<PAGE>

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                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549


                                    FORM 10-K

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     [X]  Annual Report pursuant to Section 13 or 15 (d) of the Securities
          Exchange Act of 1934 for the fiscal year ended December 31, 2001 or
                                                         -----------------

     []   Transition Report pursuant to Section 13 or 15 (d) of the Securities
          Exchange Act of 1934 for the transition period from _______ to _______

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                         Commission file number 0-28290
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                                   AKSYS, LTD.
             (Exact name of registrant as specified in its charter)
     ===========================================================================

                   Delaware                                  36-3890205
       (State or other jurisdiction of                    (I.R.S. Employer
        incorporation or organization)                  Identification No.)

     Two Marriott Drive, Lincolnshire, IL                        60069
   (Address of Principal executive offices)                   (Zip Code)

Registrant's telephone number, including area code: (847) 229-2020

      Securities registered pursuant to Section 12(b) of the Act: Not applicable

           Securities registered pursuant to Section 12(g) of the Act:

  Common Stock, par value $.01 per share, and related preferred stock purchase
  ----------------------------------------------------------------------------
                                     rights
                                     ------
                                (Title of Class)
--------------------------------------------------------------------------------

         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. []

         The aggregate market value of the voting stock held by non-affiliates
of the registrant was approximately $97,177,224 as of March 22, 2002, based on
the closing sale price of $4.39 as reported by the Nasdaq National Market.

         As of March 22, 2002 the registrant had 22,136,042 shares of Common
Stock issued and outstanding.

                       Documents Incorporated by Reference

         Portions of the Registrant's Proxy Statement to be used in connection
with the solicitation of proxies for the Annual Meeting of Stockholders to be
held on May 17, 2002 (the "Proxy Statement") are incorporated by reference into
Part III and portions of the Registrant's 2001 Annual Report to Stockholders
filed herewith as Exhibit 13 are incorporated by reference into Part II and Part
IV.

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<PAGE>


                                   AKSYS, LTD.

                       INDEX TO ANNUAL REPORT ON FORM 10-K


<TABLE>
<CAPTION>
                                                                                                         Page No.
                                                                                                         --------

<S>                                                                                                         <C>
PART I.......................................................................................................1

Item 1.       Business.......................................................................................1
Item 2.       Properties....................................................................................16
Item 3.       Legal Proceedings.............................................................................16
Item 4.       Submission of Matters to a Vote of Security-Holders...........................................16

PART II.....................................................................................................16

Item 5.       Market for the Registrant's Common Stock and Related Stockholder Matters......................16
Item 6.       Selected Financial Data.......................................................................17
Item 7.       Management's Discussion and Analysis of Financial Condition and
              Results of Operations.........................................................................18
Item 7A.      Quantitative and Qualitative Disclosures About Market Risk....................................23
Item 8.       Financial Statements and Supplementary Data...................................................23
Item 9.       Changes in and Disagreements with Accountants on Accounting
              and Financial Disclosure......................................................................23

PART III....................................................................................................23

Item 10.      Directors and Executive Officers of the Registrant............................................23
Item 11.      Executive Compensation........................................................................24
Item 12.      Security Ownership of Certain Beneficial Owners and Management................................24
Item 13.      Certain Relationships and Related Transactions................................................24

PART IV.....................................................................................................24

Item 14.      Exhibits, Financial Statement Schedules and Reports on Form 8-K...............................24

SIGNATURES..................................................................................................25

EXHIBIT INDEX...............................................................................................26
</TABLE>

<PAGE>


PART I

ITEM 1.  BUSINESS

                                   BACKGROUND

Aksys, Ltd. (the "Company") was founded in 1991 to provide hemodialysis
products and services for patients suffering from end-stage renal disease
("ESRD"), commonly known as chronic kidney failure. The Company has developed
an automated personal hemodialysis system, known as the Aksys PHD(TM) Personal
Hemodialysis System (the "PHD System"), which is designed to enable patients to
perform frequent hemodialysis at alternate sites, such as the patient's home,
and to thereby improve clinical outcomes, reduce total ESRD treatment costs and
enhance the patients' quality of life. All these characteristics have been
associated with frequent hemodialysis.

On March 27, 2002, the Company announced that it received the Food and Drug
Administration's ("FDA") clearance to market the PHD System in the United
States. The FDA clearance had no restrictions and included authorization to use
the product in the home. The Company had been working toward satisfying the
regulatory requirements of the FDA since submitting a 510(k) pre-market
notification for clearance to market the PHD System in January 2001. 510(k)
clearance by the FDA was required prior to the commercialization of the PHD
System in the United States.

Japan is also a significant market where the Company plans to seek regulatory
approval, although the regulatory approval cycle in Japan is much longer than
in the U.S. On June 21, 1999, the Company entered into a co-development and
licensing agreement with Teijin Limited of Osaka Japan (see "Foreign
Operations" for a description of the agreement). The Company is currently
working with Teijin to jointly develop and eventually commercialize the PHD
System in Japan.

There can be no assurance that the Company will be able to obtain regulatory
clearances or approvals in Japan or other foreign jurisdictions in a timely
manner or at all.

                                 THE MARKETPLACE

The target market of the Company is the ESRD treatment market. A healthy human
kidney continuously removes waste products and excess water from the blood.
ESRD is a slow, progressive loss of kidney function caused by inherited
disorders, prolonged medical conditions such as diabetes and hypertension, or
the long-term use of certain medications. ESRD is irreversible and lethal if
untreated. Life can be sustained only through either transplantation or
dialysis. Transplantation is severely limited due to the shortage of suitable
donors, the incidence of organ transplant rejection and the age and health of
many ESRD patients. The vast majority (over 90%) of patients, therefore, must
rely on dialysis for the remainder of their lives.

The Company estimates that over $16 billion was spent in the U.S. during 2000
for the treatment of patients suffering from ESRD, of which more than $5 billion
was directly related to dialysis treatment. Based upon information published by
The Centers for Medicare and Medical Services ("CMS"), the approximate number of
ESRD patients in the United States requiring dialysis treatments has grown from
66,000 at the end of 1982 to an estimated 260,000 at the end of 2000. The
current estimated annual growth rate of ESRD patients in the U.S. is
approximately 6%. In addition, it is estimated that there were approximately
450,000 dialysis patients in Europe and Japan at the end of 1999. The Company
believes that the sustained growth in the ESRD population, especially in the
United States, has been caused by (i) the aging of the population (the median
age of newly diagnosed ESRD patients in the United States is 62), (ii) the
longer average life expectancy of patients with diabetes and hypertension (two
patient groups at high risk for ESRD), (iii) the relatively more rapid growth in
the general population of certain ethnic subsets that have a higher incidence of
ESRD, (iv) competing risk - with the decline in vascular diseases of the

                                       1

<PAGE>

heart, there is a rise in vascular diseases of the kidney and (v) a possible
increase in the use of medications that damage the kidneys.

Given the expense of kidney dialysis treatments and the lack of effective
alternative therapies, in 1972 Congress enacted legislation providing for
Medicare funding for all eligible patients with ESRD regardless of age or
financial circumstances.

Under this program, after the first 30 months of treatment Medicare is
responsible for payment of 80% of the rate set by CMS for reimbursement of
outpatient dialysis. Although this program made dialysis available to virtually
all patients in need of treatment, the cost of funding the program grew
rapidly, quickly exceeding original expectations. In an effort to hold down
these costs, Congress, in 1983, capped the Medicare reimbursement rate for
outpatient dialysis at approximately $20,000 per patient per year. The costs of
operating dialysis centers, however, such as capital, labor and facility
overhead, have continued to rise. These circumstances have forced dialysis
providers to seek ways to reduce dialysis treatment costs. For example, certain
dialysis providers may be shortening dialysis treatments, reusing medical
equipment and supplies intended for a single use and shifting the
responsibilities of doctors and nurses to employees with less training.

                                  REIMBURSEMENT

Demand for the Company's products and services will be influenced by
governmental and other third-party reimbursement programs because providers of
ESRD treatment are reimbursed by Medicare, Medicaid and private insurers.

Medicare Reimbursement

Medicare generally provides health insurance coverage for persons who are age
65 or older and for persons who are completely disabled. Medicare also provides
coverage for other eligible patients, regardless of age, who have been
medically determined to have ESRD. For patients eligible for Medicare based
solely on ESRD (generally patients under age 65), Medicare eligibility begins
three months after the month in which the patient begins dialysis treatments.
During this three-month waiting period, either Medicaid, private insurance or
the patient is responsible for payment for dialysis services. This waiting
period is waived for individuals who participate in a self-care dialysis
training program, or are hospitalized for a kidney transplant and the surgery
occurs within a specified time period.

For ESRD patients under age 65 who have any employer group health insurance
coverage (regardless of the size of the employer or the individual's employment
status), Medicare coverage is generally secondary to the employer coverage
during a 30-month coordination period that follows the establishment of
Medicare eligibility or entitlement based on ESRD. During the coordination
period, an employer group health plan is responsible for paying primary
benefits at the rate specified in the plan, which may be a negotiated rate or
the healthcare provider's usual and customary rate. As the secondary payer
during this coordination period, Medicare will make payments up to the
applicable composite rate for dialysis services to supplement any primary
payments by the employer group health plan if the plan covers the services but
pays only a portion of the charge for the services.

Medicare generally is the primary payer for ESRD patients after the 30-month
coordination period. Under current rules, Medicare is also the primary payer
for ESRD patients during the 30-month coordination period if, before becoming
eligible for Medicare on the basis of ESRD, the patient was already age 65 or
over (or eligible for Medicare based on disability) unless covered by an
employer group health plan (other than a "small" employer plan) because of
current employment. This rule eliminates for many dual-eligible beneficiaries
the 30-month coordination period during which the employer plan would serve as
primary payer and reimburse health care providers at a rate that the Company
believes may be higher than the Medicare composite rate. The rules regarding
entitlement to primary Medicare coverage when the patient is eligible for
Medicare on the basis of both age (or disability) and ESRD have been the
subject of frequent legislative and regulatory changes in recent years and
there can be no assurance that such rules will not be unfavorably changed in
the future.

