be able to obtain the
funds necessary to finance such programs.

Blood Products

The primary competitor for the Company's single donor platelet and whole-
blood component business is the ARC. Community and hospital-based blood
banks also compete with HemaCare to a lesser extent. Key competitive factors
in the industry include price, responsive service and quality of product.

Blood Services

Competitors for the Company's therapeutic blood services business are
primarily regional and community blood banks and local kidney specialists
(nephrologists) who supplement hemodialysis services with therapeutic
apheresis services. In addition, some of the diseases that are treated by
therapeutic apheresis can also be treated by other medical therapies. Since
therapeutic apheresis treatment requests are often sporadic and
unpredictable, most community hospitals cannot afford to equip, staff and
maintain an apheresis unit. The Company's mobile service enables such
hospitals to offer state-of-the-art therapeutic apheresis services to their
patients on an "as needed" basis without incurring the fixed costs
associated with providing these services from in-house resources.

Marketing
- ---------

HemaCare markets its products and services as components of custom-tailored
programs developed to meet the needs of specific customers. The Blood
Management Program is the most recent application of this marketing
strategy. The Company uses a depot system for distributing its blood
products to BMP and other large volume customers which enhances convenience
and product availability. The depot system provides the customer with an on-
site inventory of blood products stocked by the Company under a standing
order. Other marketing tools include a combination of medical education,
technical and tradeshow presentations, advertising and promotional programs,
in-person sales and other marketing programs directed to selected
physicians, hospitals and donor groups.

Human Resources
- ---------------

At March 1, 1999, the Company had approximately 81 full-time and 76 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 are represented by a labor union. The
Company considers its relations with its employees to be good.

Supplies
- ---------

The Company maintains relationships with numerous suppliers who provide cell
separator equipment, disposables, supplies, replacement fluids, testing
services and purchased blood products. Generally, the Company has
experienced little difficulty in obtaining most of its equipment and
supplies from its sources. However, if there were material changes in the
sources of its supplies, the Company's operations could be adversely
affected.

Since late 1996, the Company has experienced difficulty in obtaining red
blood cell products from suppliers, and the cost of products obtained has
increased. Industry data indicates that HemaCare's experience reflects a
nationwide decrease in the availability of red blood cell products.
According to the National Blood Data Resource Center, collections of whole
blood units decreased 6% between 1994 and 1997, while blood transfusions
increases slightly. Whole blood donations collected at the Company's BMP
donor centers provided approximately 15% of the red blood cell products sold
by the Company in 1998. Although this percentage is expected to increase in
1999, the Company will continue to rely heavily on purchased red blood cells
for the foreseeable future. If the Company is unable to manufacture or to
purchase red blood cells at a price that exceeds its contract prices to
customers, the Company's profitability will be adversely affected.

The Company relies on blood donors to provide the platelets and whole blood
required to produce the blood products manufactured and sold by the Company.
The Company, unlike the ARC and most community blood banks, compensates
platelet donors who donate at its Sherman Oaks facility thereby enhancing
its ability to retain a pool of repeatedly tested platelet donors. Sales of
apheresis platelets from paid donors may be prohibited by California law
after December 2001. (See Government Regulation). Platelet and whole blood
donors at the Company's BMP donor centers are not compensated. The Company
competes directly with the American Red Cross and other blood banks in
recruiting its volunteer donors. The growth of the Company's manufactured
blood products business is dependent on the Company's ability to attract,
screen and retain qualified compensated and non-compensated donors.

Albumin is the most commonly used replacement fluid in therapeutic apheresis
procedures. In late 1996, a shortage of albumin arose when a major U.S.
manufacturer was required by regulatory agencies to temporarily cease
operations. This manufacturer has not yet fully resumed its operations, and
albumin continues to be in short supply. As a result of the shortage, the
price of albumin to HemaCare has more than doubled.

Government Regulation
- ----------------------

Providers of blood products and services are regulated by the FDA and state
licensing authorities, as well as being subject to accreditation by the
AABB. An FDA Establishment License allows the license holder to sell
licensed products across state lines. In contrast, an FDA registration
permits sales of blood products only within a state.

Most of the products produced at the Company's Sherman Oaks location are
licensed for interstate distribution under the Company's Food and Drug
Administration Establishment license. In 1998, the Maine center operated
under the FDA registration of Maine Medical Center. Effective January 1999,
the Maine center is authorized to distribute products intrastate under its own
FDA registration. Other east coast centers operate under the FDA
registration of the sponsoring hospital, and accordingly, may only
distribute products collected as directed by the sponsoring hospital. It is
the Company's intention to extend its FDA licensure to certain CBS
locations.

In response to the potential dangers of blood borne infections such as
hepatitis and HIV, the FDA now requires that blood products be manufactured
in accordance with Current Good Manufacturing Practices ("cGMPs") which have
long been applied to the manufacturing of pharmaceuticals. HemaCare has
maintained a near perfect regulatory record for 20 years. This record, along
with its licenses and accreditations, are critical to the Company's ability
to attract and retain customers who want to decrease their regulatory
compliance burden by outsourcing all or a portion of their blood-related
activities.

The Company's licensed and accredited laboratory performs the
various tests required by the FDA and State of California to ensure the
purity, potency and quality of the blood products that it sells in
California. This laboratory is staffed by state licensed medical
technologists and laboratory technicians. Testing for products collected in
other locations is outsourced to FDA licensed laboratories under contract
arrangements. The Company carefully qualifies its outsource vendors and
regularly audits their operations to assure compliance with stated
standards.

Since 1976, California law has prohibited the infusion of blood products
into patients if the donors of those products were paid unless, in the
opinion of the recipient's physician, blood from a non-paid donor was not
immediately available. Apheresis platelet products obtained from paid
donors, including the Company's Sherman Oaks center's paid donors, are
exempted from this law by a state statute passed in late 1994 which contains
a "sunset" provision. Unless a new exemption is obtained, the existing
exemption will expire under its sunset provision on December 31, 2001,
which could have a material adverse affect on the Company's revenue and
net income. The Company is evaluating a number of available options with
regard to the expiration of the extension.

State and federal laws set forth antikickback 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.

Joshua Levy, M.D., medical director of the Company and a shareholder, through
his private practice, treats patients who require therapeutic services. Sales
by the Company to unaffiliated hospital customers for therapeutic services
provided to Dr. Levy's patients amounted to approximately 4% ($589,000), 5%
($584,000) and 6% ($675,000) of the Company's total revenues for 1998, 1997
and 1996, respectively. There are no agreements between Dr. Levy, or the
Company, and the Company's hospital customers that require the hospitals to
select HemaCare to provide therapeutic services to the hospital's patients.

Amendments to the Federal self-referral laws and related regulations which
became effective in 1995 could restrict the Company's ability to provide
therapeutic services to Dr. Levy's patients who are covered by Medicare or
MediCal. It is estimated that revenues from these patients represented
approximately 2% ($295,000)of the Company's 1998 revenues. These regulations
are complex, and in early 1996, the Company requested a clarification of
their application to its business from Health Care Financing Administration
("HCFA"). To date, the Company has not received a response to this request.
However, in January 1998, proposed new regulations were issued for comment.
The proposed regulations do not specifically address therapeutic apheresis
services, and the Company has requested a revision of these regulations to
provide a clear exemption for these services. The comment period for the
proposed regulations ended in May 1998, but the new regulations have not yet
been issued. If the new regulations do not provide an exemption for
therapeutic apheresis services, the Company could lose the future revenue
from its services for Dr. Levy's Medicare and MediCal patients.

Health care 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.

Professional and Product Liability Insurance
- --------------------------------------------

The nature of the Company's business is such that it may be subject to
substantial liabilities for personal injury. There can be no assurance that
potential insurance claims will not exceed present coverage or that
additional insurance coverage would be available at affordable premium
costs. If such insurance were ineffective or inadequate for any reason, the
Company could be exposed to significant liabilities. HemaCare has medical
professional liability insurance in the amount of $2,000,000 for a single
occurrence and $5,000,000 in the aggregate per year.

California law and the laws of virtually all other states classify the
provision and use of whole blood, plasma and blood products for the purpose
of injections and transfusions into human beings as a service rather than
the sale of a product. Therefore, the Company does not believe it is
subject to product liability claims as a result of injuries arising out of
the therapeutic infusion of its blood products and does not intend to obtain
product liability insurance at this time.

Glossary
- ---------

Albumin - A protein based fluid derived from human plasma, commonly used to
replace the plasma removed in a plasma exchange or cell depletion therapeutic
apheresis procedure.

Antibodies - Protective substances, protein in nature, circulating in body
fluids as the result of exposure to a specific antigen. Chemically active
against that antigen only.

Autoimmune Diseases - Those diseases in which the patient's immune system
has become overly active to the point where it produces antibodies which are
directed against its own tissues or cells.

Autologous - A blood product obtained from a patient and subsequently
reinfused into that patient.

Components - The products manufactured from whole blood donations, including
red blood cells, fresh frozen plasma and cryoprecipitate.

Cryopreservation - The process of freezing tissues or cells, usually in
protective fluids, and storage at extremely low temperatures in a frozen
state (e.g., -70 degrees C or colder).

Human Immunodeficiency Virus (HIV) - The infectious agent of the disease
commonly referred to as Acquired Immune Deficiency Syndrome (AIDS).

Immunoadsorbant Column - A device through which plasma is passed in order to
separate or remove certain harmful components such as immune complexes.

Plasma - The liquid portion of whole blood; composed of a mixture of soluble
proteins including antibodies, minerals and nutrients.

Platelets - One of the cellular components of blood involved in the blood
clotting process.

Platelet Apheresis - The process of removing blood from a donor, separating
it into its various components and retaining the concentrated platelets
which will then be transfused into a patient deficient in platelets. The
remaining blood components are returned to the donor.

Stem Cells - Cells which originate in the bone marrow and mature into the
different cellular components of blood. Frequently transfused into certain
cancer patients in order to facilitate regeneration of blood components
after bone marrow has been purposely destroyed by chemotherapy or radiation.

Therapeutic Apheresis - The application of apheresis technology to the
clinical treatment of autoimmune diseases and blood cell disorders by
removing selected, abnormal components or cells and returning all other
components.

ITEM 2. PROPERTIES.

The Company occupies a 12,000-square foot facility in Sherman Oaks,
California, where it maintains its corporate office and operates a platelet
apheresis center, a blood bank laboratory, a manufacturing facility for
whole blood components and a distribution center. On August 1, 1998, the
lease on this space was extended for a four-year period ending October 31,
2002.

The USC Blood Donor Center occupies a 1,600 square foot facility located in
Los Angeles, California, under a lease with a rolling one year term. The
Citrus Valley Blood Donor Center, which was closed in July 1998, occupied a
2,300 square foot facility located in Covina, California. The Company is
currently seeking to sublease this space. Under its terms, the Citrus Valley
Center lease expires in April 2003, however, HemaCare may terminate this
lease any time after April 2000, under certain circumstances.

The Company assumed several existing leases in connection with the October
23, 1998 purchase of the assets of Coral Therapeutics, Inc. The
Company now occupies a 2,121 square foot donor center facility in South
Portland, Maine and a 1,278 square foot office space in Yonkers, New York.
The Maine lease expires September 30, 1999 and the New York lease expires
August 31, 2001. The St. Vincent BMP Donor Center occupies a 879 square foot
facility located in St. Vincent Hospital in Worcester, Massachusetts under
the terms of the related BMP agreement. The UNC Blood Donor Center is
located in a 1,200 square foot facility in the UNC Hospitals. The lease on
this space term is concurrent with the term of the BMP agreement.

ITEM 3. LEGAL PROCEEDINGS.

In December 1995, the HemaCare filed an antitrust and unfair competition
complaint to recover damages and secure injunctive relief against the
American Red Cross ("ARC") in connection with ARC pricing practices in
Southern California. The Company believed that these pricing practices may
have compelled Southern California ARC customers to purchase certain blood
products from the ARC at prices higher than those offered by the Company. In
June 1997, this suit was settled. Although the terms of the settlement are
confidential, the Company believes that the settlement may ultimately
improve its ability to obtain and retain blood product customers.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

None.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS

Market for Common Stock
- -----------------------

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

The following table sets forth the range of high and low closing bid prices
of the Common Stock, as reported by Nasdaq and the Nasdaq market system, for
the quarters ended March 31, June 30, September 30 and December 31, 1998 and
1997. These prices reflect inter-dealer quotations, without retail markups,
markdowns or commissions, and do not necessarily represent actual
transactions.

1998 1997
Quarter ended High Low High Low
- -------------- ---- ---- ---- ----
<S> <C> <C> <C> <C>

March 31 $0.78 $0.38 $3.13 $2.03

June 30 $0.88 $0.38 $2.50 $1.06

September 30 $0.53 $0.28 $1.56 $0.75

December 31 $0.81 $0.13 $0.97 $0.38

</TABLE>

No cash dividends had been paid as of March 1, 1999. The Company does not
anticipate paying cash dividends in the foreseeable future. As of March 1,
1999, there were approximately 334 holders of record of the Company's Common
Stock.

On October 22, 1998, the Company issued 450,000 shares of its Series B
Senior Convertible Preferred Stock ("Series B Preferred Shares") to Comdisco,
Inc. ("Comdisco") in connection with the acquisition from Comdisco of assets
of Coral Therapeutics, Inc. ("Coral"). The Series B Preferred Shares are
convertible into 500,000 shares of HemaCare Common Stock, at the option of
the holder, one year after issuance without payment of further consideration.
In addition, and as part of the asset purchase, HemaCare (i) has entered into
non-competition agreements with certain former managers of Coral pursuant to
which the Company expects to issue 60,000 common shares and warrants to
purchase 90,000 shares of Common stock at an exercise price per share of
$0.90 per share, and (ii) expects to issue warrants for 35,000 shares of common
stock at an exercise price of $0.31 per share to consultants who assisted in
the acquisition. The warrants to be issued will expire in October 2003. The
Company has relied Section 4(2) of the Securities Act of 1933, as amended,
and/or Regulation D, thereunder, in connection with the issuance of these
securities.

ITEM 6. SELECTED FINANCIAL DATA.

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

Year Ended December 31,
(In Thousands, except Per Share Data)
1998 1997 1996 1995 1994
------ ------- ------ ------- ------
<S> <C> <C> <C> <C> <C>
Revenues........................ $13,124 $11,101 $10,921 $10,783 $10,847
Operating profit................ 3,122 1,907 1,234 2,559 2,963
Income (loss) from continuing
operations..................... 745 37 (1,090) 480 676
Discontinued Operations:
Loss from discontinued
operations..................... - - - (902) (2,964)
Gain (loss) on disposal
of discontinued operations..... - 293 600 (3,114) -
Net income (loss)............... 745 330 (490) (3,536) (2,288)

Basic Per Share Amounts:
- -------------------------
Income (loss) from continuing
operations..................... $ 0.10 $ 0.01 $ (0.17) $ 0.08 $ 0.13
Income (loss) from discontinued
operations..................... - 0.04 0.09 (0.70) (0.59)
Net income (loss)............... 0.10 0.05 (0.08) (0.62) (0.45)

Diluted Per Share Amounts:
- ---------------------------
Income (loss) from continuing
operations..................... 0.10 0.01 (0.17) 0.08 0.13
Income (loss) from discontinued
operations..................... - 0.04 0.09 (0.69) (0.57)
Net income (loss)............... 0.10 0.05 (0.08) (0.61) (0.44)

Total assets.................... $ 7,662 $ 4,384 $ 4,776 $ 4,456 $ 6,289
Long-term debt and capital lease
obligations, net of current
portion........................ 1,118 209 503 649 287
Shareholders' equity............ 3,291 2,402 2,023 1,226 3,900

</TABLE>

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.

All comparisons within the following discussions are to the previous year.

In October 1998, the Company, through its subsidiary Coral Blood Services,
Inc. ("CBS"), acquired existing blood products and services operations in
the eastern United States. These operations are primarily comprised of blood
management programs and other blood services provided to hospitals and
medical centers. Presently, CBS is providing services to its customers under
interim arrangements, while negotiating new contractual agreements.

The Company operates five blood management programs. The University of
Southern California ("USC") program, initiated in 1996, and four east coast
programs which were operated by Coral Therapeutics, Inc. prior to October
1998. The east coast programs are Dartmouth-Hitchcock Medical Center
("DHMC"), Maine Medical Center ("MMC"), St. Vincent Hospital ("St. Vincent")
and University of North Carolina ("UNC").

In late 1995, the Company initiated the Gateway Community Blood Program
("Gateway") located in St. Louis, Missouri, and in October 1996 the Citrus
Valley Health Partners ("Citrus Valley") Blood Management Program located
in southern California, commenced. Both the Gateway and Citrus Valley BMPs
failed to meet the Company's profitability criteria. Gateway was sold in
August 1997, and the Citrus Valley contract was terminated in July 1998.

The above programs are collectively referred to as the "Blood Management
Programs" or "BMPs" in the following discussions.

Revenues
- --------

Total revenues increased 18% ($2,023,000) in 1998, compared to an increase of
2% ($180,000) in 1997. The 1998 increase was due to higher Regional Blood
Services ($1,595,000) and Blood Products ($941,000) revenue, partially offset
by a decrease in Blood Management Program revenue. The acquisition of CBS
contributed $1,366,000 of this increase. The 1997 increase was due primarily
to higher Blood Management Program and Regional Blood Services revenue,
offset by lower Regional Blood Products revenue.

Blood Management Programs

Blood Management Program revenue decreased by $513,000 in 1998 and increased
by $1,388,000 in 1997. The 1998 decrease was due primarily to the
disposition of Gateway ($587,000) and termination of the Citrus
Valley contract ($703,000), partially offset by the addition of the
CBS BMPs in ($771,000). The increase in 1997 Blood Management
Program revenue was related to Citrus Valley, which commenced in the third
quarter of 1996. Both Gateway and Citrus Valley were terminated because they
failed to meet the Company's profitability criteria.

Regional Operations

Blood Products
Blood products (apheresis and whole blood component) revenues increased 36%
($941,000) in 1998 after decreasing 41% ($1,789,000) in 1997. The 1998 increase
resulted from an increase in the volume of apheresis platelet sales,
partially offset by a small decrease in the sales price of these products,
and a decrease in the volume of whole blood components sold. The decrease in
1997 revenue was due primarily to the conversion of the Citrus Valley
business to a blood management program. In addition, the volume and sales
prices of apheresis platelets and whole blood components sold to other
customers decreased in 1997.

Blood Services
Regional Blood Services revenue increased by 36% ($1,595,000) in 1998 and 15%
($581,000) in 1997. The 1998 increase resulted from sales of albumin, the
addition of CBS's operations ($565,000) and a higher volume of southern
California therapeutic procedures. In 1997, revenue increased due to a higher
volumes of southern California therapeutic apheresis procedures and donor
testing.

Albumin, a protein replacement fluid, has been in short supply since
regulatory agencies required the shut down of a major manufacturing facility
in late 1996. In 1998, the Company was able to purchase albumin at favorable
prices and sell a portion of this albumin to non-hospital customers. The
volume of southern California therapeutic apheresis procedures increased 8%
in 1998 and 11% in 1997. Revenue per procedure increased 1% in 1998 and 8% in
1997. The 1997 price increase resulted from passing through a portion of the
increased cost of albumin.

The choice of therapeutic apheresis rather than an alternative treatment for
a particular diagnosis often depends on general acceptance by the medical
community and the willingness of third-party payors to reimburse hospitals
for the cost of this treatment. Although HemaCare enjoys a large share of the
southern California therapeutics market, the Company reduced its basic
therapeutic procedure fees to retain a number of its high volume customers in
1997. There was no change in the basic fee in 1998.

The volume of donor tests remained constant in 1998, while the average price
per unit tested increased 7%. In 1997, the Company expanded its outside donor
testing services, more than tripling the number of units tested for customers
in 1996. The increases in testing volume in 1997 were partially offset by
decreases in the average price per unit tested.

Operating Profit
- ----------------

Operating profit as a percentage of revenue ("operating profit margin")
increased 7% in 1998 and 6% in 1997. Both increases resulted primarily from
improved performance of Blood Management Programs and decreased sales of low
profit margin whole blood components.

Blood Management Programs

Blood Management Programs generated profit of $312,000 in 1998 compared to
losses of $210,000 and $963,000 in 1997 and 1996, respectively. The 1998
operating profit resulted from improved performance of the USC program and
elimination of operating losses from Gateway and Citrus Valley. Operating
profit from the USC program increased in 1998 due both to more efficient
donor center operations and a lower cost of apheresis products produced by
the Sherman Oaks operation and sold to the USC hospitals. Of the losses,
$316,000 in 1997 and $1,106,000 in 1996 were related to Gateway's operations
which were sold in August 1997. In addition, the Citrus Valley BMP, which
failed to achieve profitability, was terminated in July 1998. In October
1998, CBS took over operation of four existing BMP's. These operations
contributed to operating profit in the fourth quarter of 1998.

