<PAGE>

                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549


                                   FORM 10-K

      ===================================================================

      [X] Annual Report pursuant to Section 13 or 15 (d) of the Securities
          Exchange Act of 1934 for the fiscal year ended December 31, 1999 or
                                                         -----------------

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

================================================================================
                        Commission file number 0-28290
         =============================================================

================================================================================
                                  AKSYS, LTD.
            (Exact name of registrant as specified in its charter)
        ==============================================================

<TABLE>
<S>                                                                 <C>
           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)
</TABLE>

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 aggregated market value of voting stock held by non-affiliates of the
registrant as of March 20, 2000 at a closing sale price of $11.375 as reported
by the Nasdaq National Market was approximately $121,827,000.

       As of March 20, 2000 the registrant had 15,243,087 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 to be held on April 20,
2000 (the "Proxy Statement") are incorporated by reference in Part III and
portions of the Registrant's 1999 Annual Report to Stockholders are incorporated
by reference in Part II and Part IV.

================================================================================
<PAGE>

                                  AKSYS, LTD.

                      INDEX TO ANNUAL REPORT ON FORM 10-K
                                                                        Page No.
                                                                        --------
<TABLE>
<CAPTION>
<S>         <C>                                                                            <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...................................................................................    17

Item 5.      Market for the Registrant's Common Stock and Related Stockholder Matters.....    17
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...................    22
Item 8.      Financial Statements and Supplementary Data..................................    22
Item 9.      Changes in and Disagreements with Accountants on Accounting
             and Financial Disclosure.....................................................    22

PART III..................................................................................    22

Item 10.     Directors and Executive Officers of the Registrant...........................    22
Item 11.     Executive Compensation.......................................................    22
Item 12.     Security Ownership of Certain Beneficial Owners and Management...............    22
Item 13.     Certain Relationships and Related Transactions...............................    22

PART IV...................................................................................    23

Item 14.     Exhibits, Financial Statement Schedules and Reports on Form 8-K..............    23

SIGNATURES................................................................................    24

EXHIBIT INDEX.............................................................................    25
</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 Personal
Hemodialysis System (the "PHD System"), which is designed to enable patients to
perform daily 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 daily hemodialysis.

The Company is currently working toward satisfying the regulatory requirements
for Food and Drug Administration ("FDA") clearance of the PHD System in the
United States.  After receiving an approved Investigational Device Exemption
("IDE") in July 1999, the Company began a clinical evaluation of the PHD System
in September 1999.  The Company expects the clinical evaluation will be
completed by the end of the third quarter 2000.  Following completion of the
clinical evaluation, the data compiled will be submitted along with other
requested data in a 510(k) pre-market notification.  510(k) clearance by the FDA
is required prior to the U.S. commercialization of the PHD System.

Japan is also a significant market where Aksys 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 any of the
above-mentioned regulatory clearances or approvals 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 $16 billion was spent in the U.S. during 1999 for the
treatment of patients suffering from ESRD, of which approximately $5 billion was
directly related to dialysis treatment.  Based upon information published by the
Health Care Financing Administration ("HCFA"), the approximate number of ESRD
patients in the United States requiring dialysis treatments has grown from
66,000 at the end of 1982 to approximately 263,000 at the end of 1999,
representing a compound annual growth rate of approximately 7%.  In addition, it
is estimated that there were approximately 370,000 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 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.

                                       1
<PAGE>

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 HCFA 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 change 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.  From 1991 until January 1, 2000, the Medicare base composite rates for
outpatient dialysis services were $126 per treatment for hospitals and $122 for
independent facilities (equivalent to approximately $20,000 per year) and were
adjusted depending on regional wage differences.  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,
supplies and support services.  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 CCPD (as defined below).
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.

