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Arbios
Systems, Inc.

8797
Beverly Boulevard

Suite
206

Los
Angeles, CA 90048

May 23,
2005

Via EDGAR

Securities
and Exchange Commission

Division
of Corporate Finance

Office of
Small Business Review

450 Fifth
Street, N.W.

Washington,
D.C. 20549

Attn:
Gary Todd—Reviewing Accountant

Re:
Arbios
Systems, Inc. File 000-32603

Dear Mr.
Todd:

By letter
dated May 10, 2005, the staff of the Securities and Exchange Commission (the
“Staff”) provided this Company, Arbios Systems, Inc., with comments to this
Company’s Annual Report on Form 10-KSB for the year ended December 31, 2004.
This letter contains the responses of Arbios Systems, Inc. to the Staff’s
comments. The numbers of the responses and the headings set forth below
correspond to the numbered comments and headings in the May 10 letter from the
Staff.

As
requested by the Staff, we will file an amendment to the Annual Report on Form
10-KSB for the fiscal year ended December 31, 2004 with the corrected Section
302 Certifications after confirmation from the Staff that the Staff has no
further comments to the Form 10-KSB.

Form
10-KSB for the fiscal year ended December 31, 2004

Item
8A. Controls and Procedures

    1.

      We
      hereby confirm that we believe that our disclosure controls and procedures
      are effective to ensure that information is “accumulated” and
      “communicated” to management in a manner to allow timely decisions
      regarding required disclosure. We further agree that we will revise our
      future disclosures regarding controls and procedures to confirm the
      foregoing. As requested by the Staff, our quarterly report on Form 10-QSB
      that we filed on Monday, May 16, 2005 contains the language that we
      propose to use in the future.

Consolidated
Statements of Operations

    2.

      We
      agree to delete the measurement of cumulative loss per share from future
      filings. We have already removed the cumulative loss per share measurement
      in the quarterly report on Form 10-QSB that we filed on Monday, May 16,
      2005.

General

    3.

      The
      Company and CeMines Biologics, LLC (“CeMines”) entered into a
      collaboration agreement dated June 1, 2003. Before the end of calendar
      year 2003 the Company and CeMines agreed to terminate the agreement. The
      $30,000 advance payment was returned to CeMines. The deferred revenue
      recorded under this agreement was reversed in the financial statements
      during the quarter ending December 31, 2003.

Stock-Based
Compensation

    4.

      We
      will describe the methods we use to value and account for non-employee
      stock-based compensation in future filings. On page 6 of our quarterly
      report on Form 10-QSB that we filed on Monday, May 16, 2005, we have
      supplemented our disclosure in the stock based compensation footnote to
      explain that the fair value of expensed options is estimated using the
      Black Scholes option-pricing model.

Recent
Accounting Pronouncements

    5.

      We
      agree to remove disclosure regarding accounting standards that are not
      relevant to our business in future filings of our Annual Reports on Form
      10-KSB.

Patent
Rights

    6.

      In
      accordance with FAS 2, the cost of patents licensed in June 2001 were
      capitalized since these patent costs were intangibles purchased from a
      third party, were used in current research and development activities, and
      had alternative future uses. For example, the liver cell cryopreservation
      technology (US Patent #6,140,123 for “Method for Conditioning and
      Cryopreserving Cells” issued on October 31, 2000) that we licensed
      from Cedars-Sinai Medical Center in June 2001 was used in our preclinical
      trials for one of our bioartificial liver products and will be a key
      component of our product technology when our bioartificial liver is
      commercialized. While we are currently using this technology for product
      development of bioartificial liver support therapy, we believe that when
      the technology is proven to be viable for liver disease patients, we will
      be able to license and/or sell the technology to third parties for use in
      other clinical applications.

We have
supplemented the discussion under “Critical Accounting Policies—Patents” in the
Form 10-QSB that we filed on Monday, May 16, 2005, with a new first sentence as
follows:

“Patents

In
accordance with FASB No. 2, the costs of intangibles that are purchased from
others for use in research and development activities and that have alternative
future uses are capitalized and amortized.”

    7.

      We
      acquired the referenced patents in June 2001 from Cedars-Sinai Medical
      Center. At the time of the acquisition, Cedars-Sinai Medical Center
      engaged a third party independent appraiser to value the patents. The
      $400,000 valuation assigned to the patent is based on the third party
      appraisal. In future filings in which we make reference to the $400,000
      valuation, we will explain that the value of the Cedars-Sinai Medical
      Center patents was based on an appraisal. We have supplemented the
      discussion under “Critical Accounting Policies—Patents” in the Form 10-QSB
      that we filed on Monday, May 16, 2005, with addition of the following
      sentence: “The valuation assigned to the capitalized patents is based upon
      a valuation report prepared by an independent intellectual property
      valuation company.”

    8.

      Arbios
      Technologies was formed in August 2000. Almost one year later, in June
      2001, Arbios acquired the patent rights from Cedars-Sinai Medical Center.
      The acquisition of patent rights was not related to the formation of the
      Company. Cedars-Sinai Medical Center did not own any equity or other
      interest in Arbios prior to the acquisition of the patent rights.
      Concurrently with the license of the Cedars-Sinai patent rights,
      Cedars-Sinai also paid $250,000 in cash and received 681,818 shares of
      junior preferred stock.

We do not
believe that Topic 5-G is applicable in this situation. Topic 5-G applies to
transfers of nonmonetary assets by promoters or shareholders to a company for
shares of the company’s common stock just prior or contemporaneously with a
first time public offering. However, as indicated above, Arbios was formed in
August 2000, the patent license transaction took place in June 2001,
Cedars-Sinai Medical Center was not a shareholder before the licensing
transaction, and Arbios did not become a public company until November 2003. As
a result of the licensing transaction, Cedars-Sinai Medical Center acquired 12%
of the outstanding equity of Arbios. However, at the time that Arbios became a
public company, Cedars-Sinai Medical Center’s interest had been diluted to below
10%.