Regional Operations

Blood Products
The operating profit margin on blood product sales increased to 32% in 1998,
from 27% in 1997 and 22% in 1996. Both increases were due primarily due to a
higher profit margin on apheresis platelet sales and decreased sales of low
margin whole blood component products. Apheresis platelet profit margin
increased in 1998 and 1997 as a result of lower per unit production costs,
partially offset by lower per unit sales prices.

In late 1996, the price of red blood cells began to increase and their
availability and profit margin decreased. As a result, Regional Blood
Products revenue from components, principally red blood cells, as a
percentage of total Regional Blood Products revenue, decreased to 8% in 1998,
from 17% in 1997 and 36% in 1996. A portion of the 1997 decrease in Regional
Operations sales of components also resulted from the conversion of Citrus
Valley sales to a BMP arrangement.

Blood Services
The gross profit margin for the blood services decreased by 4% in 1998 and 2%
in 1997. The 1998 decrease was due to the mix of services provided. In
particular, the gross profit margin on albumin is typically lower than on
therapeutic apheresis services. In 1997, the decrease was due to increased
cost of albumin used in therapeutic procedures. The average price per
therapeutic procedure increased in 1997 in response to an increase in the
cost of albumin, a replacement fluid used in most therapeutic procedures.

General and Administrative Expenses
- -----------------------------------

General and administrative expenses increased 18% ($356,000) in 1998 and
decreased 14% ($326,000) in 1997. The 1998 increase was due to severance
payments, compensation cost associated with forgiveness of a related-party
loan, higher CEO compensation and higher legal, director and consulting
fees. In addition, 1997 general and administrative expenses were reduced by
a $71,000 recovery of previously expensed legal fees related to the
Company's lawsuit against the American Red Cross, which was settled in June
1997.

Discontinued Operations
- -----------------------

During the wind down of the research and development operations, the Company
manufactured a supply of Immupath sufficient for the patients still
receiving treatment for a limited period of time, and all remaining HIV
positive plasma was disposed of in 1997. There are currently two patients
receiving Immupath treatments. In the fourth quarter of 1997, the Company
reviewed and revised its estimated costs of discontinued operations,
including on-going cost of patient treatment and other continuing
liabilities related to discontinued operations, and recognized an additional
gain of $173,000. The Company does not expect the discontinued operations to
have a material impact on its future operating performance.

Liquidity and Capital Resources
- -------------------------------

At December 31, 1998, the Company had cash and short-term investments of
$1,660,000 and $600,000 of short-term debt outstanding with the commercial
bank. In February 1999, the commercial bank increased the Company's line of
credit borrowing limit to $1.2 million and converted the $600,000 of debt
to a four year term loan due in 2003, at an interest rate of prime plus 1%.
Under the terms of the credit line agreement, which is in effect until May
31, 1999, the Company may borrow up to 70% of eligible accounts receivable,
up to a maximum of $1.2 million and must maintain certain ratios. The credit
line bears interest at prime plus 0.5%. The Company was in compliance with
all covenants of its borrowing agreement at December 31, 1998, and is the
process of renewing the credit agreement.

Effective November 2, 1998, the Company's common stock is quoted on the OTC
Bulletin Board. Prior to that date, the Company's common stock was listed on
the Nasdaq Small Cap Market ("Nasdaq"). Issuers listed on the Nasdaq SmallCap
Market are required to maintain a minimum bid price of $1.00, and the
Company's common stock has been trading below the minimum price for some
time. Despite requests to Nasdaq for an exception to the minimum bid price
listing requirement, on October 29, 1998, the Company was informed that its
stock would be delisted from the Nasdaq SmallCap market effective the end of
that day. Although the Company's common stock is quoted on the OTC Bulletin
Board, the liquidity of the Company's common stock and the Company's ability
to raise capital may be impaired by the Nasdaq delisting.

The Company's blood products and services businesses, other than certain
blood donor center operations established for the Blood Management Programs
("Centers"), are profitable and cash flow positive. The Company periodically
evaluates the profitability and viability of each of its operating units. As
the result of such an evaluation, the Company sold Gateway's unprofitable St.
Louis-based operations in August 1997 and terminated the Citrus Valley BMP
in July 1998.

The Company is providing services to most of its east coast customers under
interim arrangements, while contractual agreements are negotiated and
finalized. The Company believes that contractual agreements will be
satisfactorily concluded with most of these customers. However, there can
be no assurance that satisfactory contracts can be negotiated with all
major customers, and the loss of one or more major customers could have an
adverse effect on the Company's revenue and operating profit.

Since 1976, California law has prohibited the infusion of blood products
into patients if the donors of those products were paid unless, in the
opinion of the recipient's physician, blood from a non-paid donor was not
immediately available. Apheresis platelet products obtained from paid
donors, including the Company's Sherman Oaks center's paid donors, are
exempted from this law by a state statute passed in late 1994 which contains
a "sunset" provision. Unless a new exemption is obtained, the existing
exemption will expire under its sunset provision on December 31, 2001, in
the event the existing exemption is not extended. The Company is evaluating
a number of alternatives with regard to continuing its California based
apheresis platelet business after the year 2001. However, there can be no
assurance that these initiatives will be successful. Should the Company be
unable to continue to sell apheresis platelets collected from paid donors,
the Company's revenue and operating profit could be materially adversely
effected.

Joshua Levy, M.D., medical director of the Company and a shareholder, treats
patients through his private practice, who require therapeutic services.
Amendments to the Federal self-referral laws and related regulations which
became effective in 1995 could restrict the Company's ability to provide
therapeutic services to Dr. Levy's patients who are covered by Medicare or
MediCal. It is estimated that revenues from these patients represented
approximately 2% ($295,000), 2.6% ($292,000) and 3%($337,000) of the Company's
1998, 1997 and 1996 revenues, respectively. New regulations which have been
proposed but not yet issued may provide an exemption for therapeutic
apheresis services. If the new regulations do not provide an exemption for
therapeutic apheresis services, the Company could lose the revenue from its
services for Dr. Levy's Medicare and MediCal patients. (See "Government
Regulation.")

Management is evaluating opportunities to develop and implement new
outsourcing models, including its Blood Management Program. Because of the
increase in the cost of acquiring red blood cells and their decreasing
availability, it is likely that future HemaCare outsourcing arrangements
will either involve fixed price supply contracts for these products or will
focus on providing specialized donation services, apheresis based products
and services, and other technology based blood therapies. However,
development and introduction of a revised Blood Management Program model or
other outsourcing programs may require that the Company obtain additional
financing or partner with other blood product and service providers. There
can be no assurance that the Company will be successful in developing and
marketing its outsourcing programs, that it will be able to obtain the funds
necessary to finance such programs, that it will be able to obtain a supply
of red blood cells at an economic price or that required partnering
relationships can be developed.

The Company anticipates that positive cash flow from its operations and its
cash and investments on hand will be sufficient to provide funding for its
needs during the next 12 months, including (i) anticipated operating
deficits of certain Centers, (ii) the remaining costs of its discontinued
operations and (iii) other working capital requirements, including capital
and operating lease commitments.

Year 2000 Disclosure
- --------------------

The Company has developed and is implementing a comprehensive program to
address year 2000 issues. The program considers the effect of the Year 2000
on the Company's internal systems, customers, products and services,
production systems, and suppliers and other critical business partners.
Implementation of the Company's plan is substantially complete, and the
Company believes that all identified potential Year 2000 issues have been
effectively resolved. The cost to identify and resolve Year 2000 issues was
not material to the Company's financial results and has been expensed as
incurred. Management does not believe that the there will be a significant
disruption to the Company's business due to Year 2000 issues. However, the
Company has begun contingency planning to address any situations which may
arise in which the planning of the Company or third parties prove to be
inadequate, and where practical alternatives are available. There can be no
assurance that the Company's Year 2000 program or the programs of critical
business partners will be successful, and failure could have a material
adverse affect on the Company's business and results of operations.

Factors Affecting Forward-Looking Information
- ---------------------------------------------

The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
from liability for forward-looking statements. Certain information included
in this Form 10-K and other materials filed or to be filed by the Company
with the Securities and Exchange Commission (as well as information included
in oral statements or other written statements made or to be made by or on
behalf of the Company) are forward-looking, such as statements relating to
operational and financing plans, competition, the effects of discontinued
operations, demand for the Company's products and services, and the
anticipated outcome of contingent claims against the Company. Such forward-
looking statements involve important risks and uncertainties, many of which
will be beyond the control of the Company. These risks and uncertainties
could significantly affect anticipated results in the future, both short-term
and long-term, and accordingly, such results may differ from those expressed
in forward-looking statements made by or on behalf of the Company. These
risks and uncertainties include, but are not limited to, those relating to
the ability of the Company to develop and market profitable outsourcing
programs, obtain additional financing, to achieve profitability in certain
Blood Management Centers, to continue its paid donor business, to retain
existing customers, to improve the profitability of the Company's other
operations, to successfully negotiate contracts with its east coast customers,
to expand its operations, to renew and comply with the covenants under its
bank line of credit, to effectively compete against the ARC and other
competitors, and the effects of the Year 2000. Each of these risks and
uncertainties as well as others are discussed in greater detail in the
preceding paragraphs of this Management's Discussion and Analysis of
Financial Condition and Results of Operations.

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-F-16.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES.

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

The information required by this Item is set forth under the caption
"Election of Directors" in the Company's definitive Proxy Statement to be
filed with the Securities and Exchange Commission and is incorporated herein
by this reference as if set forth in full.

ITEM 11. EXECUTIVE COMPENSATION.

The information required by this Item is set forth under the caption
"Executive Compensation" in the Company's definitive Proxy Statement to be
filed with the Securities and Exchange Commission and is incorporated herein
by this reference as if set forth in full.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

The information required by this Item is set forth under the caption
"Principal Shareholders" in the Company's definitive Proxy Statement to be
filed with the Securities and Exchange Commission and is incorporated herein
by this reference as if set forth in full.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

The information required by this Item is set forth under the caption "Certain
Transactions" in the Company's definitive Proxy Statement to be filed with
the Securities and Exchange Commission and is incorporated herein by this
reference as if set forth in full.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.

The following are filed as part of this Report:

(a) 1. Financial Statements

An index to Financial Statements and Schedules appears on page F-1.

(a) 2. Financial Statement Schedules

The following financial statement schedule is filed herewith:

Schedule II - Valuation and Qualifying Accounts

All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission
are not required under related instructions or are inapplicable,
and therefore have been omitted.

(a) 3. Exhibits

The following exhibits listed are filed or incorporated by reference as
part of this Report.

2.1 Amended and Restated Asset Purchase Agreement between the
Registrant, HemaBiologics, Inc. (a wholly owned subsidiary of the
Registrant) and Atopix Pharmaceuticals Corporation, dated June 26,
1996 incorporated by reference to Exhibit 2.1 to Form 10-Q of the
Registrant for the quarter ended June 30, 1996.

2.2 Asset Purchase Agreement between the Registrant, Gateway Community
Blood Program and Haemonetics Corporation, dated August 1, 1997--
incorporated by reference to Exhibit 2.1 to Form 10-Q of the
Registrant for the quarter ended September 30, 1997.

3.1 Restated Articles of Incorporation of the Registrant--incorporated
by reference to Exhibit 3.1 to Form 10-K of the Registrant for the
year ended December 31, 1995.

3.2 Bylaws of the Registrant, as amended--incorporated by reference to
Exhibit 3.1 to Form 10-Q of the Registrant for the quarter ended
March 31, 1998.

4.1 Warrant Agreement between the Registrant and Medicorp Inc. dated
February 17, 1993--incorporated by reference to Exhibit 4 to the
Current Report on Form 8-K of the Registrant dated February 17,
1993.

4.2 Form of Warrant Agreement between the Registrant and each of the
following consultants: British Far East Holdings, Ltd., Joseph T.
McDonald and E. Keene Wolcott dated September 30, 1994--
incorporated by reference to Exhibit 4.1 to Form 10-Q of the
Registrant for the quarter ended September 30, 1994.

4.3 Warrant Agreement between the Registrant and Torrey Pines
Securities, Inc., dated April 8, 1994--incorporated by reference
to Exhibit 4.2 to Form 10-Q of the Registrant for the quarter
ended March 31, 1994.

4.4 Amendment to Warrant Agreement between the Registrant and Torrey
Pines Securities dated April 3, 1995--incorporated by reference to
Exhibit 4.1 to Form 10-Q of the Registrant for the quarter ended
March 31, 1995.

4.5 Warrant Agreement between the Registrant and M.A. Levy and
Associates dated March 1, 1995--incorporated by reference to
Exhibit 4.7 to Form 10-K of the Registrant for the year ended
December 31, 1994.

4.6 Warrant Agreement between the Registrant and Joseph T. McDonald
dated November 1, 1996--incorporated by reference to Exhibit 4.9
to Form 10-K of the Registrant for the year ended December 31,
1996.

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

4.8 Amended Certificate of Determination, dated March 18. 1998--
incorporated by reference to Exhibit 4.8 of Form 10-K of the
Registrant for the year ended December 31, 1997.

4.9 Certificate of Determination of the Registrant's Series B Senior
Convertible Preferred Stock between the Registrant and Comdisco
Health Care Group dated October 23, 1998--incorporated by
reference to Exhibit 4.1 of Form 8-K of the Registrant dated
November 5, 1998.

4.10 Registration Rights of Shareholders' incorporated by reference to
Exhibit 4.9 to the Current Report on Form 8-K of the Registrant
dated August 19, 1996.

10.1 1986 Employee Stock Option Plan, as amended and restated through
October 1994--incorporated by reference to Exhibit 10.4 to Form
10-Q of the Registrant for the quarter ended September 30, 1994.

10.2 1996 Stock Incentive Plan, as amended, of the Registrant--
incorporated by reference to Exhibit 4.1 to Form 10-Q of the
Registrant for the quarter ended September 30, 1996.

10.3 Office Building Lease dated August 21, 1998 between the Registrant
and Tar Asset Addison Place, L.P.--incorporated by reference to
Form 10-Q for the quarter ended September 30, 1998.

10.4 Employment Agreement between Harold I. Lieberman and the
Registrant, dated September 19, 1988-- incorporated by reference
to Exhibit 10.4 to Form 10-K of the Registrant for the year ended
December 31, 1994.

10.5 Amendment to Employment Agreement between the Registrant and
Harold I. Lieberman, dated September 19, 1989--incorporated by
reference to Exhibit 10.5 to Form 10-K of the Registrant for the
year ended December 31, 1994.

10.6 Revolving Credit Agreement between the Registrant and Bank Leumi
USA, dated February 5, 1999 and related Promissory Note.

10.7 Promissory Note between the Registrant and Bank Leumi USA, dated
February 5, 1999

10.8 Promissory Note to HemaBiologics, Inc., a wholly owned subsidiary
of the Registrant, from Joshua Levy dated January 1, 1996 --
incorporated by reference to Exhibit 10.10 to Form 10-K of the
Registrant for the year ended December 31, 1995.

10.9 Pledge Agreement between HemaBiologics, Inc., a wholly owned
subsidiary of the Registrant, and Joshua Levy dated January 1,
1996 -- incorporated by reference to Exhibit 10.11 to Form 10-K of
the Registrant for the year ended December 31, 1995.

10.10 Loan Reimbursement Agreement between HemaBiologics, Inc., a wholly
owned subsidiary of the Registrant, and Joshua Levy dated January
30, 1998--incorporated by reference to Exhibit 10.10 to Form 10-K
of the Registrant for the year ended December 31, 1997.

10.11 Settlement Agreement between the Registrant and Medicorp, Inc. --
incorporated by reference to Exhibit 10.1 to the Current Report on
Form 8-K of the Registrant dated July 19, 1996.

10.12 Foreclosure Sale Agreement between the Registrant and Comdisco
Health Care Group, Inc dated October 23, 1998--incorporated by
reference to Exhibit 2.1 of Form 8-K of the Registrant dated
November 5, 1998.

10.13 Employment agreement between the Registrant and William D. Nicely
dated May 27, 1998--incorporated by reference to Form 10-Q for the
quarter ended June 30, 1998.

11 Computation of earnings (loss) per common equivalent share.

21 Subsidiaries of the Registrant

23 Consent of Arthur Andersen LLP

27 Financial Data Schedule

(b) Reports on Form 8-K.

On November 5, 1998, the Company filed a Report on Form 8-K dated
October 22, 1998. The Company reported under Item 2 that the Company
acquired the assets of Coral Therapeutics, Inc. for Coral's secured
lender.

On December 30, 1998, the Company filed an amended Report on Form 8-K/A
dated October 22, 1998. The Company reported under Item 7 the
financial statements of Coral Therapeutics and pro forma financial
information of HemaCare Corporation and Coral Therapeutics, Inc.

<PAGE>

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.

HEMACARE CORPORATION

Dated: March 31, 1999 \s\ Sharon C. Kaiser
----------------------------
Sharon C. Kaiser,
Chief Financial Officer

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 31st day of March, 1999.

Signature Title

\s\ Alan C. Darlington Alan C. Darlington
- -------------------------- Chairman of the Board

\s\ William D. Nicely William D. Nicely
- -------------------------- Chief Executive Officer and
Director
(Principal Executive Officer)

\s\ Sharon C. Kaiser Sharon C. Kaiser
- -------------------------- Vice President, Finance, Chief
Financial Officer
(Principal Financial and Accounting
Officer)

\s\ Charles R. Schwab, Jr. Charles R. Schwab, Jr.
- -------------------------- Director

\s\ Jay Steffenhagen Jay Steffenhagen
- -------------------------- Director

<PAGE>

Index to Consolidated Financial Statements and Schedules
Item 14(a)(1) and (2)

Sequential
Page
Number
----------

Report of Independent Public Accountants...................... F-2

Consolidated balance sheets at December 31, 1998
and December 31, 1997........................................ F-3

For the years ended December 31, 1998, 1997 and 1996:

Consolidated statements of operations..................... F-4

Consolidated statements of shareholders' equity........... F-5

Consolidated statements of cash flows..................... F-6

Notes to consolidated financial statements................ F-7

Report of Independent Public Accountants on Financial
Statement Schedule........................................... S-1

Schedule II - Valuation and Qualifying Accounts............... S-2

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

F-1
<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Shareholders and Board of Directors of HemaCare Corporation:

We have audited the accompanying consolidated balance sheets of HemaCare
Corporation (a California corporation) and subsidiaries as of December 31,
1998 and 1997, and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1998. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our 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, 1998 and 1997, and the
results of their operations and their cash flows for each of the three years
in the period ended December 31, 1998 in conformity with generally accepted
accounting principles.