In its March 1, 1996 report, ProPAC recommended that HCFA should encourage the
availability of managed care alternatives for ESRD patients.  Previously, in
1993, Congress directed HCFA to include the integration of chronic and acute
ESRD care management through expanded community care services.  In January 1996,
HCFA announced the availability of funding for ESRD Managed Care Demonstrations
based on approval of grant applications and proposals.  During October 1996,
HCFA announced the selection of four dialysis treatment centers where government
funding will be provided to conduct the ESRD Managed Care Demonstration Project.
In January 2000, three sites remained in the project.  The last center to
complete the demonstration project will do so in September 2001, and a final
report is expected in 2002.  In addition to the HCFA ESRD Managed Care
Demonstration Project, private companies have recently initiated disease
management programs for the treatment of ESRD patients.

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, including
expanded enrollment of Medicare beneficiaries in managed care programs, 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 ESRD program or
substantially affect reimbursement for dialysis services.

                         Prevailing Treatment Methods

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

Hemodialysis

HCFA estimates that as of December 31, 1998, approximately 89% (217,000) of the
ESRD dialysis patients in the United States were receiving hemodialysis.
Approximately 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

HCFA estimates that as of December 31, 1998, approximately 11% (28,000) 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

                                       4
<PAGE>

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 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 HCFA, total treatment costs
per dialysis patient have risen from $33,400 in 1988 to $63,000 in 1998.  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.

The Company expects that Medicare will eventually change its reimbursement with
respect to ESRD patients to a managed care system in which all costs of treating
ESRD patients are subject to a cap.  This would encourage providers to focus on
clinical outcomes in order to reduce the total cost of care.  Congress has
mandated a demonstration project to evaluate the benefits of an ESRD managed
care approach, in which providers would be paid a capitated rate covering both
in-patient and outpatient care.  This project began in 1998 and will run for
three years.

Peritoneal Dialysis.  Although peritoneal dialysis accounted for 11% (or 28,000)
of the dialysis patient population in 1998 according to HCFA, approximately 25%
(or 7,000) 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-

                                       5
<PAGE>

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.

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.  Several studies over the past 32 years indicate that
increasing the number of dialysis treatments per week leads to dramatic
improvements in patients.  The Company has compiled data on 72 patients
(including approximately 24 patients from nine centers in Europe and the U.S.
treated with daily hemodialysis for up to 14 years) dialyzing six or seven times
per week.  The data obtained from these retrospective studies indicates that the
patients involved, when dialyzing six or seven times per week, experienced
normalization of blood pressure, decreased incidence of anemia, improved
appetite and decreased mortality.  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 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 2000,
there are 24 centers worldwide, 14 of which are in North America, treating over
300 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.  Although 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

                                       6
<PAGE>

been demonstrated to have several benefits according to publications by Dr.
Zbylut J. Twardowski, a leading dialysis researcher and member of the Company's
Scientific Advisory Board.

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

The Company is currently conducting a clinical trial of the PHD System.  There
are 24 patients participating in the trial at three centers.  The protocol for
the study calls 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 first of the 24 patients went
home with their PHD Systems in March 2000, and the Company expects to complete
the clinical trial by the end of the third quarter 2000.

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
                           operation only by trained personnel.         home, 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 treatment, 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

                                       7
<PAGE>

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 help 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 during the treatment.  The PHD System then automatically 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 close to the cost of
competing dialysis treatment modalities.  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 the
uncertainty of obtaining regulatory clearance or approval and of achieving
market acceptance and development.

                                       8
<PAGE>

Other Product Development

During 2000, virtually all of the Company's resources will be devoted to the
development and regulatory approval process of the PHD System.  As the Company
nears the stage of commercial production, resources will continue to be devoted
to additional features, service and support of the PHD System.  At that time,
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 2,000, 7,000 and 84,000 dialysis patients,
respectively, in 1998 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, nursing homes and
hospitals in an acute care setting.

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 the
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 will 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, HCFA 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 addition,
the Company is sponsoring a long-term study, lasting at least two years, to
measure the long-term clinical benefits of daily hemodialysis.  In collaboration
with members of the Company's

                                       9
<PAGE>

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.

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.  The Company estimates that there were
approximately 180,000 dialysis patients in Europe and 190,000 dialysis patients
in Japan, both as of December 31, 1999.