                                       2

<PAGE>

When Medicare is the primary payer, it reimburses 80% of the composite rate set
by the Medicare prospective reimbursement system for each dialysis treatment.
The beneficiary is responsible for the remaining 20%, as well as any unmet
Medicare deductible amount, although an approved Medicare supplement insurance
policy, other private health insurance or Medicaid may pay on the beneficiary's
behalf. Reimbursement rates are subject to periodic adjustment based on certain
factors, including budget and other legislation and costs incurred in rendering
the services if tied to certain criteria. The composite reimbursement rate was
unchanged from commencement of the program in 1972 until 1983. From 1983
through December 1990, numerous Congressional actions resulted in net
reductions of the average composite reimbursement rate from a fixed fee of $138
per treatment in 1983 to approximately $125 per treatment in December 1990.
Effective January 1, 1991, Congress increased the ESRD composite reimbursement
rate, resulting in an average rate of $126 per treatment. The Balanced Budget
Refinement Act of 1999 raised the composite rate by 1.2% in 2000 and an
additional 1.2% in 2001.

Reimbursement for home dialysis can be made in two ways. A beneficiary may
choose to receive home dialysis equipment, supplies and support services
directly from a facility or to make independent arrangements for equipment and
supplies. If the beneficiary chooses to use a facility, the facility receives
the composite rate for each treatment the patient performs at home. If the
beneficiary chooses to make independent arrangements, the supplier bills
Medicare on an assignment basis and payment is made at a rate not greater than
the composite rate, with the exception of continuous cycling peritoneal
dialysis ("CCPD"). There is a monthly payment cap of $2,080 for CCPD and
approximately $1,600 for all other methods of home dialysis.

The Medicare ESRD composite reimbursement rate has been the subject of a number
of reports and studies. Actions to change such rate usually occur in the
context of federal budget negotiations.

The Company is unable to predict what, if any, future changes may occur in the
Medicare composite reimbursement rate or in any other reimbursement program.
Any reductions in the Medicare composite reimbursement rate or in any other
reimbursement program could have a material adverse effect on the Company's
prospects, revenues and earnings. In addition, there have been various
legislative proposals for the reform of numerous aspects of Medicare, the
occurrence and effect of which are uncertain. See "--Potential Health Care
Legislation."

Medicaid Reimbursement

Medicaid programs are state-administered programs partially funded by the
federal government. These programs are intended to provide coverage for
patients whose income and assets fall below state defined levels and who are
otherwise uninsured. The programs also serve as supplemental insurance programs
for the Medicare co-insurance portion and provide certain coverage (e.g., oral
medications) that are not covered by Medicare. State regulations generally
follow Medicare reimbursement levels and coverage without any co-insurance
amounts. Certain states, however, require beneficiaries to pay a monthly share
of the cost based upon levels of income or assets.

                                       3

<PAGE>

Private Reimbursement

Some ESRD patients have private insurance that covers dialysis services. As
discussed above, health care providers receive reimbursement for ESRD
treatments from the patient or private insurance during a "waiting period" up
to three months before the patient becomes eligible for Medicare. In addition,
if the private payer is an employer group health plan, it is generally required
to continue to make primary payments for dialysis services during the 30-month
period following eligibility or entitlement to Medicare. In general, employers
may not reduce coverage or otherwise discriminate against ESRD patients by
taking into account the patient's eligibility or entitlement to Medicare
benefits.

The Company believes that before Medicare primary coverage is established,
private payers may reimburse dialysis expenses at rates higher than the
per-treatment composite rate set by Medicare. When Medicare becomes a patient's
primary payer, private insurance often covers the per-treatment 20% coinsurance
that Medicare does not pay.

Potential Health Care Legislation

Because the Medicare program represents a substantial portion of the federal
budget, Congress takes action in almost every legislative session to modify the
Medicare program for the purpose of reducing the amounts otherwise payable by
the program to health care providers in order to achieve deficit reduction
targets or meet other political goals. Legislation and/or regulations may be
enacted in the future that may significantly modify the Medicare or Medicaid
ESRD programs or substantially affect reimbursement for dialysis services.

                          PREVAILING TREATMENT METHODS

Hemodialysis and peritoneal dialysis are the two prevailing methods of dialysis.

Hemodialysis

CMS estimates that as of December 31, 2000, approximately 90% (234,000) of the
ESRD dialysis patients in the United States were receiving hemodialysis. Fewer
than 1% of these patients performed treatment in their homes, and all others
received treatment at outpatient facilities. Outpatient hemodialysis requires
that a patient travel to a dialysis clinic three times per week for dialysis
sessions lasting three to four hours. In each session, the patient's blood is
cleansed by circulation through an artificial kidney controlled by a dialysis
machine.

Home hemodialysis was common practice prior to Medicare funding, with
approximately 42% of the 11,000 United States dialysis patients on home
hemodialysis in 1973. Although the initial motivation for performing home
treatment for many patients reflected the lack of availability of dialysis
clinics and the desire to reduce the cost of hospital-based dialysis,
clinicians report that many of these patients found significant advantages in
quality of life when treating themselves at home. As Medicare funding became
available, however, the vast majority of patients began receiving treatment in
outpatient facilities, and hemodialysis machines became more complex and
sophisticated as they evolved for use in clinics. The dialysis machines
currently used in these centers are predominantly operated by trained personnel
and require significant manual preparation and cleaning in connection with each
treatment session.

Peritoneal Dialysis

CMS estimates that as of December 31, 2000, approximately 10% (26,000) of the
ESRD dialysis patients in the United States were receiving peritoneal dialysis,
with over 99% performing such treatment in their homes. There are two principal
forms of peritoneal dialysis, and all forms use the patient's peritoneum, a
large membrane rich in blood vessels that surrounds many of the body's internal
organs, as a filter to eliminate toxins and excess fluids from the patient's
blood. Dialysate, a blood-cleansing electrolyte solution, is infused through a
catheter into the patient's peritoneal cavity. Once this fluid absorbs the
toxins and excess water that are filtered from the blood through the
peritoneum, it is drained from the peritoneal cavity through a catheter. In the
most common form of peritoneal dialysis, Continuous Ambulatory Peritoneal
Dialysis ("CAPD"), the process of exchanging dialysate into and out of

                                       4

<PAGE>

the patient's peritoneal cavity occurs four times daily, seven days per week.
The other form, Continuous Cycling Peritoneal Dialysis ("CCPD"), uses an
instrument to automatically perform exchanges of solution through the
peritoneal cavity overnight, while the patient sleeps. Both forms of treatment
require strict aseptic technique.

Limitations of Prevailing Treatment Methods

Hemodialysis. Patients receiving outpatient hemodialysis often experience a
number of chronic and acute health problems. The chronic problems include
hypertension, anemia (low red blood cell count), malnutrition, fluid and
electrolyte imbalance, calcium deficiency, insomnia, sexual impotency,
decreased mental acuity and lower energy levels. The acute problems include
headaches, nausea, hypotension and asthenia (a general lack of strength and
vitality), which are associated with thrice weekly dialysis sessions. In
addition, a general feeling of ill health tends to increase between dialysis
treatments as a result of toxins, sodium and water building up in the patient's
blood. These side effects have a significant impact on (i) clinical outcomes,
with the leading cause of death among ESRD patients being cardiovascular
disease, which many clinicians believe is caused in large part by oscillations
in toxins, sodium and body fluid levels, (ii) total patient costs, resulting
from the frequent need to hospitalize ESRD patients as well as the need to
treat anemia and hypertension with medication and (iii) patient quality of
life, with patients having to not only suffer through these chronic and acute
health problems and related "hangover" frequently following each treatment, but
also to essentially devote three days per week to the treatment regimen.

The Company believes that these health problems are caused in part by
inadequate doses and frequency of dialysis. The amount of toxins removed from
the blood during dialysis is widely accepted to be determined by a formula
indicating that hemodialysis is most efficient in the earlier stages of
therapy. Thus, simply increasing the duration of a treatment session is not the
most efficient way to improve the dose of hemodialysis. Rather, the efficiency
of hemodialysis and the delivered dose can be improved with more frequent
dialysis sessions of shorter duration. More frequent sessions also decrease the
severe oscillations in toxin and hydration levels associated with the
prevailing three times per week dialysis regimen and should result in fewer
side effects.

The clinical outcomes of conventional dialysis have contributed to the
significant patient treatment cost. According to CMS, total treatment costs per
dialysis patient have risen from $33,400 in 1988 to $68,000 in 1999. The cost
of hospitalization on a fee for service basis represents the most significant
component of this increase. While reimbursement for outpatient hemodialysis
treatment (the "composite rate") has been capped since 1983, reimbursement for
the associated cost of care due to chronic and acute health problems and other
complications continues to be reimbursed on a fee for service basis. Under this
reimbursement scheme, providers have an incentive to reduce the cost of
outpatient dialysis rather than the total cost of treating dialysis patients.

Peritoneal Dialysis. Although peritoneal dialysis accounted for 10% (or 26,000)
of the dialysis patient population in 2000 according to CMS, approximately 22%
(or 6,000) of the patients in the United States switched to outpatient
in-center hemodialysis. The Company believes that most of these patients
switched from peritoneal dialysis to outpatient hemodialysis because of the
following limitations presented by CAPD, the most common form of peritoneal
dialysis: (i) due to the limited efficiency of using the peritoneal membrane as
a filter for toxin removal, patients must have a relatively low body weight or
have some residual kidney function to achieve adequate levels of dialysis (once
residual kidney function is lost, which is eventually the case in most
patients, CAPD is no longer a viable treatment for a majority of the
population); (ii) CAPD demands considerable responsibility and time to perform
the required four exchanges of solution each day, which often causes patient
"burnout" and non-compliance with the prescribed regimen; (iii) peritoneal
dialysis demands that patients follow strict aseptic techniques when changing
dialysate bags because the failure to do so often leads to peritonitis, an
infection of the peritoneum; and (iv) the supplies used in peritoneal dialysis
require considerable storage space given the quantity of dialysate (up to 30
large boxes per month) used in this treatment.

The Company believes that most new peritoneal dialysis patients choose CCPD, in
part, in an attempt to improve clinical outcomes. Although CCPD addresses some
of the limitations imposed by CAPD, it continues to present a risk of infection
of the peritoneum and in many cases requires some residual kidney function to
achieve adequate levels of dialysis. Moreover, because CCPD must often be
supplemented with peritoneal dialysis performed by the patients during the day
using the CAPD method, patient "burnout" also occurs.