/s/ Arthur Andersen LLP
----------------------------
ARTHUR ANDERSEN LLP

Los Angeles, California
March 25, 1999

F-2

<PAGE>

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

HEMACARE CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>

December 31, December 31,
1998 1997
------------- ------------
<S> <C> <C>
ASSETS

Current assets:
Cash and cash equivalents.................... $ 1,372,000 $ 1,249,000
Marketable securities........................ 288,000 363,000
Accounts receivable, net of allowance for
doubtful accounts - $596,000 (1998) and
$81,000 (1997).............................. 3,038,000 1,561,000
Product inventories.......................... 87,000 63,000
Supplies..................................... 604,000 341,000
Prepaid expenses............................. 160,000 123,000
Note receivable from related party - current. 24,000 24,000
------------- -------------
Total current assets................ 5,573,000 3,724,000

Plant and equipment, net of accumulated
depreciation and amortization of
$1,869,000 (1998) and $1,690,000 (1997)...... 1,289,000 585,000
Goodwill, net of accumulated amortization of
$11,000...................................... 742,000 -
Note receivable from related party -
non-current.................................. 49,000 65,000
Other assets................................... 9,000 10,000
------------- -------------
$ 7,662,000 $ 4,384,000
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
Accounts payable............................. $ 1,414,000 $ 659,000
Accrued payroll and payroll taxes............ 802,000 493,000
Accrued professional fees.................... 173,000 130,000
Other accrued expenses....................... 418,000 236,000
Current obligations under capital leases..... 203,000 140,000
Current notes payable........................ 109,000 -
Reserve for discontinued operations.......... 110,000 115,000
------------- -------------
Total current liabilities........... 3,229,000 1,773,000

Obligations under capital leases, net
of current portion........................... 627,000 209,000
Notes payable, net of current portion.......... 491,000 -
Other long-term liabilities.................... 24,000 -
Commitments and contingencies..................
Shareholders' equity:
Preferred stock no par value - 5,000,000
shares authorized, 450,000 issued and
outstanding in 1998......................... 75,000 -
Common stock, without par value - 20,000,000
shares authorized, 7,281,120 issued and
outstanding in 1998 and 7,190,710 in 1997.. 13,584,000 13,515,000
Accumulated deficit.......................... (10,368,000) (11,113,000)
------------- -------------
Total shareholders' equity.......... 3,291,000 2,402,000
------------- -------------
$ 7,662,000 $ 4,384,000
============= =============

</TABLE>

The accompanying notes are an integral part of these
consolidated balance sheets.
F-3

<PAGE>
HEMACARE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS

Years ended December 31,
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Blood management programs......... $ 3,592,000 $ 4,105,000 $ 2,717,000
Regional operations
Blood products.................. 3,530,000 2,589,000 4,378,000
Blood services.................. 6,002,000 4,407,000 3,826,000
------------- ------------- ------------
Total revenue................... 13,124,000 11,101,000 10,921,000

Operating costs and expenses:
Blood management programs......... 3,280,000 4,315,000 3,680,000
Regional operations
Blood products.................. 2,394,000 1,879,000 3,402,000
Blood services.................. 4,328,000 3,000,000 2,605,000
------------- ------------- ------------
Total operating costs and
expenses...................... 10,002,000 9,194,000 9,687,000
------------- ------------ ------------
Operating profit................ 3,122,000 1,907,000 1,234,000

General and administrative expense.. 2,354,000 1,998,000 2,324,000

Gain on sale of Gateway Community
Blood Program..................... - 128,000 -
------------- ------------- ------------
Income (loss) from continuing
operations before income taxes.... 768,000 37,000 (1,090,000)
Provision for income taxes.......... (23,000) - -
------------- ------------- ------------
Income (loss) from continuing
operations........................ 745,000 37,000 (1,090,000)

Discontinued operations:
Gain from disposal of discontinued
operations........................ - 293,000 600,000
------------- ------------- ------------
Net income (loss)............... $ 745,000 $ 330,000 $ (490,000)
============= ============= ============
Basic and diluted per share amounts:
Income (loss) from continuing
operations...................... $ 0.10 $ 0.01 $ (0.17)
Income from discontinued
operations...................... - 0.04 0.09
------------- ------------- ------------
Net income (loss)............... $ 0.10 $ 0.05 $ (0.08)
============= ============= ============

Weighted average shares outstanding
- basic............................ 7,268,000 7,189,000 6,350,000
============= ============= ============

Weighted average shares oustanding
- dilutive......................... 7,373,000 7,205,000 6,350,000
============= ============= ============

</TABLE>

The accompanying notes are an integral part of these
consolidated financial statements.
F-4

<PAGE>
HEMACARE CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996

Preferred Stock Common Stock Accumulated
Shares Amount Shares Amount Deficit Total
-------- ---------- ---------- ------------ ------------- -----------
<S> <C> <C> <C> <C> <C> <C>

Balances at
December 31, 1995.. - $ - 5,911,285 $12,179,000 $(10,953,000) $ 1,226,000

Exercise of stock
options and
warrants........... - - 53,750 107,000 - 107,000
Issuance of common
stock, net......... - - 1,200,000 1,136,000 - 1,136,000
Issuance of common
stock for employee
401(k) and
incentive bonus
plans.............. - - 12,480 44,000 - 44,000
Net income/(loss)... - - - - (490,000) (490,000)
------- -------- ---------- ------------ ------------- ------------
Balances at December
31, 1996........... - - 7,177,515 13,466,000 (11,443,000) 2,023,000

Issuance of common
stock for employee
401(k) and
incentive bonus
plans.............. - - 13,195 41,000 - 41,000
Non-cash
compensation....... - - - 8,000 - 8,000
Net income/(loss)... - - - - 330,000 330,000
------- -------- ---------- ------------ ------------- ------------
Balances at December
31, 1997........... - - 7,190,710 13,515,000 (11,113,000) $ 2,402,000

Issuance of common
stock for employee
401(k) and
incentive bonus
plans.............. - - 90,410 42,000 - 42,000
Issuance of pre-
ferred stock....... 450,000 75,000 - - - 75,000
Non-cash
compensation....... - - - 27,000 - 27,000
Net income/(loss)... - - - - 745,000 745,000
------- -------- ----------- ------------ ------------- ------------
Balances at December
31, 1998........... 450,000 $75,000 7,281,120 $13,584,000 $(10,368,000) $ 3,291,000
======= ======== =========== ============ ============= ============
</TABLE>

The accompanying notes are an integral part of these
consolidated financial statements.
F-5
<PAGE>
HEMACARE CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>

Years ended December 31,
1998 1997 1996
------------ ------------ -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net Income (loss)............................... $ 745,000 $ 330,000 $ (490,000)
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating
activities:
Gain on disposal of discontinued operations.. - (293,000) (600,000)
Gain on sale of Gateway Community Blood
Program..................................... - (128,000) -
Provision (benefit) for losses on accounts
receivable.................................. - 35,000 (25,000)
Depreciation and amortization................ 175,000 187,000 359,000
Issuance of preferred stock, common stock
and options for compensation................ 69,000 50,000 44,000

Changes in operating assets and liabilities:
Increase (decrease) in accounts receivable... (415,000) 196,000 (70,000)
Increase(decrease) in inventories, supplies
and prepaid expenses........................ (203,000) (1,000) 59,000
Increase (decrease) in other assets, net..... 6,000 41,000 28,000
Increase (decrease) in accounts payable,
accrued expenses and other liabilities...... (213,000) (185,000) 267,000
Proceeds from (expenditures for) discontinued
operations.................................. (6,000) 8,000 (30,000)
------------ ------------ ------------
Net cash provided by (used in) operating
activities.................................. 158,000 240,000 (458,000)

Cash flows from investing activities:
Purchase of assets, net of cash acquired........ (555,000) - -
(Increase) decrease in note receivable from
related party................................. 16,000 14,000 6,000
(Increase) decrease in marketable securities.... 75,000 (52,000) (415,000)
(Purchase) disposition of plant and equipment,
net........................................... (23,000) 46,000 (32,000)
------------ ------------ ------------
Net cash provided by (used in) investing
activities.................................... (487,000) 8,000 (441,000)

Cash flows from financing activities:
Net proceeds from issuance of common stock...... - - 1,243,000
Net borrowings on line of credit................ 600,000 - -
Principal payments on line of credit, net, and
capital leases................................ (148,000) (135,000) (205,000)
------------ ------------ ------------
Net cash (used in) provided by financing
activities.................................... 452,000 (135,000) 1,038,000
------------ ------------ ------------

Increase in cash and cash equivalents........... 123,000 113,000 139,000
Cash and cash equivalents at beginning of
period........................................ 1,249,000 1,136,000 997,000
------------ ------------ ------------
Cash and cash equivalents at end of period...... 1,372,000 $ 1,249,000 $ 1,136,000
============ ============ ============

Supplemental disclosure:
Interest paid................................... $ 23,000 $ 51,000 $ 78,000
============ ============ ============
Income taxes paid............................... $ - $ - $ -
============ ============ ============

Items not impacting cash flow:
Increase in capital lease obligations........... $ 629,000 $ 38,000 $ 92,000
============ ============ ============
Liability for issuance of stock and warrants
with the purchase of assets.................... $ 22,000 $ - $ -
============ ============ ============

Issuance of preferred stock in the purchase
of assets...................................... $ 75,000 $ - $ -
============ ============ ============
</TABLE>

The accompanying notes are an integral part of these
consolidated financial statements.
F-6
<PAGE>

HEMACARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1 - Organization
- ---------------------

HemaCare Corporation was incorporated in California in 1978 for
the purpose of providing blood products and blood services to
hospitals and medical centers.

Coral Blood Service, Inc., a wholly owned subsidiary of the
Company was formed in October 1998, for the purpose of purchasing
substantially all of the assets of a company which had been in the
business of supplying blood products and services to hospitals
primarily in the Eastern United States. (See Note 3.)

In September 1995, the Company formed Gateway Community Blood
Program, Inc. ("Gateway"), a wholly owned subsidiary incorporated
in Missouri, to provide blood products and services in Missouri
and Illinois. In August 1997, Gateway"s operations were sold.

In 1992, the Company acquired Georgia Hemapheresis Services
("GHS"), a company it had previously managed. GHS was closed in
July 1996.

From 1990 to November 1995, the Company, through its wholly-owned
subsidiary HemaBiologics, Inc. ("HBI"), conducted research and
development of Immupath, an anti-HIV hyperimmune plasma-based
product intended to be used in the treatment of Acquired Immune
Deficiency Syndrome ("AIDS"). In November of 1995, the Company's
Board of Directors decided to discontinue the operations of HBI.
(See Note 12.)

HemaCare Corporation and its wholly owned subsidiaries are
referred to as "HemaCare" or the "Company" in the accompanying
consolidated financial statements and notes to consolidated
financial statements.

Note 2 - Summary of Accounting Policies
- ---------------------------------------

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

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

Cash, Cash Equivalents and Marketable Securities: The Company
considers all highly liquid investments with an original maturity
of three months or less to be cash equivalents. Marketable
securities consist of U.S. government treasury bills and
certificates of deposit held at financial institutions.

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

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

F-7
<PAGE>

Inventories and Supplies: Inventories consist of Company-
manufactured platelets and whole blood components as well as
component blood products purchased for resale. Supplies consist
primarily of medical supplies for collecting and manufacturing
products and providing therapeutic services. Inventories are
accounted for on a first-in, first-out basis.

Plant and Equipment: Plant and equipment is stated at original
cost. Furniture, fixtures, equipment and automobiles are
depreciated using the straight-line method over three to seven
years. Leasehold improvements are amortized over the lesser of
the their useful life or the length of the lease, ranging from
three to five years. Capital equipment leases are recorded at the
lower of the present value of the minimum lease payments or the
fair value of the equipment at the beginning of the lease term.
The cost of normal repairs and maintenance are expensed as
incurred.

Goodwill: Goodwill is being amortized on a straight-line basis
over ten years. It is the Company's policy to periodically
evaluate goodwill for recoverability. In the event of a permanent
impairment, the goodwill balance would be reduced to net
realizable value, and the write down would be charge to expense.

Income Taxes: Income taxes are computed under the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 109,
"Accounting for Income Taxes". SFAS 109 is an asset and liability
approach that requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of events
that have been recognized in the Company's financial statements or
tax returns. In estimating future tax consequences, SFAS 109
generally considers all expected future events other than
enactments of changes in the tax law or rates.

Per Share Data: Per share data is computed in accordance with SFAS
128 "Earnings Per Share". The Company adopted SFAS No. 128
effective December 31, 1997 and restated prior years' per share
data in accordance with the requirements of SFAS 128.

Warrants and options to purchase 1,443,300, 1,289,800, and 995,800
shares of common stock outstanding at December 31, 1998, 1997 and
1996, respectively, were not included in the computation of
diluted earnings per share because the exercise price of the
warrants and options was greater than the average market price of
the common stock.

Reclassification: Certain 1997 and 1996 amounts have been
reclassified to conform to 1998 presentations.
Recent Accounting Pronouncement: In June 1997, the Financial
Accounting Standards Board issued SFAS No. 131, "Disclosures About
Segments of An Enterprise and Related Information." SFAS 131,
which is effective for years beginning after December 15, 1997,
revises the requirements for segment disclosures. The Company
adopted this standard in the fourth quarter of 1998.

Note 3 - Acquisition
- --------------------

In October 1998, the Company purchased, through its wholly owned
subsidiary CBS, substantially all of the assets of Coral
Therapeutics, Inc. ("Coral") from Coral's secured lender. Prior
to the acquisition, Coral provided blood services to major
university, teaching and community hospitals in Maine, New
Hampshire, Massachusetts, Connecticut, New York, North Carolina
and other states. The acquired assets, included (i) approximately
$1.6 million in accounts receivable, $600,000 of which were over
90 days old, (ii) inventory and supplies with a net book value of
approximately $113,000 (iii) fixed assets with a net book value of
approximately $248,000 and (iv) Coral's rights under its hospital
contracts. HemaCare is in the process of completing the
negotiation of separate agreements with the hospitals previously
served by Coral and is providing services to hospitals that have
not signed a new agreement under interim arrangements. Concurrent
with the closing of the asset purchase, HemaCare extended offers
of employment to most of Coral's employees. HemaCare expects to
satisfy certain liabilities of Coral to its ex-employees and to
make payments necessary to maintain essential business
relationships totaling approximately $1.5 million.

F-8
<PAGE>

The acquisition was accounted for as a purchase, and the
operations of the acquired assets are included in the Company's
consolidated operations for the period from the acquisition date
(October 23, 1998) through December 31, 1998. The acquisition
price of the assets was $950,000 in cash and 450,000 shares of
HemaCare's Series B senior convertible preferred stock. The
Company financed the acquisition by (i) utilizing existing cash
balances, (ii) borrowing $600,000 on its line of credit and (iii)
issuing 450,000 shares of HemaCare Series B senior convertible
preferred stock. In addition, HemaCare has entered into or expects
to enter into non-competition agreements with certain former
managers of Coral pursuant to which HemaCare will make (i) cash
payments, (ii) issue 60,000 shares of HemaCare common stock and
(iii) issue warrants to purchase 90,000 shares of HemaCare common
stock with an exercise price of $.90 per share, expiring in
October, 2003. In addition, warrants for 35,000 shares of HemaCare
common stock exercisable at $0.31 per share will be issued to
consultants who assisted in the acquisition. These warrants will
expire October 2003 and are in the process of being issued.

The purchase price has been allocated to assets and liabilities based
on preliminary estimates and fair value as of the of the acquisition.
The final allocation of the purchase price will be determined when all
liabilities are settled. Based on the allocation of the purchase price
over the assets acquired and liabilities incurred, the Company recorded
goodwill of $753,000, which is being amortized on a straight line basis
over ten years.

The following unaudited pro forma combined condensed results of
operations have been prepared as if the acquisition has occurred
at the beginning of the period presented. They do not purport to
be indicative of the results of results of operations which would
have occurred if the acquisiton had been effected on the dates
indicated, nor do they purport to be indicative of future results
of operations.

Year Ended December 31,
1998 1997
(Unaudited) ----------- ------------
Revenue.......................... $18,582,000 $ 16,968,000
=========== ============
Income before extraordinary
items........................... $ 179,000 $(1,851,000)
=========== ============

Net income....................... $ 179,000 $(1,851,000)
=========== ============
Basic and diluted earnings
per share........................ $ 0.02 $ (0.26)
=========== ============

Note 4 - Plant and Equipment
- ----------------------------

Plant and equipment consists of the following:

December 31,
1998 1997
------------ ------------

Furniture, fixtures and equipment.... $ 2,969,000 $ 2,089,000
Leasehold improvements............... 189,000 186,000
------------ ------------
3,158,000 2,275,000
Less accumulated depreciation and
amortization......................... (1,869,000) (1,690,000)
------------ ------------
$ 1,289,000 $ 585,000
============ ============

Equipment with a cost of $1,369,000 in 1998 and $740,000 in 1997 was
financed by capital leases. In 1997, the Company disposed of
equipment and leasehold improvements with a cost of $347,000,
including $188,000 financed by capital leases, in connection with
the sale of Gateway's operations.

Note 5 - Line of Credit and Note Payable
- -----------------------------------------

Line of Credit

The Company maintains a line of credit with a commercial bank
secured by its accounts receivable, inventory and equipment. In
February 1999, the commercial bank increased the Company's line of
credit borrowing limit to $1.2 million, from $700,000, and
converted the $600,000 balance then outstanding on the line of
credit to a four-year term loan. Under the terms of the credit
line agreement, which is in effect until June 1, 1999, the Company
may borrow up to 70% of eligible accounts receivable, up to a
maximum of $1.2 million, at an interest rate of prime plus 0.5%,
and must maintain certain ratios. The

F-9
<PAGE>

Company was in compliance with all covenants of its borrowing
agreement at December 31, 1998, and the Company is in the process
of renewing its credit agreement. As of December 31, 1997,
and during the year then ended, there were no balances outstanding
under the line of credit.

Note Payable

The Company has a term note with a bank, payable in 48 monthly
payments of principal and interest of approximately $15,000
through February 2003. The note bears interest at the prime rate
plus one percent (8.75% at December 31, 1998). Minimum future
payments under the note at December 31, 1998 are as follow:

Year ending December 31,

1999 $109,000
2000 140,000
2001 155,000
2002 168,000
2003 28,000
--------
$600,000
========

The Company incurred $9,000 of interest expense in connections
with the note payable and line of credit agreements in 1998. No
interest expense was incurred in connection with the line of
credit agreement in 1997 or 1996.

Note 6 - Leases
- ----------------

The Company has entered into several capital leases for equipment.
Future minimum, capital lease payments, which expire at various
times during the period from 1999 to 2004, are as follows:

Year Ending December 31,

1999 $ 265,000
2000 196,000
2001 168,000
2002 163,000
2003 128,000
Thereafter 4,000
----------
Total minimum lease
payments 924,000
Less: Amount representing
interest (94,000)
----------
Present value of minimum
lease payments 830,000
Less current portion (203,000)
----------
$ 627,000
==========

F-10
<PAGE>

The Company leases its facilities and certain equipment under
operating leases which expire through the year 2003. Future
minimum rentals under operating leases are as follows:

Year ending December 31,

1999 $ 436,000
2000 362,000
2001 348,000
2002 283,000
2003 21,000
Thereafter -
-----------
$ 1,450,000

Total rent expense under all operating leases was $424,000,
$600,000, and $664,000 for the years ended December 31, 1998, 1997
and 1996, respectively.

Note 7 - Income Taxes
- ---------------------

The provision for income taxes for the year ended December 31,
1998, which was primarily due to the effect of the alternative
minimum tax. The provision which is all current, consists of
$20,000 of federal income tax expense and $3,000 of state income
tax expense.

There was no current or deferred income tax provision for 1997 and
1996. The Company utilized net operating loss carryforwards
("NOL") in 1997 and incurred losses in 1996. A reconciliation of
income tax expense at the statutory rate to income tax recognized
follows.

1998 1997 1996
---------- ---------- ---------

Income tax expense at statutory
rate............................ $ 261,000 $ 13,000 $(371,000)
State income taxes, net of
Federal benefit................. 46,000 2,000 (65,000)
Generation (Utilization) of NOL. (284,000) (15,000) 436,000
---------- --------- ----------
Income tax expense.............. $ 23,000 $ - $ -
========== ========= ==========

The approximate tax effects of temporary differences which gave
rise to significant deferred tax assets and liabilities at
December 31, 1998 and 1997, are as follows:

1998 1997
----------- -----------

Current:
Reserve for doubtful accounts.. $ 238,000 $ 32,000
Accrued expenses and other..... 323,000 286,000
Noncurrent:
Depreciation and amortization.. 220,000 290,000
Deferred research and
development expenses.......... 200,000 210,000
Other.......................... 8,000 93,000
Net operating loss
carryforwards................. 2,725,000 3,124,000
Tax credit carryforwards....... 878,000 881,000
------------ ------------
Total deferred assets.......... 4,592,000 4,916,000
Valuation allowance............ (4,592,000) (4,916,000)
------------ ------------
$ - $ -
============ ============

F-11
<PAGE>

A valuation allowance is recorded if the weight of available
evidence suggests it is more likely that not that some portion or
all of the deferred tax asset will not be recognized. There is no
assurance that the Company will continue to be profitable in
future periods. Accordingly, a valuation allowance has been
recorded for the full amount of the deferred tax assets in 1998
and 1997.

At December 31, 1998, the Company had net operating loss
carryforwards available for federal income and state tax purposes
of $7,300,000 and $2,700,000, respectively, expiring through 2010.

Acquisitions of common stock which result in changes in equity
ownership in the Company could result in an "ownership change"
within the meaning of Section 382 of the Internal Revenue Code of
1986, as amended (the "Code"), thereby imposing an annual
limitation (the "Section 382 Limitation") on the Company's
ability to utilize its net operating loss carryforwards to reduce
future taxable income. In the event of a Section 382 Limitation,
the Company's utilization of its net operating loss carryforwards
would be restricted to an annual amount equal to the product of
the equity value, as defined in the Code, of the Company at the
time of the applicable ownership change multiplied by the long-
term tax-exempt rate as published monthly by the Internal Revenue
Service. The expiration dates of the net operating loss
carryforwards would not be extended, and accordingly, a Section
382 Limitation could result in the expiration of a portion of
Company's net operating loss carryforwards. The long-term, tax-
exempt rate is currently 5.5%; such rate, however, is subject to
change, and it is impossible to predict whether the equity value
of the Company and such rate will increase, or decrease, and to
what extent.

At December 31, 1998, the Company had federal income tax credit
carryforwards of approximately $562,000 expiring through 2010, and
state tax credit carryforwards of approximately $316,000 which are
not subject to expiration.