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 SeaMED Corporation (''SeaMED''), a contract manufacturer of
medical devices, to assemble and produce the dialysis machine.  The Company has
entered into an agreement with SeaMED that remains in effect for three years
after delivery of the first production model of the PHD System, subject to
earlier termination under specified circumstances.  SeaMED has specialized in
the custom manufacturing of medical instrumentation for more than 15 years 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 SeaMED, 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 good manufacturing practices ("GMP") and other requirements
prescribed by regulatory agencies. There can be no assurance that SeaMED or any
other manufacturer of the Company's products will continue to comply with
applicable regulatory requirements or that SeaMED 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 and packager of pharmaceutical 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, 1999, the Company employed a research and development staff
of 74 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, 1999, 1998 and 1997, the Company
incurred total research and development expenditures of approximately
$15,910,000, $15,343,000 and $10,887,000, 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 GMPs).  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).

The Company submitted a 510(k) pre-market notification for clearance of the PHD
System on March 5, 1996. The FDA notified the Company on July 17, 1996 of the
acceptance for formal review of the Company's 510(k) pre-

                                       11
<PAGE>

market notification submission. Subsequently, on September 18, 1996, the FDA
notified the Company of additional data required to be submitted with regard to
the PHD System. The FDA also notified the Company of the requirement for
clinical data to be included in the 510(k) pre-market notification submission.
While the FDA denied the Company's 510(k) filing due to the request for clinical
data, the FDA also notified the Company to resubmit the requested data, once
available, in the form of a new 510(k) pre-market notification.

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 IDE approval in July 1999, and in September 1999
began the clinical trial of the PHD System.  There are 24 patients participating
in the trial at three centers.  The protocol for the study calls 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 first of the 24 patients went home with their PHD Systems in March 2000, and
the Company expects to complete the clinical trial by the end of the third
quarter 2000.  Upon completion of the clinical evaluation, the data compiled
will be submitted along with other requested data in a new 510(k) pre-market
notification.

The 510(k) clearance process is lengthy and uncertain and requires substantial
commitments of the Company's financial resources and management's time and
effort. Significant unforeseen delays in the process could occur as a result of
the FDA's scheduling of advisory review panels, changes in established review
guidelines, regulations or administrative interpretations or determinations by
the FDA that clinical data collected is insufficient to support the safety and
effectiveness of one or more of the devices for their intended uses or that the
data warrants the continuation of clinical studies. Delays in obtaining, or
failure to obtain, requisite regulatory approvals or clearances in the United
States and other countries would prevent the marketing of the PHD System and
other devices and impair the Company's ability to generate funds from
operations, which in turn would have a material adverse effect on the Company's
business, financial condition, and results of operations.

The FDC Act requires that medical devices be manufactured in accordance with the
FDA's current GMP regulations.  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 GMP 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.

Before the FDA clears a Section 510(k) submission, the FDA is likely to inspect
the utilized manufacturing facilities and processes for compliance with GMPs.
Even after the FDA has cleared a 510(k) submission, it will periodically inspect
the manufacturing facilities and processes for compliance with GMPs. 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 GMPs. The processes that will be
used to manufacture the Company's products have not yet been inspected by the
FDA for compliance with GMPs. There is no assurance that the facilities and
processes utilized by the Company will comply with GMPs 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.
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

                                       12
<PAGE>

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 ISO 9000, which is analogous to compliance with the
FDA's GMP requirements. The Company has not obtained any regulatory approvals to
market the PHD System outside of the United States.

                             Intellectual Property

As of November 15, 1999, the Company either owns or has exclusive rights to 33
U.S. patents and 15 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,

                                       13
<PAGE>

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 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 the Company were determined to be 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, 1999, the Company had 85 full-time employees, 74 of whom were
employed in research and development capacities.  The Company considers its
employee relations to be good.

                      Executive Officer and Key Employees

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

                                       14
<PAGE>

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 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. Mr. Dow serves as a director of PLC
Systems Inc.