                                       5

<PAGE>

HOME HEMODIALYSIS AS AN ALTERNATIVE

The Company believes that increasing the frequency of hemodialysis treatments
while decreasing the length of each treatment session can significantly improve
clinical outcomes and patient quality of life while reducing the total cost of
managing ESRD patients. The Company completed a clinical trial of the PHD
System in November 2000, whereby a total of 23 patients converted from three
times per week dialysis at home to a treatment regimen of more frequent
dialysis on the PHD System. Over 4,000 dialysis treatments have been performed
by patients on the PHD System, including over 3,500 times at home. Patients
showed better clinical outcomes and improved quality of life on more frequent
dialysis.

Several other studies over the past 32 years indicate that increasing the
number of dialysis treatments per week leads to dramatic improvements in
patients. Several study centers report that most of the ESRD patients who
performed hemodialysis on a daily basis reported that daily hemodialysis gave
them a more positive attitude toward treatment and a higher quality of life.
Neither the Company nor the PHD System was involved in the treatments received
by patients in these other studies and the Company did not fund these studies.
Moreover, patient selection for these studies was not randomized; the Company
gathered the data on a retrospective basis from providers that it knew were
treating patients with a daily hemodialysis regimen. Consequently there can be
no assurance that the patient populations in these studies are representative
of the general ESRD patient population. As a result, these studies should not
be deemed to have established the impact of daily hemodialysis on clinical
outcomes.

In addition to the aforementioned retrospective studies, daily hemodialysis is
gaining popularity. There are initiatives in the U.S. and worldwide to study
the benefits of daily hemodialysis. The Company estimates that in early 2001,
there are 40 centers worldwide, 20 of which are in North America, treating over
400 patients with daily hemodialysis.

Despite the potential benefits of frequent hemodialysis, several barriers have
prevented it from becoming a viable treatment regimen. The most significant is
the economic implication of administering more frequent hemodialysis to
patients from the traditional three times per week dialysis. Under the current
capped Medicare reimbursement level, dialysis providers cannot afford the
additional costs that would be incurred in providing more frequent treatments
in outpatient facilities. Requiring more frequent visits to a dialysis
treatment facility would also place additional burdens on a patient's lifestyle.

There is also a perception that vascular access complications arising from
inserting the needles into the patient's blood access site may increase with
daily treatment sessions. These complications are common in the clinical
setting already and account for a significant portion of the cost of treating
patients. The Company believes that vascular access complications should not
increase with more frequent hemodialysis sessions in a home or self-care
setting and such complications may in fact decrease. That belief is based on
data collected from patients using a native fistula. The Company has collected
little data from patients using artificial blood vessel grafts or central
venous catheters, and there is no assurance that such grafts or catheters will
withstand daily treatment. There are a number of approaches to vascular access
that may enhance more frequent treatments, including (i) the use of "single
needle" vascular access devices which reduce the number of punctures by half,
(ii) the use of central venous catheters which eliminate the need to use
needles at all, (iii) novel graft materials, (iv) new, totally implanted
central venous catheters with titanium ports and (v) the practice of inserting
needles in the same site each day, which has been demonstrated to have several
benefits according to publications by Dr. Zbylut J. Twardowski, a leading
dialysis researcher.

The Company believes that most barriers to a more frequent hemodialysis regimen
could be overcome if it were available in the patient's home, but to date no
hemodialysis device has become sufficiently available to establish home
hemodialysis as a feasible alternative therapy for the general dialysis patient
population.

                               PRODUCT DEVELOPMENT

THE AKSYS PHD SYSTEM

                                       6

<PAGE>

By addressing the many drawbacks of conventional hemodialysis systems, which
have prevented the widespread use of daily home hemodialysis, the Company
believes its products and services can be instrumental in improving clinical
outcomes, decreasing the total treatment costs and improving quality of life
for dialysis patients. The following chart describes how the PHD System
addresses the drawbacks presented when ESRD patients and helpers use
conventional systems for home hemodialysis:

<TABLE>
<CAPTION>
       Drawback                   Conventional Home Systems                        Aksys PHD System
<S>                        <C>                                         <C>
Complexity                 Complicated equipment designed for          Designed for ease of operation at home,
                           operation only by trained personnel.        including computerized, user-friendly
                                                                       interface.

Time and Effort            Difficult and time consuming to setup,      Fully automated, reducing operator
                           operate, clean and maintain.                involvement.

Cost of Consumables        Requires frequent replacement of blood      Integrated automatic disinfection system
                           circuit.                                    designed to enable safe and effective
                                                                       reuse of blood circuit.

Storage Requirements       Large volume of consumables and             Substantially fewer and smaller items
                           dialysate consumed each month.              consumed with each treatment.
</TABLE>

Although the most common form of peritoneal dialysis, CAPD, does not require a
dialysis machine, as discussed above, peritoneal dialysis has inherent
limitations. The Company believes that the PHD System addresses the primary
drawbacks of both forms of peritoneal dialysis by delivering a substantially
greater dose of dialysis in significantly less time. Furthermore, by enabling
the use of frequent home hemodialysis, the PHD System overcomes other
limitations of peritoneal dialysis such as the risk of peritonitis and patient
non-compliance to the prescribed regimen.

The Company believes that the PHD System offers patients simplification and
control. The new technology of the PHD System integrates three systems into
one: water purification, delivery of dialysis and dialyzer reprocessing. The
PHD System is a fully automated personal dialysis instrument designed to enable
operators to perform hemodialysis in a self-care setting, such as the patient's
home, on a frequent or daily basis. The PHD System is designed to reduce the
patient's time and effort involved in performing each hemodialysis treatment
with minimal assistance. Through a touch sensitive display screen with
instructions available on a graphic video display, the PHD System is designed
to be less intimidating and easier to use than current hemodialysis systems.

The PHD System is designed to evaluate the performance of the artificial kidney
in removing toxins from the patient's blood prior to each treatment to ensure
that the prescribed dose of hemodialysis is achieved during the treatment. The
PHD System also automatically evaluates the water treatment filters and
indicates whether a replacement is required and verifies that all critical
safety systems, sensors and alarms are operating correctly.

To begin a treatment session on the PHD System, the operator connects the blood
tubing to the vascular access device. A user-friendly, touch-sensitive monitor
prompts the patient through the treatment and displays procedure and
patient-specific information for review. The PHD System is designed to monitor
during the treatment a variety of vital statistics, including the patient's
blood flow rate, the amount of water removed from the patient, the length of
the treatment session and other key parameters. The treatment can be suspended
at any time by the patient. If the patient's blood pressure drops below normal
levels during the treatment, the system prompts the patient to take appropriate
action. Data from a hemodialysis treatment is displayed for viewing by the
patient.

At the end of a treatment session, the operator reconnects the blood tubing to
the system and inserts two small bottles of dialysate in the system to replace
those consumed for the previous treatment. The PHD System then automatically

                                       7

<PAGE>

flushes and disinfects all fluid pathways, performs a self-diagnostic test to
determine whether the disinfection was adequate and readies itself without
further patient involvement for the next treatment session.

SERVICES SUPPORTING THE PHD SYSTEM

To fully service hemodialysis patients, the Company intends to develop a
service network to provide support for patients and dialysis providers in all
aspects relating to the use and maintenance of the PHD System. The Company
expects this service network will provide: (i) delivery and installation of the
PHD System (including arranging for any minor changes to plumbing and
electrical circuits in the patient's home, or other self-care setting, that
will be necessary for operation of the PHD System), (ii) technical service
through a 24 hour call center and through field representatives who will
maintain and repair all components of the PHD System, (iii) delivery of
consumables used in dialysis such as the artificial kidney and arterial and
venous blood tubing (which are replaced periodically), water purification
components and dialysate concentrate, (iv) delivery of ancillary supplies such
as dressings, tape, antiseptics, drugs and syringes and (v) customer service
representatives who will interface with the dialysis provider to address the
status of, and any necessary changes in, the patient's treatment made by the
dialysis provider. The Company believes that by providing all of the products
and services necessary to perform hemodialysis at home as well as in other
self-care settings and nursing homes, the Company can establish and maintain
loyalty with patients and dialysis providers.

The PHD System is intended to reduce total treatment costs for ESRD patients,
including hospitalization costs. There is no reliable way at this time,
however, to quantify the potential savings in total treatment cost. The Company
expects that the PHD System will be priced at a level to fit within current
reimbursement guidelines. Thus, the Company expects there will be little or no
reduction in dialysis cost (as opposed to total treatment costs) associated
with the PHD System.

Although the Company believes that the PHD System provides a solution to many
of the problems presented by conventional dialysis modalities, there are a
number of risks that must be overcome for the PHD System to succeed, including
achieving market acceptance and development and the uncertainty of obtaining
regulatory clearance or approval in foreign jurisdictions.

                                       8

<PAGE>

OTHER PRODUCT DEVELOPMENT

During 2002, the Company expects that substantially all of its resources,
including available cash and short-term investments, will be devoted to the
regulatory approval process and commercialization activities of the PHD System.
Now that the FDA clearance has been obtained and the Company plans to move into
commercial production, resources will be devoted to additional features,
service and support of the PHD System. Resources will also be directed toward
using the platform technology incorporated in the PHD System to develop
follow-on products.

                         BUSINESS AND MARKETING STRATEGY

In October 1997, the National Kidney Foundation released the results of the
first comprehensive effort to standardize practices at U.S. dialysis centers
(the Dialysis Outcomes Quality Initiative, or DOQI guidelines). The
recommendations called for minimum doses of dialysis; however, approximately
32% of all current U.S. patients are under that recommended minimum dosage.
These recommendations support the Company's belief that patients who receive
that higher dose through daily dialysis would benefit through improved clinical
outcomes. The Company believes that the PHD System offers the potential for
better clinical outcomes, lower total treatment costs and improved quality of
life for dialysis patients. The relatively poor patient outcomes resulting from
current dialysis treatment methods and the increasing total cost of treating
ESRD patients have created significant demand for improved dialysis systems.
Through the PHD System, the Company intends to capitalize on this demand by
pursuing the following strategies.

Target Specific Market Segments. The Company intends to market its products and
services directly to those providers of dialysis services most focused on
patient outcomes and total cost of care. This strategy is designed to achieve
access to the key patient segments which the Company believes will be
especially receptive to frequent home hemodialysis using the PHD System,
including: (i) dialysis patients currently receiving conventional home
hemodialysis, (ii) dialysis patients who drop out of home peritoneal dialysis
and (iii) ESRD patients who are just beginning dialysis treatment. In the
United States, these segments accounted for approximately 1,600, 9,000 and
91,000 dialysis patients, respectively, in 2000 according to industry data.
Although the PHD System has been designed primarily for home use, the Company
believes it will also be an attractive alternative dialysis device for
self-care clinics and nursing homes.