Note 8 - Shareholders' Equity
- -----------------------------

Stock Options

In July 1996, the Board of Directors approved and adopted a new
stock incentive plan (the "1996 Plan") which provides for grants
of both stock options and shares of restricted stock. Prior to
that date, options were granted under the Company's 1986 Stock
Option Plan, as amended (the "1986 Plan"). A total of 1,400,000
shares may be granted under the terms of the 1996 Plan. The term
of the options granted is determined by Company's Board of
Directors, but in no event may be longer than ten years. The
exercise price of options granted generally is required to be not
less than the fair market value of the common stock on the date of
grant. Options granted to employees must vest at a rate of at
least 20% per year.

The 1986 Plan expired in July 1996. At December 31, 1998, 65,800
options were outstanding under this plan.

A one-time grant of options typically is made to each non-employee
director at the time of joining the Board, and, beginning in 1999,
an additional 15,000 options will be granted annually to non-
employee directors. The table below summarizes transactions in
the Plans and weighted average exercise prices ("Price") during
1998, 1997 and 1996.

F-12

<PAGE>
<TABLE>
<CAPTION>
1998 1997 1996
------------------ ----------------- -----------------
Shares Price Shares Price Shares Price
--------- ------- --------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>

Outstanding at beginning
of year................... 495,800 $2.36 185,800 $4.01 395,800 $3.12
Granted................... 535,000 0.67 372,500 1.74 63,000 3.41
Exercised................. - - - - 53,750 1.99
Canceled.................. 107,500 3.58 62,500 2.78 219,250 2.59
------- ----- ------- ----- -------- -----
Outstanding at end of
year..................... 923,300 1.12 495,800 2.36 185,800 4.01
======= ===== ======= ===== ======= =====
Exercisable at end of
year..................... 386,300 $1.61 184,550 $3.05 140,300 $4.12
======= ===== ======= ===== ======= =====

</TABLE>

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, 1998:

<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------- -------------------
Range of Exercise price Shares Life Price Shares Price
- ------------------------- --------- ---------- ---------- --------- --------
<S> <C> <C> <C> <C> <C>

$0.59 to $1.74 792,500 9.2 years $0.81 288,500 $1.12
$1.75 to $2.43 20,000 9.5 years 2.00 20,000 2.00
$2.44 to $4.99 110,800 6.8 years 3.16 77,800 3.31
------- ----- ------- -----
923,300 $1.12 386,300 $1.61
======= ===== ======= =====
</TABLE>

The Company grants stock options to employees and others in
accordance with the terms of its stock option plans. Warrants are
granted upon the Board of Directors' approval. The Company has
elected to adopt SFAS 123 "Accounting for Stock-Based
Compensation" for disclosure purposes only and applies the
provisions of APB Opinion No. 25. The Company recognized $27,000,
$8,000, and $5,000 of compensation expense related to consulting
options in 1998, 1997 and 1996, respectively. Had compensation
expense for all options granted been recognized in accordance with
SFAS 123, the Company's net income (loss) and net income (loss)
per share would have been as follows:

Years ended December 31,
1998 1997 1996
--------- --------- ---------
Pro forma net income (loss).. $617,000 $288,000 $(622,000)
Pro forma basic and diluted
net income (loss) per
share....................... $ 0.08 $ 0.04 $ (0.10)

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

Years ended December 31,
1998 1997 1996
--------- --------- ---------
Expected life............... 3 Years 3 Years 3 Years
Expected volatility......... 75% 68% 60%
Dividend yield.............. - - -
Interest rate............... 5.5% 5.0% 5.75%

Warrants

At December 31, 1998, 1997 and 1996, the Company had a total of
520,000, 810,000 and 810,000 warrants to purchase common stock
outstanding, at weighted average exercise prices of $4.89, $4.54
and $4.54, respectively. Of the outstanding warrants, 500,000,
790,000 and 790,000 were exercisable, at weighted average exercise
prices of $4.96, $4.57 and $4.57, in 1998, 1997 and 1996,
respectively.

At December 31, 1998, 1997 and 1996, 70,000 warrants for
consulting services were outstanding. These warrants, of which
50,000 were exercisable, had exercise prices between $2.63 and
$3.69 and expire between June 1999 and June 2002.

In connection with stock sales in 1993 and 1994, the Company
issued warrants to finders. Warrants to purchase 50,000 shares of
the Company's stock are still outstanding at prices ranging from
$1.45 and $4.00, expiring between April 1999 and July 2000.

In 1993, the Company issued warrants to purchase 400,000 shares of
stock at $5.50 per share in connection with the acquisition of the
Immupath license. (See Note 11, "Discontinued Operations".) These
options expire in February 2003.

F-13
<PAGE>

Preferred Stock

In October, 1998 as part of the purchase price of the acquisition
(see Note 3), 450,000 shares of no par value Senior Convertible
Series B preferred stock ("Series B Preferred") were issued to the
seller. The Series B preferred stock is convertible into 500,000
shares of HemaCare common stock, at the option of the holder at
any time after one year from the date of issuance. The Series B
Preferred stock holders are entitled to dividends when declared by
the Company's Board of Directors and, if dividends are declared on
the Company's common stock, Series B Preferred stock holders are
entitled to participate in the common stock dividend on an as
converted basis. In the event of liquidation, dissolution or wind
up of the Company, Series B Preferred stock holders are entitled
to a preferential distribution of $0.90 per share.

Note 9 - Employee Salary Deferral Plan
- ---------------------------------------

HemaCare's Employee Salary Deferral Plan qualifies under Section
401(k) of the Internal Revenue Service Code (the "401(k) Plan").
Eligible employees may contribute up to 12 percent of their pre-
tax salaries, subject to certain limitations. HemaCare may elect
to match a portion of the employees' contribution. In 1998, 1997
and 1996, the Company elected to match 50 percent of the of each
participants contribution, up to 5% of the participants annual
salary, with HemaCare common stock.

During 1998, 1997 and 1996, HemaCare issued 90,410 shares
($42,000), 13,195 shares ($41,000), and 12,480 shares ($44,000)
of common stock as matching contributions for the 1997, 1996 and
1995 plan years, respectively. HemaCare plans to issue
approximately 96,462 shares ($44,000) in 1999 as matching
contributions for the 1998 plan year.

Note 10 - Commitments and Contingencies
- ---------------------------------------

On March 12, 1997, the Company was notified of a lawsuit filed by
an investment banking firm retained by the Company in connection
with the August 1996 private placement of its common stock,
seeking recovery of damages in the amount of approximately
$60,000. In July 1998, this suit was settled on terms favorable
to the Company. The effect of the settlement did not have a
material effect on the Company's financial condition or results
of operations.

Note 11 - Segment and Related Party Information
- -----------------------------------------------

Business Segments

The Company operates in three business segments, each of which
represent a separate business activity. The segments and a
description of their business activity follows:

- - Blood Management Programs ("BMP"). Outsource programs which
provide all or a major portion of the blood banking functions
to a hospital.

- - Blood Products. Apheresis and whole blood derived products.

- - Blood Services. Therapeutic apheresis and stem cell
collection procedures, autologous interoperative transfusion
and donor testing.

Management uses more than one measure to measure segment
performance. However, the dominant measurements are
consistent with the Company's consolidated financial
statements which present revenue from external customers
and pretax income for each segment. Supplemental measurement data
are as follows:

<TABLE>
<CAPTION>
BMP Blood Products Blood Services
----------- -------------- ---------------
<S> <C> <C> <C>

1998
- -----
Depreciation and amortization $ 56,000 $18,000 $ 52,000

Expenditures for long-lived
assets 484,000 4,000 388,000

1997
- ----
Depreciation and amortization $ 74,000 $18,000 $ 54,000

Expenditures for long-lived
assets 38,000 - -

1996
- -----
Depreciation and amortization $105,000 $66,000 $ 94,000

Expenditures for long-lived
assets 92,000 - -

</TABLE>

Management evaluates segment performance based primarily on
operating income. Interest expenses and income, general and
administrative expense, amortization of goodwill, income
taxes and non-recurring gains and losses are not allocated
to the segments. The accounting policies of the segments
are the same as those described in the significant
accounting policies

Sales of products and services to an unaffiliated hospital group
accounted for $2,051,000 (16%) of the Company's revenues in 1998.
In 1997, Sales to two unaffiliated hospital groups accounted for
$2,044,000 (18%) and $1,473,000 (13%) of the Company's revenues.
In 1996, sales to one unaffiliated hospital group accounted for
$1,769,000 (16%) of the Company's revenues. At December 31, 1998
and 1997, no customer accounted for over 10% of the Company's
accounts receivable.

F-15
<PAGE>

Related Party Loan

In 1995 and 1994, the Company made a series of personal loans to
Dr. Joshua Levy, then an officer and director of the Company
totaling $98,000. The proceeds of these loans were used to
refinance existing debt that was collateralized by HemaCare stock
owned by Dr. Levy. In January 1996, these individual notes were
consolidated into a promissory note, collateralized by HemaCare
stock owned by Dr. Levy, which accrued interest at a rate equal to
the rate paid by the Company under its line of credit. The Company
received installment payments in accordance with the terms of this
note of $15,000 in January 1996 and January 1997. Effective July
31, 1997, the Company entered into an agreement with Dr. Levy that
superceded the 1996 note. Under the terms of this agreement, the
Company agreed to forgive the remaining balance of Dr. Levy's
note, including interest accrued at a 10% annual rate, over a
five-year period so long as Dr. Levy remains employed by the
Company.

Note 12 - Discontinued Operations
- ---------------------------------

In November 1995, the Company discontinued the operations of HBI,
including the research and development of Immupath and the
associated specialty plasma business. The reserve established for
estimated HBI operating losses during the period of disposal,
included a $600,000 contingent liability for the resolution of the
dispute with Medicorp. In July 1996, the dispute was settled
without any payment by the Company, and the Company recognized a
$600,000 gain on disposal of discontinued operations. In June
1996, the Company agreed to sell substantially all the tangible
assets of the discontinued operations and the FDA source plasma
licenses. The sale and transfer of the licenses was contingent
upon obtaining FDA approval that was received on October 21, 1996.
The buyer delivered a promissory note, in payment of the purchase
price for certain tangible assets sold which is collateralized by
these assets. The note was repaid in March 1997, resulting in a
gain on disposal of $120,000 in the first quarter of 1997.

During the wind down of the research and development operations,
the Company manufactured a supply of Immupath to supply the
patients still receiving treatment for a limited period of time.
There are currently six patients receiving Immupath treatments. In
the fourth quarter of 1997, the Company reviewed and revised its
estimate of the remaining costs of discontinued operations and
recognized an additional gain on disposal of $173,000. The Company
does not expect discontinued operations to have a material impact
on future operating results.

F-16

<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Shareholders and Board of Directors of HemaCare Corporation:

We have audited in accordance with generally accepted auditing
standards, the consolidated financial statements included in HemaCare
Corporation's annual report to shareholders included in this Form 10-K,
and have issued our report thereon dated March 25, 1999. Our audit
was made for the purpose of forming an opinion on those statements
taken as a whole. The schedule listed in the index of consolidated
financial statements is the responsibility of the Company's management
and is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not part of the basic consolidated
financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic consolidated financial
statements and, in our opinion, fairly states in all material respects
the financial data required to be set forth therein in relation to the
basic consolidated financial statements taken as a whole.

/s/ Arthur Andersen LLP
------------------------
ARTHUR ANDERSEN LLP

Los Angeles, California
March 25, 1999

S-1

<PAGE>
HEMACARE CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

For The Years Ended December 31, 1998, 1997 and 1996

Additions
----------------------
Balance at Charged to Charged Balance
beginning costs and to other at end of
Description of period expenses accounts Write-offs period
- --------------------- --------- ----------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Year ended December
31, 1997 - Allowance
for uncollectible
accounts $81,000 $ -- $515,000(1) $ -- $596,000

Year ended December
31, 1997 - Allowance
for uncollectible
accounts $47,000 $ 35,000 $ -- $ 1,000 $ 81,000

Year ended December
31, 1996 - Allowance
for uncollectible
accounts $94,000 $(25,000)(2) $ -- $ 22,000 $ 47,000

</TABLE>

(1) Represents allowance for doubtful accounts of acquired assets
at date of acquisition.

(2) Includes a net reduction in the reserve of $48,000, based on an
analysis of the aging of accounts receivable at December 31, 1996.

S-2

<PAGE>

INDEX TO EXHIBITS

<TABLE>
<CAPTION>
Sequential
Page Number
-----------
<S> <C> <C>

2.1 Amended and Restated Asset Purchase Agreement between the
Registrant, HemaBiologics, Inc. (a wholly owned subsidiary
of the Registrant) and Atopix Pharmaceuticals Corporation,
dated June 26,1996 incorporated by reference to Exhibit
2.1 to Form 10-Q of the Registrant for the quarter ended
June 30, 1996..................................................

2.2 Asset Purchase Agreement between the Registrant, Gateway
Community Blood Program and Haemonetics Corporation, dated
August 1, 1997--incorporated by reference to Exhibit 2.1 to
Form 10-Q of the Registrant for the quarter ended September
30, 1997.......................................................

3.1 Restated Articles of Incorporation of the Registrant--incorp-
orated by reference to Exhibit 3.1 to Form 10-K of the
Registrant for the year ended December 31, 1995................

3.2 Bylaws of the Registrant, as amended--incorporated by
reference to Exhibit 3.1 to Form 10-Q of the Registrant for
the quarter ended March 31, 1998...............................

4.1 Warrant Agreement between the Registrant and Medicorp Inc.
dated February 17, 1993--incorporated by reference to Exhibit
4 to the Current Report on Form 8-K of the Registrant dated
February 17, 1993..............................................

4.2 Form of Warrant Agreement between the Registrant and each of
the following consultants: British Far East Holdings, Ltd.,
Joseph T. McDonald and E. Keene Wolcott dated September 30,
1994--incorporated by reference to Exhibit 4.1 to Form 10-Q
of the Registrant for the quarter ended September 30, 1994.....

4.3 Warrant Agreement between the Registrant and Torrey Pines
Securities, Inc., dated April 8, 1994--incorporated by
reference to Exhibit 4.2 to Form 10-Q of the Registrant for
the quarter ended March 31, 1994...............................

4.4 Amendment to Warrant Agreement between the Registrant and
Torrey Pines Securities dated April 3, 1995--incorporated by
reference to Exhibit 4.1 to Form 10-Q of the Registrant for
the quarter ended March 31, 1995...............................

4.6 Warrant Agreement between the Registrant and Joseph T.
McDonaldd dated November 1, 1996--incorporated by reference to
Exhibit 4.9 to Form 10-K of the Registrant for the year ended
December 31, 1996..............................................

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

4.8 Amended Certificate of Determination, dated March 18, 1998--
incorporated by reference to Exhibit 4.8 of Form 10-K of the
Registrant for the year ended December 31, 1997................

4.10 Registration Rights of Shareholders'--incorporated by reference
to Exhibit 4.9 to the Current Report on Form 8-K of the
Registrant dated August 19, 1996...............................

10.1 1986 Employee Stock Option Plan, as amended and restated
through October 1994--incorporated by reference to Exhibit
10.4 to Form 10-Q of the Registrant for the quarter ended
September 30, 1994.............................................

10.2 1996 Stock Incentive Plan, as amended, of the Registrant--
incorporated by reference to Exhibit 4.1 to Form 10-Q of the
Registrant for the quarter ended September 30, 1996............

10.3 Office Building Lease dated August 21, 1998 between the
Registrant and Tar Asset Addison Place, L.P.--incorporated
by reference to Form 10-Q for the quarter ended September 30,
1998...........................................................

10.4 Employment Agreement between Harold I. Lieberman and the
Registrant, dated September 19, 1988-- incorporated by
reference to Exhibit 10.4 to Form 10-K of the Registrant for
the year ended December 31, 1994...............................

10.6 Revolving Credit Agreement between the Registrant and Bank
Leumi USA, dated February 5, 1999 and related Promissory
Note........................................................... Filed herewith
electronically

10.7 Promissory Note between the Registrant and Bank Leumi USA,
dated February 5, 1999......................................... Filed herewith
electronically

10.8 Promissory Note to HemaBiologics, Inc., a wholly owned
subsidiary of the Registrant, from Joshua Levy dated January
1, 1996 -- incorporated by reference to Exhibit 10.10 to Form
10-K of the Registrant for the year ended December 31, 1995....

10.9 Pledge Agreement between HemaBiologics, Inc., a wholly owned
subsidiary of the Registrant, and Joshua Levy dated January 1,
1996 -- incorporated by reference to Exhibit 10.11 to Form
10-K of the Registrant for the year ended December 31, 1995....

10.10 Loan Reimbursement Agreement between HemaBiologics, Inc., a
wholly owned subsidiary of the Registrant, and Joshua Levy
dated January 30, 1998--incorporated by reference to Exhibit
10.10 to Form 10-K of the Registrant for the year ended
December 31, 1997..............................................

10.11 Settlement Agreement between the Registrant and Medicorp,
Inc. -- incorporated by reference to Exhibit 10.1 to the
Current Report on Form 8-K of the Registrant dated July
19, 1996.......................................................

10.12 Foreclosure Sale Agreement between the Registrant and
Comdisco Health Care Group, Inc dated October 23, 1998--
incorporated by reference to Exhibit 2.1 of Form 8-K of
the Registrant dated November 5, 1998..........................

10.13 Employment agreement between the Registrant and William D.
Nicely dated May 27, 1998--incorporated by reference to Form
10-Q for the quarter ended June 30, 1998.......................

11 Computation of earnings (loss) per common equivalent share..... Filed herewith
electronically

21 Subsidiaries of the Registrant................................. Filed herewith
electronically

23 Consent of Arthur Andersen LLP................................. Filed herewith
electronically

27 Financial Data Schedule........................................ Filed herewith
electronically

</TABLE>

<PAGE>
EXHIBIT 10.6

[LOGO]
BANK LEUMI USA
- -------------------------
- -------------------------
- -------------------------
Member FDIC

<TABLE>
<CAPTION>
LOAN AGREEMENT
- ---------------------------------------------------------------------------------------------------------
PRINCIPAL LOAN DATE MATURITY LOAN NO CALL COLLATERAL ACCOUNT OFFICER INITIALS
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$1,200,000.00 02-05-1999 06-01-1999 1-1 04A0 030 xxxxxxxxxx KXA
- ---------------------------------------------------------------------------------------------------------
References in the shaded area are for lender's use only and do not limit the applicability of this
document to any particular loan or item.
- ---------------------------------------------------------------------------------------------------------
</TABLE>

BORROWER: HEMACARE CORPORATION LENDER: BANK LEUMI LE-ISRAEL, B.M.
4954 VAN NUYS BLVD., #201 8383 WILSHIRE BLVD. STE. 400
SHERMAN OAKS, CA 91403 BEVERLY HILLS, CA 90211
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

THIS LOAN AGREEMENT BETWEEN HEMACARE CORPORATION ("BORROWER") AND BANK LEUMI
LE-ISRAEL, B.M. ("LENDER") IS MADE AND EXECUTED ON THE FOLLOWING TERMS AND
CONDITIONS. BORROWER HAS RECEIVED PRIOR COMMERCIAL LOANS FROM LENDER OR HAS
APPLIED TO LENDER FOR A COMMERCIAL LOAN OR LOANS AND OTHER FINANCIAL
ACCOMMODATIONS, INCLUDING THOSE WHICH MAY BE DESCRIBED ON ANY EXHIBIT OR
SCHEDULE ATTACHED TO THIS AGREEMENT. ALL SUCH LOANS AND FINANCIAL
ACCOMMODATIONS, TOGETHER WITH ALL FUTURE LOANS AND FINANCIAL ACCOMMODATIONS
FROM LENDER TO BORROWER, ARE REFERRED TO IN THIS AGREEMENT INDIVIDUALLY AS
THE "LOAN" AND COLLECTIVELY AS THE "LOANS." BORROWER UNDERSTANDS AND AGREES
THAT: (A) IN GRANTING, RENEWING, OR EXTENDING ANY LOAN, LENDER IS RELYING
UPON BORROWER'S REPRESENTATIONS, WARRANTIES, AND AGREEMENTS, AS SET FORTH IN
THIS AGREEMENT; (B) THE GRANTING, RENEWING, OR EXTENDING OF ANY LOAN BY
LENDER AT ALL TIMES SHALL BE SUBJECT TO LENDER'S SOLE JUDGMENT AND
DISCRETION; AND (C) ALL SUCH LOANS SHALL BE AND SHALL REMAIN SUBJECT TO THE
FOLLOWING TERMS AND CONDITIONS OF THIS AGREEMENT.