Bruce E. Dobsch, Executive Vice President and Chief Technology Officer, joined
the Company in October 1998 as Senior Vice President of Research and
Development.  During his 28 years in the medical diagnostics field with DuPont
and Dade Behring, he was instrumental in overseeing the development of numerous
complex medical products from initial concept to commercialization.  From 1996
to 1998, he was Vice President of Research and Development for Dade Behring's
Chemistry and Engineering Skill Center.  Previously, from 1989 through 1996, he
served as Director of Research and Development for DuPont's Chemistry Division.

The following individuals are key employees of the Company:

Carl M. Kjellstrand, M.D., Ph.D., joined the Company in April 1997 as Vice
President of Medical Affairs.  He joined Aksys from the University of Alberta
with more than 40 years of medical teaching experience.  As a long-time advocate
of patients' rights, his research in dialysis has been published in more than
450 articles.  A former consultant to the U.S. Food and Drug Administration on
medical devices and former president of the Canadian Society of Nephrology, he
is an active member of leading scientific societies and editorial boards.

Thomas F. Scully joined the Company in January 1996 as Vice President of
Operations.   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 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, 1999.
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.

                                       15
<PAGE>

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 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 $2.6 million of revenue
related to co-development of the PHD System in 1999.

On January 7, 1998, the Company established a strategic alliance with Teijin
Limited of Osaka, Japan, 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 Aksys common shares 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 Aksys.  The first of
those milestones, for agreeing to the regulatory strategy in Japan, resulted in
a payment to Aksys of $1,000,000 during 1998.  The Joint Development Agreement
was superceded by the Co-Development and License Agreement entered into in 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, 1999.

                                       16
<PAGE>

PART II

Item 5.  Market for the Registrant's Common Stock and Related Stockholder
Matters.

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, 1998 through December 31, 1999.

<TABLE>
<CAPTION>
   Fiscal          Fiscal
    Year           Quarter             High               Low
 -----------   --------------    ---------------  ----------------
<S>            <C>               <C>              <C>
    1999             1st                 $ 8.25           $4.00
                     2nd                  6.625            4.50
                     3rd                  6.938            5.00
                     4th                   6.00            3.75

    1998             1st                  8.375            5.75
                     2nd                   7.50            5.75
                     3rd                  8.875            4.75
                     4th                   7.50            3.50
</TABLE>

There were 258 stockholders of record of the Company's Common Stock as of March
2, 2000.  In addition, the Company estimates that there were approximately 4,500
beneficial stockholders at March 2, 2000, who held shares in "street name."  The
Company has not paid cash dividends to date, and management anticipates that
future earnings will be retained for development of the Company's business.

Item 6.  Selected Financial Data.

The selected statement of operations and balance sheet data set forth below have
been derived from the audited financial statements of the Registrant included as
Exhibit 13 to this Annual Report on Form 10-K.  The financial data for the
Company 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>
                                                                  Year Ended December 31,
                                  --------------------------------------------------------------------------------------
                                       1999              1998               1997                1996            1995
                                  ------------      ------------        ------------         -----------    ------------
<S>                                 <C>                  <C>               <C>                 <C>               <C>
Consolidated Statement of
 Operations Data:
Revenues:
 Joint development income         $  9,609,313      $  1,000,000        $         --         $        --     $       --
                                  ------------      ------------        ------------         -----------     -----------
Operating costs and expenses:
 Research and development           15,909,993        15,342,533          10,886,803           6,515,485      4,261,230
 Business development                1,737,069         1,185,254           1,043,867             547,767        359,530
 General and administrative          4,258,162         3,304,747           3,848,701           2,559,441        876,613
                                   ------------      ------------        ------------         -----------    -----------
 Total operating expenses           21,905,224        19,832,534          15,779,371           9,622,693      5,497,373
                                   ------------      ------------        ------------         -----------    -----------

Operating loss                     (12,295,911)      (18,832,534)        (15,779,371)         (9,622,693)    (5,497,373)
Other income, net                      997,642         1,677,807           2,272,769           1,803,656        152,710
                                   ------------      ------------        ------------         -----------    -----------

Net loss                          $(11,298,269)     $(17,154,727)       $(13,506,602)        $(7,819,037)   $(5,344,663)
                                   ============      ============        ============         ===========   ============