Deferred
Employee Loan-Out Costs

    9.

      We
      did incur and expense employee loan out costs under the original loan out
      agreement in both 2001 and 2002. The amount of such compensation that we
      recognized was $83,000 in 2001 and $172,000 in 2002. These expenses are
      included in the cumulative employee loan out costs since inception
      ($624,601) that is referenced in the last sentence of footnote (4). We
      acknowledge that the next to last sentence of footnote(4) is unclear
      because the amount listed for the year ended December 31, 2003 is actually
      the cumulative amount since inception through December 31, 2003, and the
      amount listed for December 31, 2004 is for the one-year period. We agree
      to correct this language in future filings.

    10.

      We
      did not issue any stock or additional compensation for the extension of
      the employee loan-out agreement.

Convertible
Promissory Notes

    11.

      We
      agree to expand our disclosure in future filings to disclose how we
      determined the fair value of the initial 300,000 warrants issued in
      connection with the $400,000 convertible note unit offering, and to
      identify the model applied. For the Staff’s information, the fair value of
      the warrants was determined using the Black Scholes option-pricing model
      using the following assumptions: dividend yield 0%; volatility 233%; risk
      free interest rate 5.5%; and expected life of three
  years.

    12.

      The
      additional 400,000 warrants issued upon conversion of the convertible
      notes were accounted for in accordance with EITF 00-27. The convertible
      notes were convertible into units consisting of one share of stock and a
      warrant to purchase one share of common stock at $2.50/share. The fair
      value of the unit was $1, which was the value paid in cash by other
      investors. EITF 00-27 Example 15 requires the value of the beneficial
      conversion option be allocated between the fair value of the common stock
      and the fair value of the warrant issuable upon conversion, with the value
      attributable to the common stock being recognized on the convertible note
      commitment date and the value of the warrant recognized on the warrant
      conversion date. The convertible note was issued (September 2003) and
      converted (October 2003) within the same reporting year; therefore, we did
      not allocate the $1/unit fair value between the value of the common stock
      and warrant included in each unit. The entire amount of the beneficial
      conversion option was recognized in 2003.

Stockholders’
Equity

    13.

      We
      agree in future filings to separately identify the assigned fair value and
      the method of measurement with related disclosures regarding amortization
      periods and amounts deferred for each transaction in which shares or
      warrants are issued in a non-cash transaction. The foregoing disclosure
      will cover both previous transactions and future transactions. For the
      Staff’s information, the Black Scholes model is typically used to estimate
      the fair value of stock, option and warrant grants.

    14.

      We
      agree to present a roll-forward of outstanding warrants in a format
      similar to that provided for stock options in our future filings in which
      a roll-forward presentation is included for our stock
    options.

    15.

      The
      stock issuance expense of $519,230 related to the September/October stock
      issuances was comprised of $505,500 in third party fees and an additional
      $13,730 in related legal fees. The financing costs were recorded as a
      debit to additional paid in capital. We will add the foregoing description
      to future filings as requested by the
Staff.

Research
Costs

    16.

      In
      December 2001, Arbios entered into a research and development arrangement
      with Spectrum Laboratories. In July 2002 Arbios and Spectrum agreed that
      Spectrum’s research and development activities had been completed. At that
      time, Spectrum Laboratories had expended approximately $109,360 under the
      research and development agreement. Since Spectrum was a shareholder of
      Arbios, in accordance with Topic 5T of the Staff Accounting Bulletins,
      “Accounting for Expense or Liabilities Paid by Principal Stockholder(s),”
      the $109,360 amount that had been expended by Spectrum was expensed by
      Arbios in 2002, as required by GAAP. The $109,360 payable to Spectrum was
      satisfied by Arbios paying cash to Spectrum of $54,960, with the remaining
      $54,400 being attributed to the value of the stock previously issued to
      Spectrum. In future filings, we will clarify the language in footnote 8 to
      more clearly describe the transaction and the accounting
      treatment.

Section
302 Certification

    17.

      As
      our counsel has discussed with the Staff, the form of certifications that
      we filed was incorrect due to an administrative error and not the result
      of an intention to change the certifications. Furthermore, as was
      discussed with the Staff, we agree to file an amendment to the Form 10-KSB
      that includes the entire filing together with the corrected certifications
      of our then current CEO and CFO. As was explained to the Staff, Dr. Rozga,
      our President (and the principal executive officer) at the time of the
      filing and still our current President, signed the certifications in the
      initial filing. However, we have retained an interim CEO while we conduct
      our search for a permanent CEO. At the time that the Form 10-KSB/A is
      filed, the then current CEO and CFO will sign the Form
      10-KSB/A.

    18.

      Arbios
      did not identify a “material weakness.” As indicated in response to
      comment 17 above, the reference to “material weakness” at the end of the
      sentence rather than at the beginning of the sentence was an
      administrative error.

* * * *
*

As
requested by the Staff, we hereby acknowledge that:

    ·

      This
      company is responsible for the adequacy and accuracy of the disclosure in
      the filing;

    ·

      Staff
      comments or changes to disclosure in response to staff comments do not
      foreclose the Commission from taking any action with respect to the
      filing; and

    ·

      This
      company may not assert staff comments as a defense in any proceeding
      initiated by the Commission or any person under the federal securities
      laws of the United States.

Please
direct questions regarding this letter to the undersigned at (310)
657-4879.

Very
truly yours,

Scott
Hayashi

Chief
Financial Officer