TERM. This Agreement shall be effective as of FEBRUARY 5, 1999, and shall
continue thereafter until all Indebtedness of Borrower to Lender has been
performed in full and the parties terminate this Agreement in writing.

DEFINITIONS. The following words shall have the following meanings
when used in this Agreement. Terms not otherwise defined in this
Agreement shall have the meanings attributed to such terms in the
Uniform Commercial Code. All references to dollar amounts shall mean
amounts in lawful money of the United States of America.

AGREEMENT. The word "Agreement" means this Loan Agreement, as this
Loan Agreement may be amended or modified from time to time, together
with all exhibits and schedules attached to this Loan Agreement from
time to time.

ACCOUNT. The word "Account" means a trade account, account receivable,
or other right to payment for goods sold or services rendered owing to
Borrower (or to a third party grantor acceptable to Lender).

ACCOUNT DEBTOR. The words "Account Debtor" mean the person or entity
obligated upon an Account.

ADVANCE. The word "Advance" means a disbursement of Loan funds under
this Agreement.

BORROWER. The word "Borrower" means HEMACARE CORPORATION. The word
"Borrower" also includes, as applicable, all subsidiaries and affiliates of
Borrower as provided below in the paragraph titled "Subsidiaries and
Affiliates."

BORROWING BASE. The words "Borrowing Base" mean: (a) $1,200,000 or (b)
the sum of Seventy percent (70.000%) of Eligible Accounts. Lender may,
in its discretion, from time to time, upon not less than five (5) days
prior notice to Borrower, reduce the Borrowing Base to the extent that
Lender determines in good faith that:(a) the dilution with respect to the
Accounts for any period (based on the ratio of (i) the aggregate amount
of reductions in Accounts other than as a result of payments in cash to
(ii) the aggregate amount of total sales) has increased in any material
respect or may be reasonably anticipated to increase in any material
respect above historical levels, or (b) the general creditworthiness of
Account Debtors has declined.

BUSINESS DAY. The words "Business Day" mean a day on which commercial
banks are open for business in the State of California.

CERCLA. The word "CERCLA" means the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, as amended.

CASH FLOW. The words "Cash Flow" mean net income after taxes, and exclusive
of extraordinary gains and income, plus depreciation and amortization.

COLLATERAL. The word "Collateral" means and includes without limitation
all property and assets granted as collateral security for a Loan,
whether real or personal property, whether granted directly or
indirectly, whether granted now or in the future, and whether granted in
the form of a security interest, mortgage, deed of trust, assignment,
pledge, chattel mortgage, chattel trust, factor's lien, equipment trust,
conditional sale, trust receipt, lien, charge, lien or title retention
contract, lease or consignment intended as a security device, or any
other security or lien interest whatsoever, whether created by law,
contract, or otherwise. The word "Collateral" includes without
limitation all collateral described below in the section titled
"COLLATERAL."

DEBT. The word "Debt" means all of Borrower's liabilities excluding
Subordinated Debt.

ELIGIBLE ACCOUNTS. The words "Eligible Accounts" mean, at any time, all
of Borrower's Accounts which contain selling terms and conditions
acceptable to Lender. The net amount of any Eligible Account against
which Borrower may borrow shall exclude all returns, discounts, credits,
and offsets of any nature. Unless otherwise agreed to by Lender in
writing, Eligible Accounts do not include:

(a) Accounts with respect to which the Account Debtor is an officer, an
employee or agent of Borrower.

(b) Accounts with respect to which the Account Debtor is a subsidiary
of, or affiliated with or related to Borrower or its shareholders,
officers, or directors.

(c) Accounts with respect to which goods are placed on consignment,
guaranteed sale, or other terms by reason of which the payment by the
Account Debtor may be conditional.

(d) Accounts with respect to which Borrower is or may become liable
to the Account Debtor for goods sold or services rendered by the
Account Debtor to Borrower.

(e) Accounts which are subject to dispute, counterclaim, or setoff.

(f) Accounts with respect to which the goods have not been shipped or
delivered, or the services have not been rendered, to the Account
Debtor.

(g) Accounts with respect to which Lender, in its sole discretion,
deems the creditworthiness or financial condition of the Account
Debtor to be unsatisfactory.

(h) Accounts of any Account Debtor who has filed or has had filed
against it a petition in bankruptcy or an application for relief under
any provision of any state or federal bankruptcy, insolvency, or
debtor-in-relief acts; or who has had appointed a trustee,
custodian, or receiver for the assets of such Account Debtor; or who
has made an assignment for the benefit of creditors or has become
insolvent or fails generally to pay its debts (including its payrolls)
as such debts become due.

(i) Accounts with respect to which the Account Debtor is the United
States government or any department or agency of the United States.

(j) Accounts which have not been paid in full within 90 DAYS from the
invoice date. The entire balance of any Account of any single Account
debtor will be ineligible whenever the portion of 1he Account which has
not been paid within 90 DAYS from the invoice date is in excess of
25.000% of the total amount outstanding on the Account.

(k) That portion of Accounts due from an Account Debtor which are in
excess of 10.000% of the Debtor's aggregate dollar amount of all
outstanding Accounts.

ELIGIBLE EQUIPMENT. The words "Eligible Equipment" mean, at any time,
all of Borrower's Equipment as defined below except:

(a) Equipment which is not owned by Borrower free and clear of all
security interests, liens, encumbrances, and claims of third parties.

(b) Equipment which Lender, in its sole discretion, deems to be
obsolete, unsalable, damaged, defective, or unfit for operation.

ELIGIBLE INVENTORY. The words "Eligible Inventory" mean, at any time, all
of Borrower's Inventory as defined below except:

(a) Inventory which is not owned by Borrower free and clear of all
security interests, liens, encumbrances, and claims of third parties.

(b) Inventory which Lender, in its sole discretion, deems to be
obsolete, unsalable, damaged, defective, or unfit for further
processing.

EQUIPMENT. The word "Equipment" means all of Borrower's goods used or
bought for use primarily in Borrower's business and which are not
included in inventory, whether now or hereafter existing.

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02-05-1999 LOAN AGREEMENT Page 2
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ERISA. The word "ERISA" means the Employee Retirement Income Security
Act of 1974, as amended.

EVENT OF DEFAULT. The words "Event of Default" mean and include
without limitation any of the Events of Default set forth below in the
section titled "EVENTS OF DEFAULT."

EXPIRATION DATE. The words "Expiration Date" mean the date of
termination of Lender's commitment to lend under this Agreement.

GRANTOR. The word "Grantor" means and includes without limitation
each and all of the persons or entities granting a Security Interest
in any Collateral for the Indebtedness, including without limitation
all Borrowers granting such a Security Interest.

GUARANTOR. The word "Guarantor" means and includes without limitation
each and all of the guarantors, sureties, and accommodation parties in
connection with any Indebtedness.

INDEBTEDNESS. The word "Indebtedness" means and includes without
limitation all Loans, together with all other obligations, debts and
liabilities of Borrower to Lender, or any one or more of them, as well
as all claims by Lender against Borrower, or any one or more of them;
whether now or hereafter existing, voluntary or involuntary, due or
not due, absolute or contingent, liquidated or unliquidated; whether
Borrower may be liable individually or jointly with others; whether
Borrower may be obligated as a guarantor, surety, or otherwise;
whether recovery upon such Indebtedness may be or hereafter may
become barred by any statute of limitations; and whether such
Indebtedness may be or hereafter may become otherwise unenforceable.

INVENTORY. The word "Inventory" means all of Borrower's raw
materials, work in process, finished goods, merchandise, parts and
supplies, of every kind and description, and goods held for sale or
lease or furnished under contracts of service in which Borrower now
has or hereafter acquires any right, whether held by Borrower or
others, and all documents of title, warehouse receipts, bills of
lading, and all other documents of every type covering all or any part
of the foregoing. Inventory includes inventory temporarily out of
Borrower's custody or possession and all returns on Accounts.

LENDER. The word "Lender" means BANK LEUMI LE-ISRAEL, B.M., its
successors and assigns.

LETTER OF CREDIT. The words "Letter of Credit" mean a letter of credit
issued by Lender on behalf of Borrower as described below in the section
entitled "Letter of Credit Facility."

LINE OF CREDIT. The words "Line of Credit" mean the credit facility
described in the Section titled "LINE OF CREDIT" below.

LIQUID ASSETS. The words "Liquid Assets" mean Borrower's cash on
hand plus Borrower's readily marketable securities.

LOAN. The word "Loan" or "Loans" means and includes without
limitation any and all commercial loans and financial accommodations
from Lender to Borrower, whether now or hereafter existing, and
however evidenced, including without limitation those loans and
financial accommodations described herein or described on any exhibit
or schedule attached to this Agreement from time to time.

NOTE. The word "Note" means and includes without limitation
Borrower's promissory note or notes, if any, evidencing Borrower's
Loan obligations in favor of Lender, as well as any substitute,
replacement or refinancing note or notes therefor.

PERMITTED LIENS. The words "Permitted Liens" mean: (a) liens and
security interests securing Indebtedness owed by Borrower to Lender;
(b) liens for taxes, assessments, or similar charges either not yet
due or being contested in good faith; (c) liens of materialmen,
mechanics, warehousemen, or carriers, or other like liens arising in
the ordinary course of business and securing obligations which are not
yet delinquent; (d) purchase money liens or purchase money security
interests upon or in any property acquired or held by Borrower in the
ordinary course of business to secure indebtedness outstanding on the
date of this Agreement or permitted to be incurred under the paragraph
of this Agreement titled "Indebtedness and Liens"; (e) liens and
security interests which, as of the date of this Agreement, have been
disclosed to and approved by the Lender in writing; and (f) those
liens and security interests which in the aggregate constitute an
immaterial and insignificant monetary amount with respect to the net
value of Borrower's assets.

RELATED DOCUMENTS. The words "Related Documents" mean and include
without limitation all promissory notes, credit agreements, loan
agreements, environmental agreements, guaranties, security agreements,
mortgages, deeds of trust, and all other instruments, agreements and
documents, whether now or hereafter existing, executed in connection
with the Indebtedness.

SECURITY AGREEMENT. The words "Security Agreement" mean and include
without limitation any agreements, promises, covenants, arrangements,
understandings or other agreements, whether created by law, contract,
or otherwise, evidencing, governing, representing, or creating a
Security Interest.

SCURITY INTEREST. The words "Security Interest" mean and include
wthout limitation any type of collateral security, whether in the
form of a lien, charge, mortgage, deed of trust, assignment, pledge,
chattel mortgage, chattel trust, factor's lien, equipment trust,
conditional sale, trust receipt, lien or title retention contract,
lease or consignment intended as a security device, or any other
security or lien interest whatsoever, whether created by law,
contract, or otherwise.

SARA. The word "SARA" means the Superfund Amendments and
Reauthorization Act of 1986 as now or hereafter amended.

SUBORDINATED DEBT. The words "Subordinated Debt" mean indebtedness
and liabilities of Borrower which have been subordinated by written
agreement to indebtedness owed by Borrower to Lender in form and
substance acceptable to Lender.

TANGIBLE NET WORTH. The words "Tangible Net Worth" mean Borrower's
total assets excluding all intangible assets (i.e., goodwill,
trademarks, patents, copyrights, organizational expenses, and
similar intangible items, but including leaseholds and leasehold
improvements) less total Debt.

WORKING CAPITAL. The words "Working Capital" mean Borrower's current
assets, excluding prepaid expenses, less Borrower's current
liabilities.

LINE OF CREDIT. Lender agrees to make Advances to Borrower from time to time
from the date of this Agreement to the Expiration Date, provided the aggregate
amount of such Advances outstanding at any time does not exceed the Borrowing
Base. Within the foregoing limits, Borrower may borrow, partially or wholly
prepay, and reborrow under this Agreement as follows.

CONDITIONS PRECEDENT TO EACH ADVANCE. Lender's obligation to make any
Advance to or for the account of Borrower under this Agreement is
subject to the following conditions precedent, with all documents,
instruments, opinions, reports, and other items required under this
Agreement to be in form and substance satisfactory to Lender:

(a) Lender shall have received evidence that this Agreement and
all Related Documents have been duly authorized, executed, and
delivered by Borrower to Lender.

(b) Lender shall have received such opinions of counsel,
supplemental opinions, and documents as Lender may request.

(c) The security interests in the Collateral shall have been
duly authorized, created, and perfected with first lien priority
and shall be in full force and effect.

(d) All guaranties required by Lender for the Line of Credit
shall have been executed by each Guarantor, delivered to Lender,
and be in full force and effect.

(e) Lender, at its option and for its sole benefit, shall have
conducted an audit of Borrower's Accounts, Inventory, Equipment
books, records, and operations, and Lender shall be satisfied as
to their condition.

(f) Borrower shall have paid to Lender all fees, costs, and
expenses specified in this Agreement and the Related Documents
as are then due and payable.

(g) There shall not exist at the time of any Advance a condition
which would constitute an Event of Default under this Agreement,
and Borrower shall have delivered to Lender the compliance
certificate called for in the paragraph below titled "Compliance
Certificate."

MAKING LOAN ADVANCES. Advances under the Line of Credit may be
requested either orally or in writing subject to the limitations set
forth below. Lender may, but need not, require that all oral requests
be confirmed in writing. Each Advance shall be conclusively deemed to
have been made at the request of and for the benefit of Borrower (a)
when credited to any deposit account of Borrower maintained with
Lender or (b) when advanced in accordance with the instructions of an
authorized person. Lender, at its option, may set a cutoff time,
after which all requests for Advances will be treated as having been
requested on the next succeeding Business Day. Under no circumstances
shall Lender be required to make any Advance in an amount less than
$5,000.00.

MANDATORY LOAN REPAYMENTS. If at any time the aggregate principal
amount of the outstanding Advances shall exceed the applicable
Borrowing Base, Borrower, immediately upon written or oral notice from
Lender, shall pay to Lender an amount equal to the difference between
the outstanding principal balance of the Advances and the Borrowing
Base. On the Expiration Date, Borrower shall pay to Lender in full
the aggregate unpaid principal amount of all Advances then outstanding
and all accrued unpaid interest, together with all other applicable
fees, costs and charges, if any, not yet paid.

LOAN ACCOUNT. Lender shall maintain on its books a record of account
in which Lender shall make entries for each Advance and such other
debits and credits as shall be appropriate in connection with the
credit facility. Lender shall provide Borrower with periodic
statements of Borrower's account, which statements shall be considered
to be correct and conclusively binding on Borrower unless Borrower
notifies Lender to the contrary within thirty (30) days after
Borrower's receipt of any such statement which Borrower deems to be
incorrect.

COLLATERAL. To secure payment of the Line of Credit and performance of all
other Loans, obligations and duties owed by Borrower to Lender, Borrower (and
others, if required) shall grant to Lender Security Interests in such
property and assets as Lender may require (the "Collateral"). Lender's

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02-05-1999 LOAN AGREEMENT Page 3
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Security Interests in the Collateral shall be continuing liens and shall
include the proceeds and products of the Collateral, including without
limitation the proceeds of any Insurance. With respect to the Collateral,
Borrower agrees and represents and warrants to Lender:

PERFECTION OF SECURITY INTERESTS. Borrower agrees to execute such
financing statements and to take whatever other actions are requested
by Lender to perfect and continue Lender's Security Interests in the
Collateral. Upon request of Lender, Borrower will deliver to Lender
any and all of the documents evidencing or constituting the
Collateral, and Borrower will note Lender's interest upon any and all
chattel paper if not delivered to Lender for possession by Lender.
Contemporaneous with the execution of this Agreement, Borrower will
execute one or more UCC financing statements and any similar
statements as may be required by applicable law, and will file such
financing statements and all such similar statements in the
appropriate location or locations. Borrower hereby appoints Lender as
its irrevocable attorney-in-fact for the purpose of executing any
documents necessary to perfect or to continue any Security Interest.
Lender may at any time, and without further authorization from
Borrower, file a carbon, photograph, facsimile, or other reproduction
of any financing statement for use as a financing statement.
Borrower will reimburse Lender for all expenses for the perfection,
termination, and the continuation of the perfection of Lender's
security interest in the Collateral. Borrower promptly will notify
Lender of any change in Borrower's name including any change to the
assumed business names of Borrower. Borrower also promptly will
notify Lender of any change in Borrower's Social Security Number or
Employer Identification Number. Borrower further agrees to notify
Lender in writing prior to any change in address or location
of Borrower's principal governance office or should Borrower merge or
consolidate with any other entity.

COLLATERAL RECORDS. Borrower does now, and at all times hereafter
shall, keep correct and accurate records of the Collateral, all of
which records shall be available to Lender or Lender's representative
upon demand for inspection and copying at any reasonable time. With
respect to the Accounts, Borrower agrees to keep and maintain such
records as Lender may require, including without limitation
information concerning Eligible Accounts and Account balances and
agings. With respect to the Inventory, Borrower agrees to keep and
maintain such records as Lender may require, including without
limitation information concerning Eligible Inventory and records
itemizing and describing the kind, type, quality, and quantity of
Inventory, Borrower's Inventory costs and selling prices, and the
daily withdrawals and additions to Inventory. With respect to the
Equipment, Borrower agrees to keep and maintain such records as Lender
may require, including without limitation information concerning
Eligible Equipment and records itemizing and describing the kind,
type, quality, and quantity of Equipment, Borrower's Equipment costs,
and the daily withdrawals and additions to Equipment. The following
is an accurate and complete list of all locations at which Borrower
keeps or maintains business records concering Borrower's Accounts,
Inventory and Equipment: 4954 VAN NUYS BOULEVARD, #201, SHERMAN
OAKS, CA 91403.

COLLATERAL SCHEDULES. Concurrently with the execution and delivery of
this Agreement, Borrower shall execute and deliver to Lender schedules
of Accounts, Inventory and Equipment and schedules of Eligible
Accounts, Eligible Inventory and Eligible Equipment, in form and
substance satisfactory to the Lender. Thereafter Supplemental
schedules shall be delivered according to the following schedule:
SUBMISSION OF MONTHLY ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE AGINGS
WITHIN FIFTEEN (15) DAYS OF THE FOLLOWING MONTH.

REPRESENTATIONS AND WARRANTIES CONCERNING ACCOUNTS. With respect to
the Accounts, Borrower represents and warrants to Lender: (a) Each
Account represented by Borrower to be an Eligible Account for purposes
of this Agreement conforms to the requirements of the definition of an
Eligible Account; (b) All Account information listed on schedules
delivered to Lender will be true and correct, subject to immaterial
variance; and (c) Lender, its assigns, or agents shall have the right
at any time and at Borrower's expense to inspect, examine, and audit
Borrower's records and to confirm with Account Debtors the accuracy of
such Accounts.

REPRESENTATIONS AND WARRANTIES CONCERNING INVENTORY. With respect to
the Inventory, Borrower represents and warrants to Lender: (a) All
Inventory represented by Borrower to be Eligible Inventory for
purposes of this Agreement conforms to the requirements of the
definition of Eligible Inventory; (b) All Inventory values listed on
schedules delivered to Lender will be true and correct, subject to
immaterial variance; (c) The value of the Inventory will be determined
on a consistent accounting basis; (d) Except as agreed to the contrary
by Lender in writing, all Eligible Inventory is now and at all times
hereafter will be in Borrower's physical possession and shall not be
held by others on consignment, sale on approval, or sale or return;
(e) Except as reflected in the Inventory schedules delivered to
Lender, all Eligible Inventory is now and at all times hereafter will
be of good and merchantable quality, free from defects; (f) Eligible
Inventory is not now and will not at any time hereafter be stored with
a bailee, warehouseman, or similar party without Lender's prior
written consent, and, in such event, Borrower will concurrently at the
time of bailment cause any such bailee, warehouseman, or similar party
to issue and deliver to Lender, in form acceptable to Lender,
warehouse receipts in Lender's name evidencing the storage of
Inventory; and (g) Lender, its assigns, or agents shall have the right
at any time and at Borrower's expense to inspect and examine the
Inventory and to check and test the same as to quality, quantity,
value, and condition.

REPRESENTATIONS AND WARRANTIES CONCERNING EQUIPMENT. With respect to
the Equipment, Borrower represents and warrants to Lender: (a) All
Equipment represented by Borrower to be Eligible Equipment for
purposes of this Agreement conforms to the requirements of the
definition of Eligible Equipment; (b) All Equipment values listed on
schedules delivered to Lender will be true and correct, subject to
immaterial variance; (c) The value of the Equipment will be determined
on a consistent accounting basis; (d) Except as agreed to the contrary
by Lender in writing, all Eligible Equipment is now and at all times
hereafter will be in Borrower's physical possession; (e) Except as
reflected in the Equipment schedules delivered to Lender, all Eligible
Equipment is now and at all times hereafter will be of good and
merchantable quality, free from defects; (f) Eligible Equipment is not
now and will not at any time hereafter be stored with a bailee,
warehouseman, or similar party without Lender's prior written consent,
and, in such event, Borrower will concurrently at the time of bailment
cause any such bailee, warehouseman, or similar party to issue and
deliver to Lender, in form acceptable to Lender, warehouse receipts in
Lender's name evidencing the storage of Equipment; and (g) Lender, its
assigns, or agents shall have the right at any time and at Borrower's
expense to inspect and examine the Equipment and to check and test the
same as to quality, quantity, value, and condition.

REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to Lender, as
of the date of this Agreement, as of the date of each disbursement of Loan
proceeds, as of the date of any renewal, extension or modification of any Loan,
and at all times any Indebtedness exists:

ORGANIZATION. Borrower is a corporation which is duly organized,
validly existing, and in good standing under the laws of the State of
California and is validly existing and in good standing in all states
in which Borrower is doing business. Borrower has the full power and
authority to own its properties and to transact the businesses in
which it is presently engaged or presently proposes to engage.
Borrower also is duly qualified as a foreign corporation and is in
good standing in all states in which the failure to so qualify would
have a material adverse effect on its businesses or financial
condition.

AUTHORIZATION. The execution, delivery, and performance of this
Agreement and all Related Documents by Borrower, to the extent to be
executed, delivered or performed by Borrower, have been duly
authorized by all necessary action by Borrower; do not require the
consent or approval of any other person, regulatory authority or
governmental body; and do not conflict with, result in a violation of,
or constitute a default under (a) any provision of its articles of
incorporation or organization, or bylaws, or any agreement or other
instrument binding upon Borrower or (b) any law, governmental
regulation, court decree, or order applicable to Borrower.

FINANCIAL INFORMATION. Each financial statement of Borrower supplied
to Lender truly and completely disclosed Borrower's financial
condition as of the date of the statement, and there has been no
material adverse change in Borrower's financial condition subsequent
to the date of the most recent financial statement supplied to Lender.
Borrower has no material contingent obligations except as disclosed in
such financial statements.

LEGAL EFFECT. This Agreement constitutes, and any instrument or
agreement required hereunder to be given by Borrower when delivered
will constitute, legal, valid and binding obligations of Borrower
enforceable against Borrower in accordance with their respective
terms.

PROPERTIES. Except for Permitted Liens, Borrower owns and has good
title to all of Borrower's properties free and clear of all Security
Interests, and has not executed any security documents or financing
statements relating to such properties. All of Borrower's properties
are titled in Borrower's legal name, and Borrower has not used, or
filed a financing statement under, any other name for at least the
last five (5) years.

HAZARDOUS SUBSTANCES. The terms "hazardous waste," "hazardous
substance," "disposal," "release," and "threatened release," as used
in this Agreement, shall have the same meanings as set forth in the
"CERCLA," "SARA," the Hazardous Materials Transportation Act, 49
U.S.C. Section 1801, et seq., the Resource Conservation and Recovery
Act, 42 U.S.C. Section 6901, et seq., Chapters 6.5 through 7.7 of
Division 20 of the California Health and Safety Code, Section 25100,
et seq., or other applicable state or Federal laws, rules, or
regulations adopted pursuant to any of the foregoing. Except as
disclosed to and acknowledged by Lender in writing, Borrower
represents and warrants that: (a) During the period of Borrower's
ownership of the properties, there has been no use, generation,
manufacture, storage, treatment, disposal, release or threatened
release of any hazardous waste or substance by any person on, under,
about or from any of the properties. (b) Borrower has no knowledge of,
or reason to believe that there has been (i) any use, generation,
manufacture, storage, treatment, disposal, release, or threatened
release of any hazardous waste or substance on, under, about or from
the properties by any prior owners or occupants of any of the
properties, or (ii) any actual or threatened litigation or claims of
any kind by any person relating to such matters. (c) Neither
Borrower nor any tenant, contractor, agent or other authorized user of
any of the properties shall use, generate, manufacture, store, treat,
dispose of, or release any hazardous waste or substance on, under,
about or from any of the properties; and any such activity shall be
conducted in compliance with all applicable federal, state, and local
laws, regulations, and ordinances, including without limitation those
laws, regulations and ordinances described above. Borrower authorizes
Lender and its agents to enter upon the properties to make such
inspections and tests as Lender may deem appropriate to determine
compliance of the properties with this section of the Agreement. Any
inspections or tests made by Lender shall be at Borrower's expense and
for Lender's purposes only and shall not be construed to create any
responsibility or liability on the part of Lender to Borrower or to
any other person. The representations and warranties contained herein
are based on Borrower's due diligence in investigating the properties
for hazardous waste and hazardous substances. Borrower hereby (a)
releases and waives any future claims against Lender for indemnity or
contribution in the event Borrower becomes liable for cleanup or
other costs under any such laws, and (b) agrees to indemnify and hold
harmless Lender against any and all claims, losses, liabilities,
damages, penalties, and expenses which Lender may directly or
indirectly sustain or suffer resulting from a breach of this section

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of the Agreement or as a consequence of any use, generation,
manufacture, storage, disposal, release or threatened release
occurring prior to Borrower's ownership or interest in the properties,
whether or not the same was or should have been known to Borrower.
The provisions of this section of the Agreement, including the obligation
to indemnity, shall survive the payment of the Indebtedness and the
termination or expiration of this Agreement and shall not be affected
by Lender's acquisition of any interest in any of the properties,
whether by foreclosure or otherwise.

LITIGATION AND CLAIMS. No litigation, claim, investigation,
administrative proceeding or similar action (including those for
unpaid taxes) against Borrower is pending or threatened, and no other
event has occurred which may materially adversely affect Borrower's
financial condition or properties, other than litigation, claims, or
other events, if any, that have been disclosed to and acknowledged by
Lender in writing.

TAXES. To the best of Borrower's knowledge, all tax returns and
reports of Borrower that are or were required to be filed, have been
filed, and all taxes, assessments and other governmental charges have
been paid in full, except those presently being or to be contested by
Borrower in good faith in the ordinary course of business and for
which adequate reserves have been provided.

LIEN PRIORITY. Unless otherwise previously disclosed to Lender in
writing, Borrower has not entered into or granted any Security
Agreements, or permitted the filing or attachment of any Security
Interests on or affecting any of the Collateral directly or indirectly
securing repayment of Borrower's Loan and Note, that would be prior or
that may in any way be superior to Lender's Security Interests and
rights in and to such Collateral.

BINDING EFFECT. This Agreement, the Note, all Security Agreements
directly or indirectly securing repayment of Borrower's Loan and Note
and all of the Related Documents are binding upon Borrower as well as
upon Borrower's successors, representatives and assigns, and are
legally enforceable in accordance with their respective terms.

COMMERCIAL PURPOSES. Borrower intends to use the Loan proceeds solely
for business or commercial related purposes.

EMPLOYEE BENEFIT PLANS. Each employee benefit plan as to which
Borrower may have any liability complies in all material respects with
all applicable requirements of law and regulations, and (i) no
Reportable Event nor Prohibited Transaction (as defined in ERISA) has
occurred with respect to any such plan, (ii) Borrower has not
withdrawn from any such plan or initiated steps to do so, (iii) no
steps have been taken to terminate any such plan, and (iv) there are
no unfunded liabilities other than those previously disclosed to
Lender in writing.

LOCATION OF BORROWER'S OFFICES AND RECORDS. Borrower's place of
business, or Borrower's Chief executive office, if Borrower has more
than one place of business, is located at 4954 VAN NUYS BLVD., #201,
SHERMAN OAKS, CA 91403. Unless Borrower has designated otherwise in
writing this location is also the office or offices where Borrower
keeps its records concerning the Collateral.

INFORMATION. All information heretofore or contemporaneously herewith
furnished by Borrower to Lender for the purposes of or in connection
with this Agreement or any transaction contemplated hereby is, and all
information hereafter furnished by or on behalf of Borrower to Lender
will be, true and accurate in every material respect on the date as of
which such information is dated or certified; and none of such
information is or will be incomplete by omitting to state any material
fact necessary to make such information not misleading.

SURVIVAL OF REPRESENTATIONS AND WARRANTIES. Borrower understands and
agrees that Lender, without independent investigation, is relying upon
the above representations and warranties in extending Loan Advances to
Borrower. Borrower further agrees that the foregoing representations
and warranties shall be continuing in nature and shall remain in full
force and effect until such time as Borrower's Indebtedness shall be
paid in full, or until this Agreement shall be terminated in the
manner provided above, whichever is the last to occur.

AFFIRMATIVE COVENANTS. Borrower covenants and agrees with Lender that, while
this Agreement is in effect, Borrower will:

LITIGATION. Promptly inform lender in writing of (a) all material
adverse changes in Borrower's financial condition, and (b) all
existing and all threatened litigation, claims, investigations,
administrative proceedings or similar actions affecting Borrower or
any Guarantor which could materially affect the financial condition of
Borrower or the financial condition of any Guarantor.

FINANCIAL RECORDS. Maintain its books and records in accordance with
generally accepted accounting principles, applied on a consistent
basis, and permit Lender to examine and audit Borrower's books and
records at all reasonable times.

FINANCIAL STATEMENTS. Furnish Lender with, as soon as available, but
in no event later than ninety (90) days after the end of each fiscal
year, Borrower's balance sheet and income statement for the year
ended, audited by a certified public accountant satisfactory to
Lender, and, as soon as available, but in no event later than forty-five
(45) days after the end of each fiscal quarter, Borrower's balance sheet
and profit and loss statement for the period ended, prepared and
certified as correct to the best knowledge and belief by Borrower's chief
financial officer or other officer or person acceptable to Lender.
All financial reports required to be provided under this Agreement
shall be prepared in accordance with generally accepted accounting
principles, applied on a consistent basis, and certified by Borrower
as being true and correct.

ADDITIONAL INFORMATION. Furnish such additional information and
statements, lists of assets and liabilities, agings of receivables and
payables, inventory schedules, budgets, forecasts, tax returns, and
other reports with respect to Borrower's financial condition and
business operations as Lender may request from time to time.

FINANCIAL COVENANTS AND RATIOS. Comply with the following covenants
and ratios:

TANGIBLE NET WORTH. Maintain a minimum Tangible Net Worth of
not less than $2,200,000.00.

NET WORTH RATIO. Maintain a ratio of Total Liabilities to
Tangible Net Worth of less than 2.50 to 1.00.

WORKING CAPITAL. Maintain Working Capital in excess of
$500,000.00.

CURRENT RATIO. Maintain a ratio of Current Assets to Current
Liabilities in excess of 1.00 to 1.00.

OTHER RATIO. Maintain a ration of"EBITDA", WHICH MEANS FOR ANY
PERIOD, THE SUME OF (A) NET INCOME FOR SUCH PERIOD AND (B) THE
FOLLOWING, TO THE EXTENT DEDUCTED IN DETERMINING SUCH NET INCOME:
(I) DEPRECIATION AND AMORTIZATION, (II) INCOME TAXES, AND (III)
INTEREST EXPENSE OF 2.50 TO 1.00. Except as provided above, all
computations made to determine compliance with the requirements
contained in this paragraph shall be made in accordance with
generally accepted accounting principles, applied on a consistent
basis, and certified by Borrower as being true and correct.

INSURANCE. Maintain fire and other risk insurance, public
liability insurance, and such other insurance as Lender may
require with respect to Borrower's properties and operations,
in form, amounts, coverages and with insurance companies
reasonably acceptable to Lender. Borrower, upon request of
Lender, will deliver to Lender from time to time the policies or
certificates of insurance in form satisfactory to Lender,
including stipulations that coverages will not be cancelled or
diminished without at least ten (10) days' prior written notice
to Lender. Each insurance policy also shall include an
endorsement providing that coverage in favor of Lender will not
be impaired in any way by any act, omission or default of
Borrower or any other person. In connection with all policies
covering assets in which Lender holds or is offered a security
interest for the Loans, Borrower will provide Lender with
such loss payable or other endorsements as Lender may require.

INSURANCE REPORTS. Furnish to Lender, upon request of Lender, reports
on each existing insurance policy showing such information as Lender
may reasonably request, including without limitation the following:
(a) the name of the insurer; (b) the risks insured; (c) the amount of
the policy; (d) the properties insured; (e) the then current property
values on the basis of which insurance has been obtained, and the
manner of determining those values; and (f) the expiration date of the
policy. In addition, upon request of Lender (however not more often
than annually), Borrower will have an independent appraiser
satisfactory to Lender determine, as applicable, the actual cash
value or replacement cost of any Collateral. The cost of such
appraisal shall be paid by Borrower.

OTHER AGREEMENTS. Comply with all terms and conditions of all other
agreements, whether now or hereafter existing, between Borrower and
any other party and notify Lender immediately in writing of any
default in connection with any other such agreements.

LOAN PROCEEDS. Use all Loan proceeds solely for Borrower's business
operations, unless specifically consented to the contrary by Lender in
writing.

TAXES, CHARGES AND LIENS. Pay and discharge when due all of its
indebtedness and obligations, including without limitation all
assessments, taxes, governmental charges, levies and liens, of every
kind and nature, imposed upon Borrower or its properties, income, or
profits, prior to the date on which penalties would attach, and all
lawful claims that, if unpaid, might become a lien or charge upon any
of Borrower's properties, income, or profits. Provided however,
Borrower will not be required to pay and discharge any such
assessment, tax, charge, levy, lien or claim so long as (a) the
legality of the same shall be contested in good faith by appropriate
proceedings, and (b) Borrower shall have established on its books
adequate reserves with respect to such contested assessment, tax,
charge, levy, lien, or claim in accordance with generally accepted
accounting practices. Borrower, upon demand of Lender, will furnish
to Lender evidence of payment of the assessments, taxes, charges,
levies, liens and claims and will authorize the appropriate
governmental official to deliver to Lender at any time a written
statement of any assessments, taxes, charges, levies, liens and
claims against Borrower's properties, income, or profits.

PERFORMANCE. Perform and comply with all terms, conditions,
and provisions set forth in this Agreement and in the Related
Documents in a timely manner, and promptly notify Lender if Borrower
learns of the occurrence of any event which constitutes an Event of
Default under this Agreement or under any of the Related Documents.

OPERATIONS. Maintain executive and management personnel with
substantially the same qualifications and experience as the present
executive and management personnel; provide written notice to Lender of any
change in executive and management personnel; conduct its business

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02-05-1999 LOAN AGREEMENT PAGE 5
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affairs in a reasonable and prudent manner and in compliance with all
applicable federal, state and municipal laws, ordinances, rules and
regulations respecting its properties, charters, businesses and
operations, including without limitation, compliance with the
Americans With Disabilities Act and with all minimum funding standards
and other requirements of ERISA and other laws applicable to
Borrower's employee benefit plans.

INSPECTION. Permit employees or agents of Lender at any reasonable
time to inspect any and all Collateral for the Loan or Loans and
Borrower's other properties and to examine or audit Borrower's books,
accounts, and records and to make copies and memoranda of Borrower's
books, accounts, and records. If Borrower now or at any time
hereafter maintains any records (including without limitation computer
generated records and computer software programs for the generation of
such records) in the possession of a third party, Borrower, upon
request of Lender, shall notify such party to permit Lender free
access to such records at all reasonable times and to provide Lender
with copies of any records it may request, all at Borrower's expense.

COMPLIANCE CERTIFICATE. Unless waived in writing by Lender, provide
Lender at least annually and at the time of each disbursement of Loan
proceeds with a certificate executed by Borrower's chief financial
officer, or other officer or person acceptable to Lender, certifying
that the representations and warranties set forth in this Agreement
are true and correct as of the date of the certificate and further
certifying that, as of the date of the certificate, no Event of
Default exists under this Agreement.

ENVIRONMENTAL COMPLIANCE AND REPORTS. Borrower shall comply in all
respects with all environmental protection federal, state and local
laws, statutes, regulations and ordinances; not cause or permit to
exist, as a result of an intentional or unintentional action or
omission on its part or on the part of any third party, on property
owned and/or occupied by Borrower, any environmental activity where
damage may result to the environment, unless such environmental
activity is pursuant to and in compliance with the conditions of a
permit issued by the appropriate federal, state or local governmental
authorities; shall furnish to Lender promptly and in any event within
thirty (30) days after receipt thereof a copy of any notice, summons,
lien, citation, directive, letter or other communication from any
governmental agency or instrumentality concerning any intentional or
unintentional action or omission on Borrower's part in connection
with any environmental activity whether or not there is damage to the
environment and/or other natural resources.

ADDITIONAL ASSURANCES. Make, execute and deliver to Lender such
promissory notes, mortgages, deeds of trust, security agreements,
financing statements, instruments, documents and other agreements as
Lender or its attorneys may reasonably request to evidence and secure
the Loans and to perfect all Security Interests.

RECOVERY OF ADDITIONAL COSTS. If the imposition of or any change in any law,
rule, regulation or guideline, or the interpretation or application of any
thereof by any court or administrative or governmental authority (including any
request or policy not having the force of law) shall impose, modify or make
applicable any taxes (except U.S. federal, state or local income or franchise
taxes imposed on Lender), reserve requirements, capital adequacy requirements or
other obligations which would (a) increase the cost to Lender for extending or
maintaining the credit facilities to which this Agreement relates, (b) reduce
the amounts payable to Lender under this Agreement or the Related Documents, or
(c) reduce the rate of return on Lender's capital as a consequence of Lender's
obligations with respect to the credit facilities to which this Agreement
relates, then Borrower agrees to pay Lender such additional amounts as will
compensate Lender therefor, within five (5) days after Lender's written demand
for such payment, which demand shall be accompanied by an explanation of such
imposition or charge and a calculation in reasonable detail of the additional
amounts payable by Borrower, which explanation and calculations shall be
conclusive in the absence of manifest error.

NEGATIVE COVENANTS. Borrower covenants and agrees with Lender that while this
Agreement is in effect, Borrower shall not, without the prior written consent of
Lender:

INDEBTEDNESS AND LIENS. (a) Except for trade debt incurred in the
normal course of business and indebtedness to Lender contemplated by
this Agreement, create, incur or assume additional indebtedness for
borrowed money, including capital leases, (b) except as allowed as a
Permitted Lien, sell, transfer, mortgage, assign, pledge, lease, grant
a security interest in, or encumber any of Borrower's assets, or (c) sell
with recourse any of Borrowers accounts, except to Lender.

CONTINUITY OF OPERATIONS. (a) Engage in any business activities
substantially different than those in which Borrower is presently
engaged, (b) cease operations, liquidate, merge, transfer, acquire or
consolidate with any other entity, change ownership, change its name,
dissolve or transfer or sell Collateral out of the ordinary course of
business, (c) pay any dividends on Borrower's stock (other than
dividends payable in its stock), provided, however that
notwithstanding the foregoing, but only so long as no Event of Default
has occurred and is continuing or would result from the payment of
dividends, if Borrower is a "Subchapter S Corporation" (as defined in
the Internal Revenue Code of 1986, as amended), Borrower may pay cash
dividends on its stock to its shareholders from time to time in
amounts necessary to enable the shareholders to pay income taxes and
make estimated income tax payments to satisfy their liabilities under
federal and state law which arise solely from their status as
Shareholders of a Subchapter S Corporation because of their ownership
of shares of stock of Borrower, or (d) purchase or retire any of
Borrower's outstanding shares or alter or amend Borrower's capital
structure.

LOANS, ACQUISITIONS AND GUARANTIES. (a) Loan, invest in or advance
money or assets, (b) purchase, create or acquire any interest in any
other enterprise or entity, or (c) incur any obligation as surety or
guarantor other than in the ordinary course of business.

CESSATION OF ADVANCES. If lender has made any commitment to make any Loan to
Borrower, whether under this Agreement or under any other agreement, Lender
shall have no obligation to make Loan Advances or to disburse Loan proceeds if:
(a) Borrower or any Guarantor is in default under the terms of this Agreement or
any of the Related Documents or any other agreement that Borrower or any
Guarantor has with Lender; (b) Borrower or any Guarantor becomes insolvent,
files a petition in bankruptcy or similar proceedings, or is adjudged a
bankrupt; (c) there occurs A material adverse change in Borrower's financial
condition, in the financial condition of any Guarantor, or in the value of any
Collateral securing any Loan; (d) any Guarantor seeks, claims or otherwise
attempts to limit, modify or revoke such Guarantor's guaranty of the Loan or any
other loan with Lender; or (e) Lender in good faith deems itself insecure, even
though no Event of Default shall have occurred.

NOTICE OF LITIGATION. Debtor will promptly give notice to Lender in writing of
any proceedings against Debtor involving amounts in excess of $25,000.00 not
fully covered by insurance, any substantial claim or dispute which may exist
between Debtor and any Person, any labor controversy resulting in or threatening
to result in a strike against Debtor, or any proposal by any public authority to
acquire a material portion of the assets or business of Debtor.