Provide a Broad Range of Dialysis Products and Services. The Company intends to
provide a broad range of products and services for hemodialysis patients and
providers. In addition to the delivery, installation and maintenance of the PHD
System, the Company intends to provide training, technical support and delivery
of all required consumables. The Company intends to sell the instruments to
customers or to a third party lease company, and enter into contracts with its
customers to provide all consumables and services for a single monthly price.

Capture and Provide Outcome Data. The PHD System has a built-in computer
capable of recording specific medical data regarding dialysis treatment and
patient health and compliance. Future versions of the PHD System may allow
outcome data to be furnished on-line to the healthcare provider responsible for
treating the patient and will aid the provider in assessing the effectiveness
of the patient's dialysis treatment prescription as well as promote the
potential clinical and cost benefits of frequent home hemodialysis. Outcome
data should become increasingly important if, as the Company believes, CMS
moves towards a reimbursement system that capitates total ESRD patient cost.

Implement Programs to Demonstrate Clinical Benefits and Cost-Effectiveness. The
Company intends to complement its marketing by conducting clinical studies and
implementing other measures designed to document the clinical and cost benefits
it believes will result from frequent home hemodialysis using the PHD System.
In 1998, the Company sponsored a study at six centers to measure the early
improvements in nutrition and well-being of patients converting from the
standard thrice-weekly hemodialysis regimen to a daily hemodialysis regimen.
Results of the study indicated dramatic improvements in the patients' feeling
of well-being after converting to a regimen of daily hemodialysis. In
collaboration with members of the Company's Scientific Advisory Board and other
leading nephrologists, the Company intends to promote the benefits of the PHD
System through publication in clinical journals and presentations at scientific
conferences of the results of these studies.

                                       9

<PAGE>

Phased Domestic and International Market Launch. The Company believes that
there is worldwide demand for a cost effective, more clinically effective
approach to dialysis. In addition to pursuing market launch in the United
States, the Company is establishing marketing and regulatory resources in
Europe, Japan and elsewhere. As of December 31, 2000, the Company estimates
that there were approximately 260,000 dialysis patients in Europe and 190,000
dialysis patients in Japan.

SALES AND MARKETING

The Company initially intends to operate with a relatively small direct sales
force to market its products and services, primarily to healthcare providers
such as hospitals, dialysis clinics, managed care organizations and nephrology
physician groups. The Company intends to distribute and provide technical
support for the PHD System through a combination of in-house resources and
contracted third parties.


                           MANUFACTURING AND SUPPLIERS

The Company does not intend to initially manufacture any component of the PHD
System or related consumables. With respect to the PHD System, the Company has
contracted with Peak Industries, Inc. ("Peak"), a contract manufacturer of
medical devices, to assemble and produce the dialysis machine. The Company has
entered into an agreement with Peak that remains in effect through February 28,
2003, subject to earlier termination under specified circumstances. Peak
specializes in the custom manufacturing of medical instrumentation and is
certified to ISO requirements for manufacture of such products. ISO
Certification is an internationally recognized standard of quality
manufacturing. The Company intends to identify additional manufacturing
locations in the future, whether or not owned by Peak, to avoid having to rely
on a single location. There can be no assurances that the Company will be able
to do so on terms acceptable to it. The manufacturing of the Company's products
is subject to quality system regulations ("QSR") and other requirements
prescribed by regulatory agencies. There can be no assurance that Peak or any
other manufacturer of the Company's products will continue to comply with
applicable regulatory requirements or that Peak or any such manufacturer will
be able to supply the Company with such products in sufficient quantity or at
all.

Certain key components of the PHD System, such as the dialyzer, are available
from other manufacturers. The blood tubing set, however, is custom made to the
Company's specifications by a single supplier. Similarly, the dialysate
chemicals supplied to patients using the PHD System will be custom made and
packaged to the Company's specifications. The Company is currently working with
a leading manufacturer of dialysis products to provide the Company's needed
dialysate chemicals. There can be no assurances, however, that any of the key
components of the Company's products, including dialyzers produced by other
manufacturers, will be available on terms acceptable to the Company or at all.

                            RESEARCH AND DEVELOPMENT

As of December 31, 2001, the Company employed a research and development staff
of 30 full time employees, most of whom are engineers and technicians. In
addition, the Company used contractors on an as needed basis to assist in its
development process. The research and development staff is composed of
specialists in the fields of mechanical engineering, electrical engineering,
software engineering, biomedical and systems engineering, chemistry and
microbiology. For the years ended December 31, 2001, 2000 and 1999, the Company
incurred total research and development expenditures of approximately
$10,883,000, $14,542,000, and $15,910,000, respectively.

                                      10

<PAGE>

                                   COMPETITION

The Company expects to compete in the kidney dialysis market with suppliers of
hemodialysis and peritoneal dialysis devices, supplies and services. The
Company does not intend to compete with providers of dialysis services such as
the national dialysis providers or managed care companies. Rather, it intends
to market its products and services to these providers and to work with them to
make home hemodialysis a viable alternative to currently available treatment
methods.

The Company's primary competitors in supplying dialysis equipment, supplies and
services are expected to be Baxter International Inc., Fresenius Medical Care
AG and CGH Medical, Inc. (Cobe, Gambro, Hospal). These companies and most of
the Company's other potential competitors have substantially greater financial,
scientific and technical resources, research and development capabilities,
marketing and manufacturing resources and experience than the Company and
greater experience in developing products, providing services and obtaining
regulatory approvals.

The Company's ability to successfully market its products and services could be
adversely affected by pharmacological and technological advances in preventing
the progression of ESRD in high-risk patients (such as those with diabetes and
hypertension), technological developments by others in the area of dialysis,
the development of new medications designed to reduce the incidence of kidney
transplant rejection and progress in using kidneys harvested from
genetically-engineered animals as a source of transplants. There can be no
assurance that competitive pressure or pharmacological or technological
advancements will not have a material adverse effect on the Company.

The Company believes that competition in the market for kidney dialysis
equipment, supplies and services is based primarily on clinical outcomes,
price, product performance, cost-effectiveness, reliability and technological
innovation and that such competition in the home hemodialysis market will be
based on such factors as well as on products being relatively easy to use,
transport and maintain. Certain kidney dialysis equipment manufacturers and
service providers currently own and operate, or may in the future acquire,
dialysis treatment facilities and other providers. As a result, the Company's
ability to sell its products and services to such providers may be adversely
affected.

                              GOVERNMENT REGULATION

FOOD AND DRUG ADMINISTRATION

The PHD System is regulated as a medical device by the FDA under the Federal
Food, Drug and Cosmetic Act (the "FDC Act"). Pursuant to the FDC Act, the FDA
regulates the manufacture and distribution of medical devices in the United
States. Noncompliance with applicable requirements can result, among other
things, in fines, injunctions and civil penalties; recall or seizure of
products; total or partial suspension of production; denial or withdrawal of
pre-market clearance or approval of devices; recommendations by the FDA that
the Company not be allowed to enter into government contracts; and criminal
prosecution. The FDA also has authority to require repair, replacement or
refund of the cost of any device illegally manufactured or distributed by the
Company.

In the United States, medical devices are classified into one of three classes
(Class I, II or III) on the basis of the controls deemed necessary by the FDA
to reasonably ensure their safety and effectiveness. Class I devices are
subject to general controls (e.g., labeling and adherence to some of the QSRs).
Class II devices are subject to general and special controls (e.g., performance
standards, post-market surveillance and patient registries). Class III devices
are those which must receive pre-market approval by the FDA to ensure their
safety and effectiveness (e.g., life-sustaining, life-supporting and
implantable devices or new devices which have been found not to be
substantially equivalent to legally marketed devices).

                                      11

<PAGE>

The PHD System is classified as a Class II device. On March 30, 1999, the
Company filed an Investigational Device Exemption ("IDE") with the FDA, a
prerequisite for conducting a clinical evaluation of the PHD System. The
Company received full IDE approval in July 1999, and in September 1999 began
the clinical trial of the PHD System. 25 patients participated in the trial at
three centers. The protocol for the study called for patients to dialyze at
home on existing hemodialysis equipment for 10 weeks, followed by one month in
the center on the PHD System and two months at home on the PHD System. The
clinical trial was completed in November 2000, with 23 patients receiving
dialysis on the PHD System. Over 4,000 dialysis treatments have been performed
by patients on the PHD System, including over 3,500 in the home.

On March 27, 2002, the Company announced that it received the FDA's clearance
to market the PHD System in the United States. The FDA clearance had no
restrictions and included authorization to use the product in the home. The
Company had been working toward satisfying the regulatory requirements of the
FDA since submitting a 510(k) pre-market notification for clearance to market
the PHD System in January 2001. 510(k) clearance by the FDA was required prior
to the commercialization of the PHD System in the United States.

The FDC Act requires that medical devices be manufactured in accordance with
the FDA's current QSRs. These regulations require, among other things, that (i)
the manufacturing process must be regulated and controlled by the use of
written procedures and (ii) the ability to produce devices which meet the
manufacturer's specifications be validated by extensive and detailed testing of
every aspect of the process. They also require investigation of any
deficiencies in the manufacturing process or in the products produced and
detailed record keeping. Manufacturing facilities are therefore subject to FDA
inspection on a periodic basis to monitor compliance with QSR requirements. If
violations of the applicable regulations are noted during FDA inspections of
the Company's manufacturing facilities or the manufacturing facilities of its
contract manufacturers, there may be a material adverse effect on the continued
marketing of the Company's products.

Even though the FDA has cleared the PHD System, the FDA may periodically
inspect the manufacturing facilities and processes for compliance with QSRs. In
addition, in the event that additional manufacturing sites are added or
manufacturing processes are changed, such new facilities and processes are also
subject to FDA inspection for compliance with QSRs. The processes that will be
used to manufacture the Company's products have not yet been inspected by the
FDA for compliance with QSRs. There is no assurance that the facilities and
processes utilized by the Company will comply with QSRs and there is a risk
that clearance or approval will, therefore, be delayed by the FDA until such
compliance is achieved.