NOTICE OF UNINSURED LOSS. Debtor shall give Lender written notice of any
uninsured loss in excess of $25,000.00 in each instance.

ADDITIONAL FINANCIAL COVENANT.
1. Monthly internal financial statements and cash flows within Twenty (20)
days of the following month.
2. Quarterly 10Q statements within forty five (45) days after the close of
each quarter.
3. Fiscal year end Certified Public Accountant audited 10K Financial Statements
due within one hundred twenty days of year end.

REPLACEMENT OF PRIOR LOAN AGREEMENT. This Agreement replaces and supersedes
that certain Loan Agreement, dated as of June 30, 1998, as amended from time
to time, between Borrower and Lender.

YEAR 2000 BORROWER REPRESENTATIONS AND COVENANT. The borrower has (i)
undertaken a sufficient inventory, review and assessment of all areas within
its business and operations that could be adversely affected by the failure of
the borrower to be Year 2000 Compliant on a timely basis, (ii) developed a plan
and timeline for becoming Year 2000 compliant on a timely basis, (iii) to date,
implemented that plan in accordance with that timeline in all material respects
and, (iv) made inquiry of its key suppliers, vendors and customers as to whether
such person(s) will, on a timely basis, be Year 2000 Complaint in all material
respects and on the basis of such inquiry reasonably believes that all such
person(s) will, on a timely basis, be Year 2000 Compliant. "Year 2000
Compliant" shall mean that, in all material respects, all computer and
software related applications shall be able to recognize and perform
properly, date sensitive functions involving dates prior to and after
December 31, 1999.

No later than December 31, 1998, the borrower shall have completed testing
to verify whether all of its computer and software related applications
are Year 2000 Compliant.

The borrower shall take all action necessary to ensure that the borrower
shall be Year 2000 Compliant and that no material adverse change will
arise in the borrower's financial condition as a result of its efforts or
failure to be Year 2000 Compliant.

RIGHT OF SETOFF. Borrower grants to Lender a contractual possessory security
interest in, and hereby assigns, conveys, delivers, pledges, and transfers to
Lender all Borrower's right, title and interest in and to, Borrower's accounts
with Lender (whether checking, savings, or some other account), including
without limitation all accounts held jointly with someone else and all accounts
Borrower may open in the future, excluding however all IRA and Keogh accounts,
and all trust accounts for which the grant of a security interest would be
prohibited by law. Borrower authorizes Lender, to the extent permitted by
applicable law, to charge or setoff all sums owing on the Indebtedness against
any and all such accounts.

EVENTS OF DEFAULT. Each of the following shall constitute an Event of Default
under this Agreement:

DEFAULT ON INDEBTEDNESS. Failure of Borrower to make any payment when
due on the Loans.

OTHER DEFAULTS. Failure of Borrower or any Grantor to comply with
or to perform when due any other term, obligation, covenant or
condition contained in this Agreement or in any of the Related
Documents, or failure of Borrower to comply with or to perform any
other term, obligation, covenant or condition contained in any other
agreement between Lender and Borrower.

FALSE STATEMENTS. Any warranty, representation or statement made or
furnished to Lender by or on behalf of Borrower or any Grantor under
this Agreement or the Related Documents is false or misleading in any
material respect at the time made or furnished, or becomes false or
misleading at any time thereafter.

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02-05-1999 LOAN AGREEMENT PAGE 6
(CONTINUED)
===============================================================================

DEFECTIVE COLLATERALIZATION. This Agreement or any of the Related
Documents ceases to be in full force and effect (including failure of
any Security Agreement to create a valid and perfected Security
Interest) at any time and for any reason.

INSOLVENCY. The dissolution or termination of Borrower's existence as
a going business, the insolvency of Borrower, the appointment of a
receiver for any part of Borrower's property, any assignment for the
benefit of creditors, any type of creditor workout, or the
commencement of any proceeding under any bankruptcy or insolvency laws
by or against Borrower.

CREDITOR OR FORFEITURE PROCEEDINGS. Commencement of foreclosure or
forfeiture proceedings, whether by judicial proceeding, self-help,
repossession or any other method, by any creditor of Borrower, any
creditor of any Grantor against any collateral securing the
Indebtedness, or by any governmental agency. This includes a
garnishment, attachment, or levy on or of any of Borrowers deposit
accounts with Lender. However, this Event of Default shall not
apply if there is a good faith dispute by Borrower or Grantor, as
the case may be, as to the validity or reasonableness of the claim
which is the basis of the creditor or forfeiture proceeding, and if
Borrower or Grantor gives Lender written notice of the creditor or
forfeiture proceeding and furnishes reserves or a surety bond for
the creditor or forfeiture proceeding satisfactory to Lender.

EVENTS AFFECTING GUARANTOR. Any of the preceding events occurs with
respect to any Guarantor of any of the Indebtedness or any Guarantor
dies or becomes incompetent, or revokes or disputes the validity of,
or liability under, any Guaranty of the Indebtedness. Lender, at its
option, may, but shall not be required to, permit the Guarantor's
estate to assume unconditionally the obligations arising under the
guaranty in a manner satisfactory to Lender, and, in doing so, cure
the Event of Default.

CHANGE IN OWNERSHIP. Any change in ownership of twenty-five percent
(25%) or more of the common stock of Borrower.

ADVERSE CHANGE. A material adverse change occurs in Borrower's
financial condition, or Lender believes the prospect of payment or
performance of the Indebtedness is impaired.

INSECURITY. Lender, in good faith, deems itself insecure.

RIGHT TO CURE. If any default, other than a Default on Indebtedness,
is curable and if Borrower or Grantor, as the case may be, has not
been given a notice of a similar default within the preceding twelve
(12) months, it may be cured (and no Event of Default will have
occurred) if Borrower or Grantor, as the case may be, after receiving
written notice from Lender demanding cure of such default: (a) cures
the default within fifteen (15) days; or (b) if the cure requires more
than fifteen (15) days, immediately initiates steps which Lender deems
in Lender's sole discretion to be sufficient to cure the default and
thereafter continues and completes all reasonable and necessary steps
sufficient to produce compliance as soon as reasonably practical.

EFFECT OF AN EVENT OF DEFAULT. If any Event of Default shall occur, except
where otherwise provided in this Agreement or the Related Documents, all
commitments and obligations of Lender under this Agreement or the Related
Documents or any other agreement immediately will terminate (including any
obligation to make Loan Advances or disbursements), and, at Lender's
option, all Indebtedness immediately will become due and payable, all
without notice of any kind to Borrower, except that in the case of an
Event of Default of the type described in the "Insolvency" subsection
above, such acceleration shall be automatic and not optional. In addition,
Lender shall have all the rights and remedies provided in the Related
Documents or available at law, in equity, or otherwise. Except as may be
prohibited by applicable law, all of Lender's rights and remedies shall be
cumulative and may be exercised singularly or concurrently. Election by
Lender to pursue any remedy shall not exclude pursuit of any other remedy,
and an election to make expenditures or to take action to perform an
obligation of Borrower or of any Grantor shall not affect Lender's right
to declare a default and to exercise its rights and remedies.

MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a
part of this Agreement:

AMENDMENTS. This Agreement, together with any Related Documents,
constitutes the entire understanding and agreement of the parties as
to the matters set forth in this Agreement. No alteration of or
amendment to this Agreement shall be effective unless given in writing
and signed by the party or parties sought to be charged or bound by
the alteration or amendment.

APPLICABLE LAW. THIS AGREEMENT HAS BEEN DELIVERED TO LENDER AND
ACCEPTED BY LENDER IN THE STATE OF CALIFORNIA. IF THERE IS A
LAWSUIT, BORROWER AGREES UPON LENDER'S REQUEST TO SUBMIT TO THE
JURISDICTION OF THE COURTS OF LOS ANGELES COUNTY, THE STATE OF
CALIFORNIA. LENDER AND BORROWER HEREBY WAIVE THE RIGHT TO ANY JURY
TRIAL IN ANY ACTION, PROCEEDING, OR COUNTERCLAIM BROUGHT BY EITHER
LENDER OR BORROWER AGAINST THE OTHER. THIS AGREEMENT SHALL BE
GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF
CALIFORNIA.

CAPTION HEADINGS. Caption headings in this Agreement are for
convenience purposes only and are not to be used to interpret or
define the provisions of this Agreement.

MULTIPLE PARTIES; CORPORATE AUTHORITY. All obligations of Borrower
under this Agreement shall be joint and several, and all references to
Borrower shall mean each and every Borrower. This means that each of
the Borrowers signing below is responsible for ALL obligations in this
Agreement.

CONSENT TO LOAN PARTICIPATION. Borrower agrees and consents to
Lender's sale or transfer, whether now or later, of one or more
participation interests in the Loans to one or more purchasers,
whether related or unrelated to Lender. Lender may provide, without
any limitation whatsoever, to any one or more purchasers, or potential
purchasers, any information or knowledge Lender may have about
Borrower or about any other matter relating to the Loan, and Borrower
hereby waives any rights to privacy it may have with respect to such
matters. Borrower additionally waives any and all notices of sale of
participation interests, as well as all notices of any repurchase of
such participation interests. Borrower also agrees that the
purchasers of any such participation interests will be considered as
the absolute owners of such interests in the Loans and will have all
the rights granted under the participation agreement or agreements
governing the sale of such participation interests. Borrower further
waives all rights of offset or counterclaim that it may have now or
later against Lender or against any purchaser of such a participation
interest and unconditionally agrees that either Lender or such
purchaser may enforce Borrower's obligation under the Loans
irrespective of the failure or insolvency of any holder of any
interest in the Loans. Borrower further agrees that the purchaser of
any such participation interests may enforce its interests
irrespective of any personal claims or defenses that Borrower may have
against Lender.

COSTS AND EXPENSES. Borrower agrees to pay upon demand all of
Lender's expenses, including without limitation attorneys' fees,
incurred in connection with the preparation, execution, enforcement,
modification and collection of this Agreement or in connection with
the Loans made pursuant to this Agreement. Lender may pay someone
else to help collect the Loans and to enforce this Agreement, and
Borrower will pay that amount. This includes, subject to any limits
under applicable law, Lender's attorneys' fees and Lender's legal
expenses, whether or not there is a lawsuit, including attorneys' fees
for bankruptcy proceedings (including efforts to modify or vacate any
automatic stay or injunction), appeals, and any anticipated post-
judgment collection services. Borrower also will pay any court costs,
in addition to all other sums provided by law.

NOTICES. All notices required to be given under this Agreement shall
be given in writing, may be sent by telefacsimilie, and shall be
effective when actually delivered or when deposited with a nationally
recognized overnight courier or deposited in the United States mail,
first class, postage prepaid, addressed to the party to whom the
notice is to be given at the address shown above. Any party may
change its address for notices under this Agreement by giving formal
written notice to the other parties, specifying that the purpose of
the notice is to change the party's address. To the extent permitted
by applicable law, if there is more than one Borrower, notice to any
Borrower will constitute notice to all Borrowers. For notice
purposes, Borrower will keep Lender informed at all times of
Borrower's current address(es).

SEVERABILITY. If a court of competent jurisdiction finds any provision
of this Agreement to be invalid or unenforceable as to any person or
circumstance, such finding shall not render that provision invalid or
unenforceable as to any other persons or circumstances. If feasible,
any such offending provision shall be deemed to be modified to be
within the limits of enforceability or validity; however, if the
offending provision cannot be so modified, it shall be stricken and
all other provisions of this Agreement in all other respects shall
remain valid and enforceable.

SUBSIDIARIES AND AFFILIATES OF BORROWER. To the extent the context of
any provisions of this Agreement makes it appropriate, including
without limitation any representation, warranty or covenant, the word
"Borrower" as used herein shall include all subsidiaries and
affiliates of Borrower. Notwithstanding the foregoing however, under
no circumstances shall this Agreement be construed to require Lender
to make any Loan or other financial accommodation to any subsidiary or
affiliate of Borrower.

SUCCESSORS AND ASSIGNS. All covenants and agreements contained by or
on behalf of Borrower shall bind its successors and assigns and shall
inure to the benefit of Lender, its successors and assigns. Borrower
shall not, however, have the right to assign its rights under this
Agreement or any interest therein, without the prior written consent
of Lender.

SURVIVAL. All warranties, representations, and covenants made by
Borrower In this Agreement or in any certificate or other instrument
delivered by Borrower to Lender under this Agreement shall be
considered to have been relied upon by Lender and will survive the
making of the Loan and delivery to Lender of the Related Documents,
regardless of any investigation made by Lender or on Lender's behalf.

TIME IS OF THE ESSENCE. Time is of the essence in the performance of
this Agreement.

WAIVER. Lender shall not be deemed to have waived any rights under
this Agreement unless such waiver is given in writing and signed by
Lender. No delay or omission on the part of Lender in exercising any
right shall operate as a waiver of such right or any other right. A
waiver by Lender of a provision of this Agreement shall not prejudice
or constitute a waiver of Lender's right otherwise to demand strict
compliance with that provision or any other provision of this
Agreement. No prior waiver by Lender, nor any course of dealing
between Lender and Borrower, or between Lender and any Grantor, shall
constitute a waiver of any of Lender's rights or of any obligations of
Borrower or of any Grantor as to any future transactions. Whenever
the consent of Lender is required under this Agreement, the granting
of such consent by Lender in any instance shall not constitute

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02-05-1999 LOAN AGREEMENT PAGE 7
(CONTINUED)
===============================================================================

continuing consent in subsequent instances where such consent is
required, and in all cases such consent may be granted or withheld in
the sole discretion of Lender.

BORROWER ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS LOAN
AGREEMENT, AND BORROWER AGREES TO ITS TERMS. THIS AGREEMENT IS DATED
AS OF FEBRUARY 5, 1999.

BORROWER:

HEMACARE CORPORATION

BY: /s/ Sharon C. Kaiser BY: /s/ Williamd D. Nicely
--------------------------- -------------------------
Authorized Officer Authorized Officer

LENDER:

BANK LEUMI LE-ISRAEL, B.M.

BY: /s/
--------------------------
AUTHORIZED OFFICER

<PAGE>

[LOGO]
BANK LEUMI USA
- ---------------------------
- ---------------------------
- ---------------------------
Member FDIC

<TABLE>
<CAPTION>
PROMISSORY NOTE
- ---------------------------------------------------------------------------------------------------------
PRINCIPAL LOAN DATE MATURITY LOAN NO CALL COLLATERAL ACCOUNT OFFICER INITIALS
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$1,200,000.00 02-05-1999 06-01-1999 1-1 04A0 030 xxxxxxxxxx KXA
- ---------------------------------------------------------------------------------------------------------
References in the shaded area are for lender's use only and do not limit the applicability of this
document to any particular loan or item.
- ---------------------------------------------------------------------------------------------------------
</TABLE>

PROMISE TO PAY. HEMACARE CORPORATION ("BORROWER") PROMISES TO PAY
TO BANK LEUMI USA ("LENDER"), OR ORDER, IN LAWFUL MONEY OF THE
UNITED STATES OF AMERICA, THE PRINCIPAL AMOUNT OF ONE MILLION TWO HUNDRED
THOUSAND & 00/100 DOLLARS ($1,200,000.00), TOGETHER WITH INTEREST ON
THE UNPAID OUTSTANDING PRINCIPAL BALANCE OF EACH ADVANCE. INTEREST SHALL
BE CALCULATED FROM THE DATE OF EACH ADVANCE UNTIL REPAYMENT OF EACH ADVANCE.

PAYMENT. BORROWER WILL PAY THIS LOAN IN ONE PAYMENT OF ALL OUSTANDING
PRINCIPAL PLUS ALL ACCRUED UNPAID INTEREST ON jUNE 1, 1999. IN ADDITION
BORROWER WILL PAY REGULAR MONTHLY PAYMENTS OF ACCRUED UNPAID INTEREST
BEGINNING MARCH 1, 1999, AND ALL SUBSEQUENT INTEREST PAYMENTS ARE DUE
ON THE SAME DAY OF EACH MONTH AFTER THAT. The annual interest rate
for this Note is computed on a 365/360 basis; that is, by applying
the ratio of the annual interest rate over a year of 360 days,
multiplied by the outstanding principal balance, multiplied by the
actual number of days the principal balance is outstanding.
Borrower will pay Lender at Lender's address shown above or at such
other place as Lender may designate in writing. Unless otherwise
agreed or required by applicable law, payments will be applied first
to accrued unpaid interest, then to principal, and any remaining
amount to any unpaid collections costs and late charges.

VARIABLE INTEREST RATE. The interest rate on this Note is subject
to change from time to time based on changes in an index which is
the reference rate as established by Bank Leumi USA from time to
time as its base rate. (the AIndex@). The Index is not necessarily
the lowest rate charged by Lender on its loans and is set by Lender
in its sole discretion. If the Index becomes unavailable during the
term of this loan, Lender may designate a substitute index after
notifying Borrower. Lender will tell Borrower the current index
rate upon Borrower's request. Borrower understands that Lender may
make loans based on other rates as well. The interest rate change
will not occur more often than each day. THE INDEX CURRENTLY IS
7.750%. THE INTEREST RATE TO BE APPLIED TO THE UNPAID PRINCIPAL
BALANCE OF THIS NOTE WILL BE AT A RATE OF 0.500 PERCENTAGE POINTS
OVER THE INDEX, RESULTING IN AN INITIAL RATE OF 8.250%. NOTICE:
Under no circumstances will the interest rate on this Note be more
than the maximum rate allowed by applicable law.

PREPAYMENT; MINIMUM INTEREST CHARGE. In any event, even upon full
prepayment of this Note, Borrower understands that Lender is
entitled to a MINIMUM INTEREST CHARGE OF $250.00. Other than
Borrower's obligation to pay any minimum interest charge, Borrower
may pay without penalty all or a portion of the amount owed earlier
than it is due. Early payments will not, unless agreed to by the
Lender in writing, relieve Borrower of Borrower's obligation to
continue to make payments under the payment schedule. Rather, they
will reduce the principal balance due.

LATE CHARGE. If a payment is 10 DAYS OF MORE LATE, Borrower will
be charged 3.000% OF THE UNPAID PORTION OF THE REGULARLY SCHEDULED
PAYMENT OF $25.000, WHICHEVER IS GREATER.

DEFAULT. Borrower will be in default if any of the following
happens: (a) Borrower fails to make any payment when due. (b)
Borrower breaks any promise Borrower has made to Lender, or Borrower
fails to comply with or to perform when due any other term,
obligation, covenant, or condition contained in this Note or any
other agreement or loan Borrower has with Lender. (c) Any representation
or statement made or furnished to Lender by Borrower or on Borrower's behalf
is false or misleading in any material respect either now or at the time
made or furnished. (d) Borrower has become insolvent, a receiver is
appointed for any part of Borrower's property. Borrower makes an
assignment for the benefit of creditors, or any proceeding is
commenced either by Borrower or against Borrower under any
bankruptcy or insolvency laws. (e) Any creditor tries to take any
of Borrower's property on or in which Lender has a lien or security
interest. This includes a garnishment of any of Borrower's accounts
with Lender. (f) Any guarantor dies or any of other events
described in this default section occurs with respect to any
guarantor of this Note. (g) A material adverse change occurs in
Borrower's financial condition, or Lender believes the prospect of
payment or performance of the Indebtedness is impaired. (h) Lender
in good faith deems itself insecure.

If any default, other than a default in payment, is curable and if
Borrower has not been given a notice of a breach of the same
provision of this Note within the preceding twelve (12) months, it
may be cured (and no event of default will have occurred) if
Borrower, after receiving written notice from Lender demanding cure
of such default: (a) cures the default within fifteen (15) days: or
(b) if the cure requires more than fifteen (15) days, immediately
initiates steps which Lender deems in Lender's sole discretion to
be sufficient to cure the default and thereafter continues and
completes all reasonable and necessary steps sufficient to product
compliance as soon as reasonably practical.

LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid
principal balance on this Note and all accrued unpaid interest
immediately due, without notice, and then Borrower will pay that
amount. Upon Borrower's failure to pay all amounts declared due
pursuant to this section, including failure to pay upon final
maturity, Lender, at its option, may also, if permitted under
applicable law, increase the variable interest rate on this Note to
5.500 percentage points over the Index. This includes, subject to any
limits under applicable law, Lender's attorneys' fees and Lender's
legal expenses whether or not there is a lawsuite, including attorneys'
fees and legal expenses for bankruptcy proceedings (including efforts to
modify or vacate any automatic stay or injunction), appeals, and
any anticipated post-judgement collection services. Borrower also will pay
court costs, in addition to all other sums provided by law.
THE NOTE HAS BEEN DELIVERED TO LENDER AND ACCEPTED BY LENDER IN THE STATE
OF CALIFORNIA. IF THERE IS A LAWSUIT, BORROWER AGREES UPON LENDER'S REQUEST
TO SUBMIT TO THE JURISDICTION OF THE COURTS OF LOS ANGELES COUNTY, THE STATE
OF CALIFORNIA. LENDER AND BORROWER HEREBY WAIVE THE RIGHT TO ANY JURY
TRIAL IN ANY ACTION, PROCEEDING, OR COUNTERCLAIM BROUGHT BY EITHER
LENDER OR BORROWER AGAINST THE OTHER. THIS NOTE SHALL BE GOVERNED
BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF
CALIFORNIA.

RIGHT OF SETOFF. Borrower grants to Lender a contractual security
interest in, and hereby assigns, conveys, delivers, pledges, and
transfers to Lender all Borrower's right, title and interest in and
to, Borrower's accounts with Lender (whether checking, savings, or
some other account), including without limitation all accounts held
jointly with someone else and all accounts Borrower may open in the
future, excluding however all IRA and Keogh accounts, and all trust
accounts for which the grant of a security interest would be
prohibited by law. Borrower authorizes Lender, to the extent
permitted by applicable law, to charge or setoff all sums owing on
this Note against any and all such accounts.

LINE OF CREDIT: This Note evidences a revolving line of credit. Advances
under this Note may be requested either orally or in writing by Borrower
or as provided in this paragraph. Lender may, but need not, require that
all oral requests be confirmed in writing. All communications, instructions,
or directions by telephone or otherwise to Lender are to be directed to
Lender's office shown above. The following party or parties are authorized
as provided in this paragraph to request advances under the line of credit
until Lender receives from Borrower at Lender's address shown above written
notice of revocation of their authority: SHARON KAISER, VICE PRESIDENT /
CHIEF FINANCIAL OFFICER; WILLIAM D. NICELY, CHIEF EXECUTIVE OFFICER; AND
JOANN STOVER, SECRETARY. (MINIMUM OF $5,000 PER REQUEST). Borrower agrees
to be liable for all sums either: (a) advanced in accordance with the
instructions of an authorized person or (b) credited to any of Borrower's
accounts with Lender. The unpaid principal balance owing on this Note at
any time may be evidenced by endorsements on this Note or by Lender's internal
records, including daily computer print-outs. Lender will have no obligation
to advance funds under this Note if: (a) Borrower or any guarantor is in
default under the terms of this Note or any agreement that Borrower or
any guarantor has with Lender, including any agreement made in connection with
the signing of this Note; (b) Borrower or any guarantor ceases doing business
or is insolvent; (c) any guarantor seeks, claims or otherwise attempts to
limit, modify or revoke such guarantee of this Note or any other loan with
Lender; (d) Borrower has applied funds provided pursuant to this Note for
purposes other than those authorized by Lender; or (e) Lender in good
faith deems itself insecure under this Note or any other agreement
between Lender and Borrower.

<PAGE>
02-05-1999 PROMISSORY NOTE PAGE 2
(Continued)
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------

GENERAL PROVISIONS. Lender may delay or forgo enforcing any of its
rights or remedies under this Note without losing them. Borrower
and any other person who signs, guarantees or endorses this Note,
to the extent allowed by law, waive any applicable statute of
limitations, presentment, demand for payment, protest and notice of
dishonor. Upon any change in the terms of this Note, and unless
otherwise expressly stated in writing, no party who signs this Note,
whether as maker, guarantor, accommodation maker or endorser, shall
be released from liability. All such parties agree that Lender may
renew or extend (repeatedly and for any length of time) this loan,
or release any party or guarantor or collateral; or impair, fail to
realize upon or perfect Lender's security interest in the
collateral; and take any other action deemed necessary by Lender
without the consent of or notice to anyone. All such parties also
agree that Lender may modify this loan without the consent of or
notice to anyone other than the party with whom the modification is
made.

PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE
PROVISIONS OF THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE
PROVISIONS. BORROWER AGREES TO THE TERMS OF THE NOTE AND
ACKNOWLEDGES RECEIPT OF A COMPLETE COPY OF THE NOTE.

BORROWER:

HEMACARE CORPORATION

x /s/ Sharon C. Kaiser x /s/ William D. Nicely
------------------------- ------------------------
Authorized Officer Authorized Officer

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
[LOGO]
BANK LEUMI USA
- ---------------------------
- ---------------------------
- ---------------------------
Member FDIC

<TABLE>
<CAPTION>
DISBURSEMENT REQUEST AND AUTHORIZATION
- ---------------------------------------------------------------------------------------------------------
PRINCIPAL LOAN DATE MATURITY LOAN NO CALL COLLATERAL ACCOUNT OFFICER INITIALS
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$1,200,000.00 02-05-1999 06-01-1999 1-1 04A0 030 xxxxxxxxxx KXA
- ---------------------------------------------------------------------------------------------------------
References in the shaded area are for lender's use only and do not limit the applicability of this
document to any particular loan or item.
- ---------------------------------------------------------------------------------------------------------
</TABLE>

LOAN TYPE. This is a Variable Rate (0.500% over reference rate as
established by Bank Leumi USA from time to time as its base rate.,
making an initial rate of 8.20%), Revolving Line of Credit Loan to
a Corporation for $1,200,000.00 due on June 1, 1999. This is an
unsecured renewal loan.

PRIMARY PURPOSE OF LOAN. The primary purpose of this loan is for:

/ / PERSONAL, FAMILY, OR HOUSEHOLD PURPOSES OR PERSONAL INVESTMENT

/x/ BUSINESS (INCLUDING REAL ESTATE INVESTMENT)

SPECIFIC PURPOSE. The specific purpose on this loan is: WORKING CAPITAL

DISBURSEMENT INSTRUCTIONS. Borrower understands that no loan
proceeds will be disbursed until all of Lender's conditions for
making the loan have been satisfied. Please disburse the loan
proceeds of $1,200,000.00 as follows:

UNDISBURSED FUNDS: $ 500,000.00
AMOUNT PAID ON BORROWER'S ACCOUNT: $ 700,000.00
$700,000.00 Payment on Loan
#xxxxxxxx-1-1 (I/R) --------------
NOTE PRINCIPAL: $1,200,000.00

CHARGES PAID IN CASE. Borrower has paid or will pay in cash as
agreed the following charges:

PREPAID FINANCE CHARGES PAID IN CASH: $ 0.00
OTHER CHARGES PAID IN CASH: $150.00
$150.00 Documentation Fee
-------
TOTAL CHARGES PAID IN CASH: $150.00

AUTOMATIC PAYMENTS. Borrower hereby authorized Lender automatically
to deduct from Borrower's account numbered xx-xxxxxx the amount of
any loan payment. If the funds in the account are insufficient to
cover any payment, Lender shall not be obligated to advance funds
to cover the payment. At any time and for any reason, Borrower or
Lender may voluntarily terminate automatic Payments.

COSTS AND CHARGES. Debit DDA #xx-xxxxxx for the fees shown above.

FINANCIAL CONDITION. BY SIGNING THIS AUTHORIZATION, BORROWER
REPRESENTS AND WARRANTS TO LENDER THAT THE INFORMATION PROVIDED
ABOVE IS TRUE AND CORRECT AND THAT THERE HAS BEEN NO MATERIAL
ADVERSE CHANGE IN BORROWER'S FINANCIAL CONDITION AS DISCLOSED IN
BORROWER'S MOST RECENT FINANCIAL STATEMENT TO LENDER. THIS
AUTHORIZATION IS DATED FEBRUARY 5, 1999.

BORROWER:

HEMACARE CORPORATION

x /s/ Sharon C. Kaiser x /s/ William D. Nicely
------------------------- -----------------------
Authorized Officer Authorized Officer

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

<PAGE>
EXHIBIT 10.7
[LOGO]

BANK LEUMI USA
- ---------------------------
- ---------------------------
- ---------------------------
Member FDIC

<TABLE>
<CAPTION>
PROMISSORY NOTE
- ---------------------------------------------------------------------------------------------------------
PRINCIPAL LOAN DATE MATURITY LOAN NO CALL COLLATERAL ACCOUNT OFFICER INITIALS
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$600,000.00 02-05-1999 02-18-2003 8921 04A0 030 xxxxxxxx KXA
- ---------------------------------------------------------------------------------------------------------
References in the shaded area are for lender's use only and do not limit the applicability of this
document to any particular loan or item.
- ---------------------------------------------------------------------------------------------------------
</TABLE>

PROMISE TO PAY. HEMACARE CORPORATION ("BORROWER") PROMISES TO PAY
TO BANK LEUMI USA ("LENDER"), OR ORDER, IN LAWFUL MONEY OF THE
UNITED STATES OF AMERICA, THE PRINCIPAL AMOUNT OF SIX HUNDRED
THOUSAND & 00/100 DOLLARS ($600,000.00), TOGETHER WITH INTEREST ON
THE UNPAID PRINCIPAL BALANCE FROM FEBRUARY 5, 1999, UNTIL PAID IN
FULL.

PAYMENT. SUBJECT TO ANY PAYMENT CHANGES RESULTING FROM CHANGES IN
THE INDEX, BORROWER WILL PAY THIS LOAN IN 48 PAYMENTS OF $14,938.75
EACH PAYMENT. BORROWER'S FIRST PAYMENT IS DUE MARCH 18, 1999, AND
ALL SUBSEQUENT PAYMENTS ARE DUE ON THE SAME DAY OF EACH MONTH AFTER
THAT. BORROWER'S FINAL PAYMENT WILL BE DUE ON FEBRUARY 18, 2003,
AND WILL BE FOR ALL PRINCIPAL AND ALL ACCRUED INTEREST NOT YET PAID.
PAYMENTS INCLUDE PRINCIPAL AND INTEREST. The annual interest rate
for this Note is computed on a 365/360 basis; that is, by applying
the ratio of the annual interest rate over a year of 360 days,
multiplied by the outstanding principal balance, multiplied by the
actual number of days the principal balance is outstanding.
Borrower will pay Lender at Lender's address shown above or at such
other place as Lender may designate in writing. Unless otherwise
agreed or required by applicable law, payments will be applied first
to accrued unpaid interest, then to principal, and any remaining
amount to any unpaid collections costs and late charges.

VARIABLE INTEREST RATE. The interest rate on this Note is subject
to change from time to time based on changes in an index which is
the reference rate as established by Bank Leumi USA from time to
time as its base rate. (the AIndex@). The Index is not necessarily
the lowest rate charged by Lender on its loans and is set by Lender
in its sole discretion. If the Index becomes unavailable during the
term of this loan, Lender may designate a substitute index after
notifying Borrower. Lender will tell Borrower the current index
rate upon Borrower's request. Borrower understands that Lender may
make loans based on other rates as well. The interest rate change
will not occur more often than each day. THE INDEX CURRENTLY IS
7.750%. THE INTEREST RATE TO BE APPLIED TO THE UNPAID PRINCIPAL
BALANCE OF THIS NOTE WILL BE AT A RATE OF 1.000 PERCENTAGE POINT
OVER THE INDEX, RESULTING IN AN INITIAL RATE OF 8.750%. NOTICE:
Under no circumstances will the interest rate on this Note be more
than the maximum rate allowed by applicable law. Whenever increases
occur in the interest rate, Lender, at its option, may do one or
more of the following: (a) increase Borrower's payments to ensure
Borrower's loan will pay off by its original final maturity date,
(b) increase Borrower's payments to cover accruing interest, (c)
increase the number of Borrower's payments, and (d) continue
Borrower's payments at the same amount and increase Borrower's final
payment.

LATE CHARGE. If a payment is 10 DAYS OF MORE LATE, Borrower will
be charged 3.000% OF THE UNPAID PORTION OF THE REGULARLY SCHEDULED
PAYMENT OF $25.000, WHICHEVER IS GREATER.

DEFAULT. Borrower will be in default if any of the following
happens: (a) Borrower fails to make any payment when due. (b)
Borrower breaks any promise Borrower has made to Lender, or Borrower
fails to comply with or to perform when due any other term,
obligation, covenant, or condition contained in this Note or any
agreement related to this Note, or in any other agreement or loan
Borrower has with Lender. (c) Any representation or statement made
or furnished to Lender by Borrower or on Borrower's behalf is false
or misleading in any material respect either now or at the time made
or furnished. (d) Borrower has become insolvent, a receiver is
appointed for any part of Borrower's property. Borrower makes an
assignment for the benefit of creditors, or any proceeding is
commenced either by Borrower or against Borrower under any
bankruptcy or insolvency laws. (e) Any creditor tries to take any
of Borrower's property on or in which Lender has a lien or security
interest. This includes a garnishment of any of Borrower's accounts
with Lender. (f) Any guarantor dies or any of other events
described in this default section occurs with respect to any
guarantor of this Note. (g) A material adverse change occurs in
Borrower's financial condition, or Lender believes the prospect of
payment or performance of the Indebtedness is impaired.

LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid
principal balance on this Note and all accrued unpaid interest
immediately due, without notice, and then Borrower will pay that
amount. Upon Borrower's failure to pay all amounts declared due
pursuant to this section, including failure to pay upon final
maturity, Lender, at its option, may also, if permitted under
applicable law, increase the variable interest rate on this Note to
6.000 percentage points over the Index. Lender may hire or pay
someone else to help collect this Note if Borrower does not pay.
Borrower also will pay Lender that amount. This includes, subject
to any limits under applicable law, Lender's attorney's fees and
Lender's legal expenses whether or not there is a lawsuit, including
attorney's fees and legal expense for bankruptcy proceedings
(including efforts to modify or vacate any automatic stay or
injunction), appeals, and any anticipated post- judgment collection
services. Borrower also will pay any court costs, in addition to
all other sums provided by law. THE NOTE HAS BEEN DELIVERED TO
LENDER AND ACCEPTED BY LENDER IN THE STATE OF CALIFORNIA. IF THERE
IS A LAWSUIT, BORROWER AGREES UPON LENDER'S REQUEST TO SUBMIT TO THE
JURISDICTION OF THE COURTS OF LOS ANGELES COUNTY, THE STATE OF
CALIFORNIA. LENDER AND BORROWER HEREBY WAIVE THE RIGHT TO ANY JURY
TRIAL IN ANY ACTION, PROCEEDING, OR COUNTERCLAIM BROUGHT BY EITHER
LENDER OR BORROWER AGAINST THE OTHER. THIS NOTE SHALL BE GOVERNED
BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF
CALIFORNIA.

<PAGE>

02-05-1999 PROMISSORY NOTE Page 2
(Continued)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

BORROWER:

HEMACARE CORPORATION

x /s/ Sharon C. Kaiser x /s/ William D. Nicely
------------------------- ------------------------
Authorized Officer Authorized Officer

<TABLE>
<CAPTION>
DISBURSEMENT REQUEST AND AUTHORIZATION
- ---------------------------------------------------------------------------------------------------------
PRINCIPAL LOAN DATE MATURITY LOAN NO CALL COLLATERAL ACCOUNT OFFICER INITIALS
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$600,000.00 02-05-1999 02-18-2003 8921 04A0 030 xxxxxxxxx KXA
- ---------------------------------------------------------------------------------------------------------
References in the shaded area are for lender's use only and do not limit the applicability of this
document to any particular loan or item.
- ---------------------------------------------------------------------------------------------------------
</TABLE>

LOAN TYPE. This is a Variable Rate (1.000% over reference rate as
established by Bank Leumi USA from time to time as its base rate.,
making an initial rate of 8.750%), Installment Loan to a Corporation
for $600,000.00 due on February 18, 2003.

PRIMARY PURPOSE OF LOAN. The primary purpose of this loan is for:

/ / PERSONAL, FAMILY, OR HOUSEHOLD PURPOSES OR PERSONAL INVESTMENT

/x/ BUSINESS (INCLUDING REAL ESTATE INVESTMENT)

SPECIFIC PURPOSE. The specific purpose on this loan is ACQUISITION
COSTS.

Amount paid to others on Borrower's behalf: $600,000.00
$600,000.00 DISBURSE AS REQUESTED
-----------
NOTE PRINCIPAL: $600,000.00

CHARGES PAID IN CASE. Borrower has paid or will pay in cash as
agreed the following charges:

PREPAID FINANCE CHARGES PAID IN CASH: $ 0.00
OTHER CHARGES PAID IN CASH: $150.00
$150.00 Documentation Fee
-------
TOTAL CHARGES PAID IN CASH: $150.00

AUTOMATIC PAYMENTS. Borrower hereby authorized Lender automatically
to deduct from Borrower's account numbered 02-016606 the amount of
any loan payment. If the funds in the account are insufficient to
cover any payment, Lender shall not be obligated to advance funds
to cover the payment. At any time and for any reason, Borrower or
Lender may voluntarily terminate automatic Payments.

COSTS AND CHARGES. Debit DDA #xx-xxxxxx for the fees shown above.

BORROWER:

HEMACARE CORPORATION

x /s/ Sharon C. Kaiser x /s/ William D. Nicely
------------------------- -----------------------
Authorized Officer Authorized Officer

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

EXHIBIT 11

NET INCOME (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE

Three Months Ended Twelve Months Ended
December 31, December 31,
---------------------------- -------------------------
1998 1997 1998 1997
------------ ------------- ------------ -----------
<S> <C> <C> <C> <C>
BASIC
Weighted average common shares used
to compute basic earnings (loss)
per share............................ 7,281,120 7,190,710 7,267,753 7,188,511
=========== =========== =========== ===========

Net income (loss)....... $ 420,000 $ 278,000 $ 745,000 $ 330,000
=========== =========== =========== ===========

Basic net income (loss) per share..... $ 0.06 $ 0.04 $ 0.10 $ 0.05
=========== =========== =========== ===========

DILUTED
Weighted average common shares used
to compute basic earnings (loss)
per share........................... 7,281,120 7,190,710 7,267,753 7,188,511
Dilutive preferred equivalent shares. 376,344 - 94,086 -
Dilutive effect of common stock
issuable in connection with the
acquisition......................... 45,000 11,342
Dilutive common equivalent shares
attributable to stock options
(based on average market price)..... - 5,864 - 10,542
Dilutive common equivalent shares
attributable to warrants (based
on average market price)............ - - - 4,602
----------- ----------- ----------- -----------
Weighted average common shares and
equivalents used to compute diluted
earnings (loss) per share........... 7,702,464 7,196,574 7,373,181 7,203,655
=========== =========== =========== ===========

Net income (loss)..... $ 420,000 $ 278,000 $ 745,000 $ 330,000
=========== =========== =========== ===========

Diluted net income (loss) per share.. $ 0.06 $ 0.04 $ 0.10 $ 0.05
=========== =========== =========== ===========
</TABLE>

EXHIBIT 21

SUBSIDIARIES OF THE REGISTRANT

HemaBiologics, Inc., a California corporation
Comprehensive Blood Services, Inc., a Missouri corporation
Coral Blood Services, Inc., a California corporation

EXHIBIT 23

Consent of Independent Public Accountants

As independent public accountants, we hereby consent to the incorporation by
reference in this Form 10-K, of our report dated March 25, 1999 included in
Registration Statements on Form S-8 File No. 33-30991, File No. 33-52622, File
No. 33-60101 and File No. 333-18601 and on Form S-3 File No. 33-44869 and File
No. 333-18599. It should be noted that we have not audited any financial
statements of the company subsequent to December 31, 1998 or performed any
audit procedures subsequent to the date of our report.

/s/ Arthur Andersen LLP
-----------------------
ARTHUR ANDERSEN LLP

Los Angeles, California
March 30, 1999

<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from audited
financial statements contained in Form 10-K for the year ended December 31, 1998
and is qualified in its entirety by reference to such financial statements.
</LEGEND>

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,372,000
<SECURITIES> 288,000
<RECEIVABLES> 3,038,000
<ALLOWANCES> 596,000
<INVENTORY> 691,000
<CURRENT-ASSETS> 5,573,000
<PP&E> 1,289,000
<DEPRECIATION> 1,869,000
<TOTAL-ASSETS> 7,662,000
<CURRENT-LIABILITIES> 3,229,000
<BONDS> 0
0
75,000
<COMMON> 13,584,000
<OTHER-SE> (10,368,000)
<TOTAL-LIABILITY-AND-EQUITY> 7,662,000
<SALES> 13,124,000
<TOTAL-REVENUES> 13,124,000
<CGS> 10,002,000
<TOTAL-COSTS> 10,002,000
<OTHER-EXPENSES> 2,354,000
<LOSS-PROVISION> 596,000
<INTEREST-EXPENSE> 23,000
<INCOME-PRETAX> 768,000
<INCOME-TAX> 23,000
<INCOME-CONTINUING> 745,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 745,000
<EPS-PRIMARY> .10
<EPS-DILUTED> .10

</TABLE>