FOREIGN GOVERNMENT REGULATION

The Company plans to market the PHD System in several foreign markets, including
Europe and Japan. Requirements pertaining to the PHD System vary widely from
country to country, ranging from no health regulations to detailed submissions
such as those required by the FDA. The Company believes the extent and
complexity of regulations of medical devices such as the PHD System is
increasing worldwide. The Company anticipates that this trend will continue and
that the cost and time required to obtain approval to market in any given
country will increase, with no assurance that such approval will be obtained.
The ability to export into other countries may require compliance with EN46001
or ISO13485, which is analogous to compliance with the FDA's QSR requirements.
The Company has not obtained any regulatory approvals to market the PHD System
outside of the United States.

                                       12

<PAGE>

                              INTELLECTUAL PROPERTY

As of March 1, 2002, the Company either owns or has exclusive rights to 45 U.S.
patents and 21 foreign patents for technologies that are important to
developing a safe, convenient, self-contained hemodialysis system. The U.S.
Patent and Trademark Office has also allowed claims on 10 additional patents.
The Company has filed a number of additional patent applications directed to a
number of different features of the PHD System in the United States, and in
several other countries that have significant hemodialysis markets. The Company
has also filed a Patent Cooperation Treaty ("PCT") patent application that
permits it to file patent applications in additional PCT-member countries for a
limited period of time. The Company expects to file additional patent
applications in the United States directed to the PHD System as new technology
is developed.

Twardowski License. On April 1, 1993, the Company entered into a License
Agreement (the "Twardowski License") with Dr. Zbylut Twardowski, a member of
the Company's Scientific Advisory Board, granting to the Company a worldwide
exclusive license which relates to the patent issued on August 9, 1994 entitled
"Artificial Kidney for Frequent (Daily) Hemodialysis" which expires August 9,
2011 (the "Twardowski Patent"). The Twardowski Patent relates to an artificial
kidney intended to provide frequent (daily) home hemodialysis. The Twardowski
License has a duration for as long as the Twardowski Patent remains in effect.
The Twardowski License provides for royalties based on the revenue received by
the Company from the sale or lease of the licensed product. The Twardowski
License requires certain minimum semiannual royalty payments. If the Company
fails to make any such minimum royalty payment, Twardowski has the option to
convert the Twardowski License to a non-exclusive license. There can be no
assurance that the Twardowski Patent will provide the Company significant
exclusivity or benefit in its markets. Furthermore, competitors may develop
alternative technology that achieves the same advantages as the Twardowski
Patent.

Boag License. On April 1, 1993, the Company also entered into a License
Agreement (the "Boag License") with Cynthia P. Walters for the use of a patent
entitled "Dialyzer Reuse System" issued on September 22, 1987, which expires
September 22, 2004 (the "Boag Patent"). The Boag License is exclusive subject
to the rights of Servall Corp. to market its HR3000 product, a device for
facilitating reuse of consumables with conventional hemodialysis machines. The
Boag Patent relates to a dialysis reuse system for cleaning, sterilizing and
testing a hemodialysis machine and its associated dialyzer and blood tubing
set. The Boag License has a duration for as long as the Boag Patent remains in
effect. The Boag License provides for royalties based on the revenue received
by the Company from the sale or lease of the licensed product with a minimum
semiannual royalty payment. Commencing with the third semiannual period after
the first licensed product is sold, if the Company pays no more than the
minimum semiannual royalty payment for two consecutive semiannual periods, the
licensor has the right to convert the Boag License to a non-exclusive license.
Also, commencing with the first semiannual period occurring five years after
the first licensed product is sold, if the Company pays no more than the
minimum semiannual royalty payment for two consecutive semiannual periods, the
licensor has the right to terminate the Boag License. In the event of
infringement of the patent by third parties, the Company's right to enforce the
patent is subject to the licensor's superior right to bring suit on its own and
to recover all damages without accounting to the Company. There can be no
assurance that the Boag Patent will provide the Company significant exclusivity
or benefit in its markets. Furthermore, competitors may develop alternative
technology that achieves the same advantages as the Boag Patent.

Allergan License. On March 11, 1996, the Company entered into a License
Agreement (the "Allergan License") with Allergan, Inc. for the use of a U.S.
patent entitled "Pressure Transducer Magnetically-Coupled Interface
Complementing Minimal Diaphragm Movement During Operation" issued on February
28, 1995, and its foreign counterparts (the "Allergan Patent"). The Company has
exclusive worldwide rights to the patented technology, limited to the field of
use of kidney dialysis machines and methods. The Allergan License has a duration
for as long as the Allergan Patent remains in effect and provides for royalty
payments to Allergan based on manufacturing of the PHD System, which
incorporates the patented technology. Royalty payments are to be made quarterly,
with minimum annual royalty payments beginning in 1998. If the Company fails to
pay the full minimum annual royalties, the License Agreement will terminate. If
the Company pays at least half of the minimum annual royalties

                                       13

<PAGE>


but does not pay such royalties in full, the License Agreement shall be
converted to a non-exclusive license. There can be no assurance that the
Allergan Patent will provide the Company significant exclusivity or benefits in
its markets. Furthermore, competitors may develop alternative technology that
achieves the same advantages as the Allergan Patent.

There can be no assurance that any of the Company's pending patent applications
will be approved by the patent offices in the various countries in which they
were filed. In addition, there can be no assurance that the Company will
develop additional proprietary products or processes that are patentable or
that any patents that may issue to or be licensed by the Company will provide
the Company with competitive advantages. There can be no assurance that the
Company's patent applications or patents that may issue to or be licensed by
the Company will not be challenged by any third parties or that the patents of
others will not prevent the commercialization of products incorporating the
Company's technologies. Furthermore, there can be no assurance that others will
not or have not independently developed similar products, duplicated and
designed any of the Company's products or design around the patents that may
issue to or be licensed by the Company. Any of the foregoing results could have
a material adverse effect on the Company.

The commercial success of the Company will depend, in part, on its ability to
avoid infringing patents issued to others. The field of dialysis includes a
significant number of patents that have been issued to third parties. The
Company may receive from third parties, including potential or actual
competitors, notices claiming that it is infringing third party patents or
other proprietary rights. If it was determined that the Company was infringing
any third-party patent, the Company could be required to pay substantial
damages, alter its products or processes, obtain licenses or cease certain
activities. In addition, if patents are issued to others which contain claims
that compete or conflict with the licensed patents or patent applications of
the Company and such competing or conflicting claims are ultimately determined
to be valid, the Company may be required to pay damages, to obtain licenses to
these patents, to develop or obtain alternative technology or to cease using
such technology. If the Company is required to obtain any licenses, there can
be no assurance that the Company will be able to do so on commercially
favorable terms, if at all. The Company's failure to obtain a license to any
technology that it may require to commercialize its products could have a
material adverse impact on the Company's business, operating results and
financial condition.

In addition to patent licenses and applications for patents, the Company
possesses trade secrets, copyrights, proprietary know-how and unpatented
technological advances. The Company seeks to protect these assets, in part, by
confidentiality agreements with its business partners, consultants and vendors
and non-competition agreements with its officers and employees. There can be no
assurance that these agreements will not be breached, that the Company will
have adequate remedies for any breach or that the Company's trade secrets and
proprietary know-how will not otherwise become known or be independently
developed by others.

                                    EMPLOYEES

As of December 31, 2001, the Company had 62 full-time employees, 30 of whom
were employed in research and development capacities. The Company considers its
employee relations to be good.

                               EXECUTIVE OFFICERS

The information under this Item is furnished pursuant to Instruction 3 to Item
401(b) of Regulation S-K. Executive Officers of the Company are elected by and
serve at the discretion of the Board of Directors.

William C. Dow was appointed President and Chief Executive Officer and a
director of the Company in September 1999. From August 1997 until joining the
Company in September 1999, he served as President and Chief Executive Officer of
PLC Systems Inc., a manufacturer of lasers used in cardiac surgery. From 1993 to
1997, he served as President and Chief Executive Officer of Deknatel Snowden
Pencer Worldwide, Inc., a $100 million medical device manufacturer that became a
manufacturing and marketing subsidiary of Genzyme Corporation in 1996. Mr. Dow
has over 25 years of experience in the medical device and service industry
having held various positions in sales, marketing, distribution and general
management with Griffith Micro Science, Kendall, Terumo and American

                                       14

<PAGE>

Hospital Supply. Mr. Dow is a graduate of the United States Naval Academy with a
Bachelor of Science in Engineering and served as both a pilot and a Supply Corps
officer in the U.S. Navy.

Richard P. Goldhaber, Senior Vice President and Chief Technical Officer, joined
the Company in July 2000. Prior to joining the Company, from 1993 to 2000, he
was Vice President of Research and Development at Minntech Corporation, a
company that develops, manufactures and distributes dialysis related products.
Prior to Minntech, from 1965 to 1993, he held positions of increasing
responsibility in product development with Baxter International Inc., including
20 years developing dialysis products.


David L. Bellitt, Senior Vice President of Sales and Marketing, joined the
Company in November 2000 with over 25 years of experience in the medical
devices, diagnostics and home healthcare markets. From June 1997 to November
1999, he served as Senior Vice President at Organon Teknika Corporation, a $100
million division of Akzo Nobel dealing in medical diagnostic instrumentation
systems. Prior to Organon, from 1995 to 1997, he was Senior Vice President of
Bell+Howell Mail Processing Systems, with responsibilities for worldwide
marketing, sales and service for the $370 million division operating in 48
countries.

Thomas F. Scully, Senior Vice President of Manufacturing and Operations, joined
the Company in January 1996. From 1971 to 1995, Mr. Scully worked at Baxter
International Inc. in various operational roles, including responsibilities as
Vice President, Sales and Operations of the Renal Division. In that role, Mr.
Scully was involved principally in the design, development and management of
the Renal Division's home care operations network.


                           PRODUCT LIABILITY EXPOSURE

The Company's business exposes it to potential product liability risks that are
inherent in the production, marketing and sale of dialysis products. There can
be no assurance that the Company will be able to avoid significant product
liability exposure. Upon commencement of the first human use of the PHD System
in January 2000, the Company initiated product liability insurance coverage,
with a limit of $10 million. There can be no assurance that such insurance
coverage is sufficient, or that additional coverage will be available on
acceptable terms or at all or that any insurance policy if obtained will
provide adequate protection against potential claims. Furthermore, the
Company's agreements with contract manufacturers require the Company to obtain
product liability insurance, and the failure to obtain adequate insurance
coverage could materially and adversely affect the Company's ability to produce
the PHD System. A successful claim brought against the Company in excess of
any insurance coverage maintained by the Company could have a material adverse
effect upon the Company. In addition, the Company has agreed to indemnify
certain of its contract manufacturers against certain liabilities resulting
from the sale of the PHD System.

                               FOREIGN OPERATIONS

In April 1996, the Company established Aksys Japan, K.K. ("AJKK"), a
wholly-owned Japanese subsidiary. AJKK had no employees as of December 31,
2001. The Company has engaged the services of a business consultant to act on
behalf of AJKK in pursuing business opportunities in Japan. The primary purpose
of AJKK is to establish a presence for regulatory, business development and
eventual technical and customer support as the Company progresses through the
stages of clinical studies, regulatory approval and market launch. All efforts
and decisions are directed from the Company's headquarters in Lincolnshire,
Illinois.

On June 21, 1999, the Company entered into a co-development and license
agreement (the "Agreement") with Teijin Limited of Osaka, Japan. Under the terms
of the Agreement, Teijin paid $7.0 million to the Company for the right to
manufacture and sell the PHD System in Japan. The Company is also entitled to
future royalty payments from future product sales in Japan. The $7.0 million has
been recognized as revenue. Teijin also paid the Company a $7.0 million
co-development fee relating to the PHD System. Use of the proceeds from the
co-development fee was restricted to development costs incurred on the PHD
System and could not be used for other general corporate purposes. Amounts paid
under the co-development arrangement were recognized as revenue as development
costs on the PHD System are incurred. During the years ended December 31, 2000
and 1999, the Company recognized

                                       15

<PAGE>

revenue of $3.4 million and $2.6 million, respectively, related to
co-development of the PHD System. During 2000, the Agreement was amended. The
final revenue related to the co-development of the PHD System was recognized
during 2000, and the remaining unspent co-development funds under the Agreement
were recorded in other liabilities Amounts due to Teijin were $0 and $658,423 at
December 31, 2001 and 2000, respectively.

On January 7, 1998, the Company established a strategic alliance with Teijin as
a result of mutually initiated negotiations. The alliance is represented by a
Stock Purchase Agreement and a Joint Development Agreement. Under the terms of
the Stock Purchase Agreement, Teijin purchased 493,097 newly issued common
shares of the Company at a price of $10.14 per share and received certain
registration rights with respect to such shares. The Joint Development
Agreement provided that, conditional on the achievement of certain milestones,
Teijin would make additional cash payments to the Company. The first of those
milestones, for agreeing to the regulatory strategy in Japan, resulted in a
payment to the Company of $1,000,000 during 1998. The Joint Development
Agreement was superceded by the Agreement entered into with Teijin in June 1999.

Teijin is a leading Japanese manufacturer of synthetic fibers, chemicals and
plastics, with annual sales in excess of $5 billion, of which over $600 million
is derived from pharmaceuticals and medical products. Teijin pioneered and
today is a leader in the home oxygen therapy business in Japan, and is also one
of the principal suppliers to the dialysis industry of the resins and fibers
used to produce dialyzers.

ITEM 2.  PROPERTIES.

The Company leases approximately 41,500 square feet of office space in
Lincolnshire, Illinois to conduct its research, development and administrative
functions. The Company believes that its present facilities are adequate for
its operations. The Company presently expects all manufacturing will be
contracted out to third party subcontractors.

ITEM 3.  LEGAL PROCEEDINGS.

The Company is not involved in any material pending legal proceedings.


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

There were no matters submitted for a vote of the Company's stockholders during
the fourth quarter ended December 31, 2001.

PART II

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

On December 14, 2001, the Company completed a private placement to several
institutional investors of 3,195,230 shares of its common stock. The gross
proceeds of the offering were approximately $10.39 million. The investors were
also issued stock purchase warrants for the right to acquire an aggregate of
584,728 shares of common stock at an exercise price of $3.25 per share. The
shares were sold with the assistance of U.S. Bancorp Piper Jaffray ("Piper
Jaffray"). As the placement agent, Piper Jaffray received fees of approximately
$0.6 million and stock purchase warrants to acquire an aggregate of 159,762
shares of common stock at $4.90 per share. The securities were sold in reliance
on the exemption from registration provided by section 4(2) of the Securities
Act of 1933. The private placement was made without any general solicitation or
advertising and each investor represented to the Company in writing that it was
an accredited investor within the meaning of Rule 501(a) of Regulation D.

                                       16

<PAGE>


The Company's Common Stock trades on the Nasdaq National Market under the symbol
AKSY. The following table lists the quarterly high and low prices of the Common
Stock for the period from January 1, 2000 through December 31, 2001.

              Fiscal          Fiscal
               Year           Quarter         High          Low
              -------       ----------      --------     ----------
               2001             1st         $16.875        $4.750
                                2nd          12.000         3.625
                                3rd          10.670         3.000
                                4th           8.500         3.950

               2000             1st         $13.375        $4.875
                                2nd          11.375         6.563
                                3rd           14.00         7.813
                                4th           17.50         11.50

There were 255 stockholders of record of the Company's Common Stock as of March
22, 2002. In addition, the Company estimates that there were approximately
7,000 beneficial stockholders at March 22, 2002, who held shares in "street
name." The Company has not paid cash dividends to date, and management
anticipates that all future earnings will be retained for development of the
Company's business.

ITEM 6.  SELECTED FINANCIAL DATA.

The selected statements of operations and balance sheet data as of December 31,
2001 and 2000 set forth below have been derived from the audited financial
statements of the Company included as Exhibit 13 to this Annual Report on Form
10-K. The selected statements of operations and balance sheet data as of
December 31, 1999, 1998 and 1997 set forth below have been derived from the
audited financial statements of the Company that have not been included in this
Annual Report on Form 10-K. The historical financial data for the Company is
not necessarily indicative of future results and should be read in conjunction
with the financial statements and notes thereto and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" included
elsewhere in this Annual Report on Form 10-K.

                                       17

<PAGE>

<TABLE>
<CAPTION>
                                                                                                         Cumulative from
                                                        Year Ended December 31,                          January 18, 1991
                              -------------------------------------------------------------------------    (inception)
                                                                                                             through
                                   2001           2000           1999            1998          1997      December 31, 2001
                              ------------    ------------   ------------    ------------   -----------  -----------------
<S>                               <C>       <C>             <C>              <C>             <C>              <C>
Consolidated Statement of
  Operations Data:
Revenues:
  Joint development income        $   - -   $   3,434,809   $   9,609,313    $  1,000,000    $        - -     $ 14,044,122
                                  --------  -------------   -------------    ------------    ------------     ------------

Operating costs and
expenses:
  Research and development     10,882,796      14,541,873      15,909,993      15,342,533      10,886,803       80,748,099
  Business development          1,753,499       1,025,315       1,737,069       1,185,254       1,043,867        7,652,301
  General and administrative    5,121,223       4,738,737       4,258,162       3,304,747       3,848,701       25,304,033
                             ------------    ------------    -----------     ------------    ------------    -------------
  Total operating expenses     17,757,518      20,305,925      21,905,224      19,832,534      15,779,371      113,704,433
                             ------------    ------------    -----------     ------------    ------------    -------------

Operating loss                (17,757,518)    (16,871,116)    (12,295,911)    (18,832,534)    (15,779,371)     (99,660,311)
Other income, net                 515,892       1,159,961         997,642       1,677,807       2,272,769        8,721,366
                              ------------    ------------    ------------    ------------    ------------     ------------

Net loss                     $(17,241,626)   $(15,711,155)  $ (11,298,269)   $(17,154,727)   $(13,506,602)    $(90,938,945)
                             =============   =============  ==============   =============   =============    =============

Net loss per share/(1)/          $  (0.94)       $  (0.93)      $   (0.76)       $  (1.17)      $   (0.98)       $  (11.03)
                                    ======          ======          ======          ======          ======          =======
Weighted average shares
outstanding/(1)/               18,418,410      16,934,532      14,885,449      14,653,953      13,791,236        8,242,487
                               ===========     ===========     ==========      ==========      ==========        =========
</TABLE>

<TABLE>
<CAPTION>
                                                                               December 31,
                                                ---------------------------------------------------------------------------
                                                    2001            2000            1999            1998           1997
                                                ------------    ------------    ------------    ------------   ------------
<S>                                           <C>             <C>               <C>            <C>            <C>
Consolidated Balance Sheet Data:
Cash, cash equivalents and short-term         $ 10,240,414    $ 19,121,697      $14,841,488    $ 20,260,268   $ 29,195,656
investments
Working capital                                 10,548,397      16,636,100        9,191,004      18,009,636     28,432,501
Total assets                                    14,454,503      22,188,020       18,811,434      25,941,835     36,647,251
Long-term liabilities/(2)/                         159,061         158,444          146,345         123,041         77,269
Deficit accumulated during development stage   (90,941,979)    (73,700,352)     (57,989,197)    (46,690,928)   (29,536,201)
Total stockholders' equity                      12,603,629      19,349,018       12,623,381      23,301,944     35,287,989
</TABLE>

/(1)/  Computed on the basis described in Note 1 of Notes to Consolidated
       Financial Statements.
/(2)/  Consists primarily of deferred rent under operating lease for facilities.

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

OVERVIEW

Since its inception in January 1991, the Company has been engaged in the
development of hemodialysis products and services for patients suffering from
ESRD. The Company has developed the PHD System, which is designed to enable
patients to perform daily hemodialysis at alternate sites, such as the
patient's home. The Company has never generated sales revenue and has incurred
losses since its inception. At December 31, 2001, the Company had a deficit
accumulated during the development stage of $90.9 million. The Company expects
to incur additional losses in the foreseeable future at least until such time
that it can sufficiently commercialize the PHD System, with

                                      18

<PAGE>

commercialization requiring necessary regulatory clearances or approvals from
the FDA to market the PHD System in the United States and equivalent regulatory
approvals to market the PHD System in countries other than the United States.

CRITICAL ACCOUNTING POLICIES

The preparation of financial statements requires management to make estimates
and assumptions that affect amounts reported therein. The company believes the
following critical accounting policies affect its more significant judgments
and estimates used in the preparation of its consolidated financial statements:

Accrued liabilities and contingencies

The Company is required to make certain estimates and assumptions that affect
the amounts recorded as accrued liabilities and contingencies. The Company
bases its estimates on historical experience and on various other factors that
are believed to be reasonable to determine the amount of accrued liabilities
and contingencies to be recorded. If actual results differ from these
estimates, additional expenditures might be recorded.

Other receivable write down and realizability determinations

The Company maintains allowances for doubtful accounts for estimated losses
resulting from the Company's review and assessment of its third-party vendor
ability to make required payments. If the financial condition of the Company's
third-party vendor were to deteriorate, resulting in an impairment of their
ability to make payments, additional allowances might be required.

Net deferred tax assets valuation

The Company records its net deferred tax assets in the amount that it expects
to realize based on projected future taxable income. In assessing the
appropriateness of its valuation, assumptions and estimates are required such
as the Company's ability to generate future taxable income. In the event that
the Company were to determine that it would be able to realize its deferred tax
assets in the future in excess of its net recorded amount, an adjustment to the
deferred tax asset would increase income in the period such determination was
made.

CONTRACTUAL OBLIGATIONS

The following table reflects a summary of the Company's contractual cash
obligations as of December 31, 2001:

<TABLE>
<CAPTION>
Contractual Cash Obligations                    Total      Less than 1 year     1-3 years     4-5 years
                                                -----      ----------------     ---------     ---------
<S>                                          <C>           <C>                  <C>            <C>
Operating Leases                             $2,008,877      $407,807           $1,298,120     $302,950
Royalties                                    $1,165,000      $185,000            $725,000      $255,000
Purchase Obligations                          $850,000       $850,000              -0-           -0-
Total Contractual Cash Obligations           $4,023,877    $1,442,807           $2,023,120     $557,950
</TABLE>

NOTE ON FORWARD-LOOKING INFORMATION

Certain statements in this Annual Report on Form 10-K and in future filings
made by the Company with the Securities and Exchange Commission and in the
Company's written and oral statements made by or with the approval of an
officer of the Company constitute "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, and the Company intends that such
forward-looking statements be subject to the safe harbors created thereby. The
words "believes," "expects," "estimates," "anticipates," and "will be," and
similar words or expressions, identify forward-looking statements made by or on
behalf of the Company. These forward-looking statements reflect the Company's
views as of the date they

                                      19

<PAGE>

are made with respect to future events and financial performance, but are
subject to many uncertainties and factors which may cause the actual results of
the Company to be materially different from any future results expressed or
implied by such forward-looking statements. Factors that could cause such a
difference include, but are not limited to, (i) risks related to the failure to
meet development and manufacturing milestones for the PHD System on a timely
basis, (ii) risks related to the regulatory approval process, (iii) market,
regulatory and reimbursement conditions, including without limitation
patient/clinic acceptance of the PHD System, (iv) additional capital
requirements with respect to among other things the commercialization of the
PHD System, (v) changing assumptions with respect to projected unit pricing,
product cost, gross margin and operating profit targets as identified in the
business plan, which are as yet untested, (vi) risks inherent in relying on a
third party to manufacture products, (vii) the impact of products which may be
developed, adapted or may otherwise compete with the PHD System, (viii) changes
in QSR requirements and (ix) other factors discussed elsewhere in this Annual
Report on Form 10-K. Regulatory approval risks include, without limitation,
whether and when we will obtain clearances similar to the FDA's clearance from
other countries in which we may attempt to distribute the PHD System.
Additional clinical trials and/or other data may be needed in order to obtain
such regulatory clearances. The Company does not undertake to publicly update
or revise its forward-looking statements even if experience or future changes
make it clear that any projected results or events expressed or implied therein
will not be realized.

RESULTS OF OPERATIONS

Year Ended December 31, 2001 Compared to Year Ended December 31, 2000

Net loss for the year ended December 31, 2001 was $17.2 million ($0.94 per
share), compared with $15.7 million ($0.93 per share), for the year ended
December 31, 2000. During the fiscal year 2000, the Company recognized revenue
of $3.4 million related to co-development of the PHD(R) System with Teijin
Limited of Osaka, Japan. There was no such related joint development income in
the fiscal year 2001.

Joint development income. On June 21, 1999, the Company entered into a
------------------------
co-development and license agreement with Teijin. Under the terms of the
agreement, Teijin paid $7.0 million to the Company for the right to manufacture
and sell the PHD System in Japan. The Company is also entitled to future
royalty payments from future product sales in Japan. Teijin also paid the
Company a $7.0 million co-development fee relating to the PHD System. Use of
the proceeds from the co-development fee is restricted to development costs
incurred on the PHD System and may not be used for other general corporate
purposes. Amounts paid under the co-development arrangement are recognized as
revenue as development costs on the PHD System are incurred. The Company has
recognized $3.4 million in 2000. There was no such related joint development
income in the fiscal year 2001. The agreement was amended in 2000, concluding
the recognition of revenue under the co-development agreement during 2000.

Research and development expenses. For the year ended December 31, 2001,
---------------------------------
research and development expenses decreased to $10.9 million from $14.5 million
for the year ended December 31, 2000. The decrease of $3.6 million in 2001 was
attributable to labor costs decreasing by approximately $1.1 million and the
completion of many activities associated with the development of the PHD System.

Business development expenses. During 2001, business development expenses
-----------------------------
increased $0.8 million, from $1.0 million in 2000 to $1.8 million in 2001. The
increase is primarily attributable to an increase in head count in 2001 related
to planning for commercialization of the PHD System.

General and administrative expenses. For the year ended December 31, 2001,
-----------------------------------
general and administrative expenses increased $0.4 million to $5.1 million. The
increase is primarily a result of additions to the senior management team
during the middle of 2000 and a staff addition in the beginning of 2001.

Interest income. For the year ended December 31, 2001, interest income was $0.5
---------------
million, compared with $1.2 million for the year ended December 31, 2000, a
decrease of $0.7 million. The decrease is primarily attributable to
lower interest rates on investments and the Company's use of cash and cash
equivalents to fund operations during 2001.

                                       20

<PAGE>


RESULTS OF OPERATIONS

Year Ended December 31, 2000 Compared to Year Ended December 31, 1999

Net loss for the year ended December 31, 2000 was $15.7 million ($0.93 per
share), compared with $11.3 million ($0.76 per share), for the year ended
December 31, 1999. The increase in net loss is attributable to one-time income
of $7.0 million in 1999 related to the license of manufacturing and marketing
rights to the PHD System in Japan to the Company's partner, Teijin Limited of
Osaka, Japan, as discussed below.

Joint development income. On June 21, 1999, the Company entered into a
------------------------
co-development and license agreement with Teijin. Under the terms of the
agreement, Teijin paid $7.0 million to the Company for the right to manufacture
and sell the PHD System in Japan. The Company is also entitled to future
royalty payments from future product sales in Japan. The $7.0 million has been
recognized as revenue in 1999. Teijin also paid the Company a $7.0 million
co-development fee relating to the PHD System. Use of the proceeds from the
co-development fee is restricted to development costs incurred on the PHD
System and may not be used for other general corporate purposes. Amounts paid
under the co-development arrangement are recognized as revenue as development
costs on the PHD System are incurred. The Company has recognized $3.4 million
and $2.6 million of revenue related to co-development of the PHD System in 2000
and 1999, respectively. The agreement was amended in 2000, and final revenue
under the co-development agreement was recognized during 2000.

Research and development expenses. For the year ended December 31, 2000,
---------------------------------
research and development expenses decreased to $14.5 million from $15.9 million
for the year ended December 31, 1999. The decrease of $1.4 million was
primarily attributable to a one-time charge in 1999 of approximately $1
million. During 1999, the Company determined that the PHD Systems built for
clinical trials, plus additional components to be used for the future
manufacture of PHD Systems, would differ from the version of the PHD System
that will eventually be commercialized, resulting in the one-time charge of
approximately $1 million to write those assets down to a carrying value of zero.

Business development expenses. During 2000, business development expenses
-----------------------------
decreased $0.7 million, from $1.7 million in 1999 to $1.0 million in 2000. The
decrease is primarily attributable to 1999 costs related to execution of the
co-development and licensing agreement with Teijin.

General and administrative expenses. For the year ended December 31, 2000,
-----------------------------------
general and administrative expenses increased $0.5 million to $4.7 million. The
increase is primarily a result of additions to the senior management team
during the middle of 2000.

Interest income. For the year ended December 31, 2000, interest income was $1.2
---------------
million, compared with $1.0 million for the year ended December 31, 1999, an
increase of $0.2 million. The increase is primarily attributable to interest
earned on the net proceeds from the Company's private equity financings in
2000, totaling $20.6 million.

LIQUIDITY AND CAPITAL RESOURCES

The Company has financed its operations to date primarily through public and
private sales of its equity securities. Through December 31, 2001, the Company
had received net offering proceeds from public and private sales of equity
securities of approximately $102.7 million. Since its inception in 1991 through
December 31, 2001, the

                                       21

<PAGE>


Company made $6.9 million of capital expenditures and used $83.6 million in cash
to support its operations. At December 31, 2001, the Company had cash and cash
equivalents of $10.2 million, short-term investments of $1 million, working
capital of $10.5 million and restricted long-term investments of $0.8 million.
The Company believes that inflation generally has not had a material impact on
its operations or liquidity to date.


On March 27, 2002, the Company announced receipt of FDA clearance to market the
PHD System in the United States. The FDA clearance had no restrictions and
included authorization to use the product in the home. Additional capital will
be required to fund operations for a full-scale commercialization launch. It is
the Company's plan to raise the additional capital required to fund full-scale
commercial operations through public or private equity or debt financings. The
additional capital required for full-scale commercialization may not be
available with terms agreeable to the Company. In the event the Company cannot
raise sufficient capital for a full-scale commercial launch, the Company
believes that cash and short-term investments as of December 31, 2001 are
sufficient to finance the Company's operations through December 31, 2002, under
a scaled back commercial launch.

Generally, the Company expects U.S. customers to purchase PHD Systems and enter
into contracts whereby the Company will provide all products and services
related to the PHD Systems for a single monthly price, which would include all
consumables, service and product support. As an alternative, U.S. customers may
enter into lease agreements for the PHD Systems, under which the single monthly
price would also include a lease payment. The Company's present
commercialization plan for markets outside of the United States is to develop a
partnership in those markets to distribute the PHD System and related
consumables and services. Financing production of the PHD System in quantities
necessary for commercialization will require a significant investment in
working capital. This need for working capital is likely to increase to the
extent that demand for the PHD System increases. The Company would, therefore,
have to rely on sources of capital beyond cash generated from operations to
finance production of the PHD System even if the Company were successful in
marketing its products and services.

The Company currently intends to finance the working capital requirements
associated with these arrangements through the equity or debt financings to
achieve its business objectives. The Company has not yet obtained a commitment
for any such financings, and there can be no assurance that the Company will be
able to obtain financing on acceptable terms or at all.

The Company's funding needs will depend on many factors, including the timing
and costs associated with continued progress in research and development, the
results of clinical studies, manufacturing scale-up, the cost involved in
filing and enforcing patent claims and the status of competitive products. In
the event that the Company's plans change, its assumptions change or prove
inaccurate or it is unable to obtain production financing on commercially
reasonable terms, the Company could be required to seek additional financing
sooner than currently anticipated. In addition, in the future the Company will
require substantial additional financing to fund full-scale production and
marketing of the PHD System and related services. The Company has no current
arrangements with respect to sources of additional financing.

The Company has not generated taxable income to date. At December 31, 2001, the
net operating losses available to offset future taxable income were
approximately $96.8 million. Because the Company has experienced ownership
changes, future utilization of the carryforwards may be limited in any one
fiscal year pursuant to Internal Revenue Code regulations. The carryforwards
expire at various dates beginning in 2012. As a result of the annual
limitation, a portion of these carryforwards may expire before ultimately
becoming available to reduce federal income tax liabilities.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141 (FAS 141), Business Combinations, which
supercedes Accounting Principles Board Opinion No. 16, Business Combinations,
and Statement of Financial Accounting Standards No. 38, Accounting for
Pre-acquisition Contingencies of Purchased Enterprises. This statement
establishes financial accounting and reporting standards for

                                      22

<PAGE>

business combinations. The provisions of this statement are required to be
applied to all business combinations initiated after June 30, 2001. Management
does not expect there will be a material impact of adopting the provision of FAS
141.

In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 142 (FAS 142), Goodwill and Other Intangible
Assets, which supercedes Accounting Principles Board Opinion No. 17, Intangible
Assets, and establishes financial accounting and reporting standards for
intangible assets acquired individually or with a group of other assets at
acquisition. This Statement addresses financial accounting and reporting for
goodwill and other intangible assets subsequent to their acquisition. The
provisions of this Statement are required to be applied starting with fiscal
years beginning after December 15, 2001. Management does not expect there will
be a material impact of adopting the provisions of FAS 142.

In October 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 144 (FAS 144), Accounting for the Impairment
or Disposal of Long-Lived Assets, which addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. This Statement
supercedes Statement of Financial Accounting Standards No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of, and the accounting and reporting provisions of Accounting Principles Board
Opinion No. 30, Reporting the Results of Operations - Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions, for the disposal of a segment
of a business. The provisions of this Statement are required to be applied
starting with fiscal years beginning after December 15, 2001. Management does
not expect there will be a material impact of adopting the provisions of FAS
144.


ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.

The investments of the Company have been made for investment (as opposed to
trading) purposes. Interest rate risk with respect to the investments of the
Company is not significant as substantially all of such investments are in U.S.
dollar cash equivalents and short-term investments (with maturities of less
than 12 months), which are by their nature less sensitive to interest rate
movements. The investments of the Company are generally made in U.S.
government and federal agency bonds and high-grade commercial paper and
corporate bonds.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

The Consolidated Balance Sheets as of December 31, 2001 and 2000, and the
Consolidated Statements of Operations, Stockholders' Equity and Cash Flows for
the years ended December 31, 2001, 2000 and 1999 and for the period from
January 18, 1991 (inception) through December 31, 2001, the Notes to the
Consolidated Financial Statements and the Independent Auditors' Report set
forth on pages 7 through 20 of the 2001 Annual Report to Stockholders of the
Company are incorporated herein by reference.

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

Not applicable.

PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

Information with respect to the Directors of the Company is set forth in the
Proxy Statement under the heading "Election of Directors," which information is
incorporated herein by reference. Information regarding the executive officers
is set forth above in Part I under "Business - Executive Officers ." Information
required by Item 405 of

                                       23

<PAGE>

Regulation S-K is set forth in the Proxy Statement under the heading "Section 16
(a) Beneficial Ownership Reporting Compliance," which information is
incorporated herein by reference.

ITEM 11.  EXECUTIVE COMPENSATION.

Information with respect to executive compensation is set forth in the Proxy
Statement under the heading "Compensation of Executive Officers," which
information is incorporated herein by reference.

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

Information with respect to security ownership of certain beneficial owners and
management is set forth in the Proxy Statement under the heading "Beneficial
Ownership of Common Stock," which information is incorporated herein by
reference.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

None.

PART IV

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

(a)    Financial Statements:

       1.     Financial Statements.

              The Consolidated Balance Sheets as of December 31, 2001 and 2000,
              and the Consolidated Statements of Operations, Stockholders'
              Equity and Cash Flows for the years ended December 31, 2001, 2000
              and 1999 and for the period from January 18, 1991 (inception)
              through December 31, 2001, the Notes to the Consolidated Financial
              Statements and the Independent Auditors' Report set forth on pages
              7 through 20 of the 2001 Annual Report to Stockholders of the
              Company are incorporated herein by reference.

       2.     Financial Statement Schedules.

              None.

(b)    Reports on Form 8-K.

       None.

(c )   Exhibits.

       See "Exhibits Index" below.

                                      24

<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 on the 28th day of
March, 2002.

                             AKSYS, LTD.

                             By         /s/ William C. Dow
                               ------------------------------------------------
                                        William C. Dow
                               President and Chief Executive 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 this 28th day of March, 2002.

         Signature                             Capacity
         ---------                             --------

       /s/ William C. Dow           President, Chief Executive Officer and
---------------------------------   Director (Principal Executive Officer and
         William C. Dow             Interim Principal Financial Officer)


       /s/ Richard B. Egen          Chairman of the Board of Directors
---------------------------------
         Richard B. Egen


       /s/ Peter H. McNerney        Director
---------------------------------
         Peter H. McNerney


       /s/ W. Dekle Rountree, Jr.   Director
---------------------------------
         Dekle Rountree, Jr.


       /s/ Bernard R. Tresnowski    Director
---------------------------------
         Berrnard R. Tresnowski


       /s/ Alan R. Meyer            Director
---------------------------------
         Alan R. Meyer

                                      25

<PAGE>

                                   AKSYS, LTD.
                                  EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number            Description
--------------------------------------------------------------------------------------------------------------
<S>               <C>
3.1               Restated Certificate of Incorporation of Aksys, Ltd./(1)/.............................
3.2               Amended and Restated By-Laws of Aksys, Ltd./(1)/......................................
4.1               Form of certificate representing shares of Common Stock,
                      $.01 par value per share/(1)/.....................................................
4.2               Registration Agreement, dated as of April 2, 1993, among
                      the Company and certain stockholders of the Company/(1)/..........................
4.3               Amendment No. 1 to Registration Agreement, dated as of
                      September 22, 1995, among the Company and certain
                      stockholders of the Company/(1)/..................................................
4.4               Registration Rights Agreement, dated as of
                      April 7, 2000, by and among the Company and the
                      investors named therein/(2)/......................................................
4.5               Registration Rights Agreement, dated as of
                      August 14, 2000, by and among the Company and the
                      investors named therein/(3)/......................................................
4.6               Registration Rights Agreement, dated as of
                      December 19, 2001, by and among the Company and the
                      investors named therein/(4)/......................................................
4.7               Registration Rights Agreement, dated as of
                      December 19, 2001, by and among the Company and
                      U.S. Bancorp Piper Jaffray/(4)/...................................................
10.1              Aksys, Ltd. 1993 Stock Option Plan/(1)/...............................................
10.2              Manufacturing Agreement, dated as of January 23, 1996,
                      between the Company and Texas Medical Products, Inc./(1)/.........................
10.3              License Agreement, dated as of April 1, 1993, between the
                      Company and Zbylut J. Twardowski/(1)/.............................................
10.4              License Agreement, dated as of April 1, 1993, between the
                      Company and Cynthia P. Walters/(1)/...............................................
10.5              Form of Indemnification Agreement/(1)/................................................
10.6              License Agreement, dated as of March 11, 1996, between the
                      Company and Allergan, Inc./(1)/...................................................
10.7              Lease for Property at Two Marriott Drive/(5)/.........................................

10.8              Severance, Confidentiality and Post-Employment
                      Restrictions Agreement, dated as of October 4, 1999
                      Between the Company and William C. Dow/(6)/.......................................
10.9              Manufacturing Agreement, dated as of February 28, 2001,
                      Between the Company and Peak Industries, Inc./(7)/................................
10.10             Aksys, Ltd. 1996 Stock Awards Plan, as amended/(8)/...................................
10.11             Aksys, Ltd. 2001 Employee Stock Purchase Plan/(8)/....................................
13                Annual Report to Stockholders. Except as specifically incorporated herein
                  by reference, this document shall not be deemed "filed" as part of this
                  Annual Report on Form 10-K/(9)/.......................................................
21                Subsidiaries of the Company/(1)/......................................................
23                Consent of KPMG LLP/(9)/..............................................................
</TABLE>

/(1)/  Incorporated by reference to the Company's Registration Statement on
       Form S-1 (Registration No.333-2492).
/(2)/  Incorporated by reference to the Company's Current Report on Form 8-K,
       filed on April 19, 2000.
/(3)/  Incorporated by reference to the Company's Current Report on Form 8-K,
       filed on August 21, 2000.

                                       26

<PAGE>

/(4)/  Incorporated by reference to the Company's Current Report on Form 8-K,
       filed on December 21, 2001.
/(5)/  Incorporated by reference to the Company's Annual Report on Form 10-K for
       the year ended December 31, 1997.
/(6)/  Incorporated by reference to the Company's Annual Report on Form 10-K for
       the year ended December 31, 1999.
/(7)/  Incorporated by reference to the Company's Annual Report on Form 10-K for
       the year ended December 31, 2001.
/(8)/  Incorporated by reference to the Company's Proxy Statement for its 2001
       Annual Meeting of Stockholders.
/(9)/  Filed herewith.

                                       27