Net loss per share(1)                   $(0.76)           $(1.17)             $(0.98)             $(0.63)
                                        ======            ======              ======              ======
Weighted average shares
 outstanding(1)                      14,885,449        14,653,953          13,791,236          12,441,718
                                    ============      ============        ============         ===========


<CAPTION>
                                     Cumulative from
                                     January 18, 1991
                                       (inception)
                                         through
                                    December 31, 1999
                                    -----------------
<S>                                         <C>
Consolidated Statement of
 Operations Data:
Revenues:
 Joint development income                $ 10,609,313
                                         ------------
Operating costs and expenses:
 Research and development                  55,323,430
 Business development                       4,873,487
 General and administrative                15,444,073
                                         ------------
 Total operating expenses                  75,640,990
                                         ------------

Operating loss                           (65,031,677)
Other income, net                          7,045,513
                                         ------------

Net loss                                $(57,986,164)
                                        ============

Net loss per share(1)

Weighted average shares
 outstanding(1)
</TABLE>

<TABLE>
<CAPTION>
                                                                                        December 31,
                                                    --------------------------------------------------------------------------------
                                                        1999              1998              1997             1996          1995
                                                    ------------      ------------      ------------     ------------  -------------
<S>                                               <C>               <C>               <C>               <C>            <C>
Consolidated Balance Sheet Data:
Cash, cash equivalents and short-term investments   $ 14,841,488      $ 20,260,268      $ 29,195,656     $ 45,649,934   $ 3,957,105
Working capital                                        9,191,004        18,009,636        28,432,501       45,041,960     3,565,263
Total assets                                          18,811,434        25,941,835        36,647,251       50,147,510     4,693,450
Long-term liabilities(2)                                 146,345           123,041            77,269           19,630        35,761
Redeemable preferred stock                                    --                --                --               --    12,406,761

Deficit accumulated during development stage         (57,989,197)      (46,690,928)      (29,536,201)     (16,029,599)   (8,210,562)

Total stockholders' equity (deficit)                  12,623,381        23,301,944        35,287,989       48,684,094    (8,201,948)

</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, 1999, the Company had a

                                       18
<PAGE>

deficit accumulated during the development stage of $58.0 million. The Company
expects to incur additional losses in the foreseeable future at least until such
time that it obtains necessary regulatory clearances or approvals from the FDA
to market the PHD System in the United States or it is able to secure equivalent
regulatory approvals to market the PHD System in countries other than the United
States.

Note on Forward-Looking Information

Certain statements in this 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 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.  Examples of such uncertainties and factors include,
but are not limited to, (i) risks related to the failure to meet development and
manufacturing milestones on a timely basis, (ii) the Company's need to achieve
manufacturing scale-up in a timely manner with its primary manufacturing
contractor and its need to provide for the efficient manufacturing of sufficient
quantities of its products, (iii) changes in GMP requirements, (iv) the
Company's need to develop the marketing, distribution, customer service and
technical support and other functions critical to the success of the Company's
business plan, (v) the uncertainty regarding the effectiveness and ultimate
market acceptance of the PHD System, the Company's primary product in
development, (vi) changing market conditions, (vii) the need to further
establish the clinical benefits of daily hemodialysis, (viii) the capital
requirements necessary to fund the development and commercialization of the
Company's products and services and effectively compete with its competitors,
many of whom have substantially greater resources, (ix) the potential adverse
impact of possible changes to Medicare reimbursement policies and rates (x) the
Company's dependence on key personnel and on patents and proprietary
information, and (xi) risks related to the regulatory approval process.
Regulatory risks include the timing, scope and results of the Company's clinical
trials, and whether and when the Company will obtain clearance from the FDA of a
510(k) pre-market notification (and equivalent regulatory clearances for Europe
and Japan), and what additional clinical and other data the Company might have
to obtain in connection with seeking such clearances. The Company does not
undertake any obligation to update or revise any forward-looking statement made
by it or on its behalf, whether as a result of new information, future events,
or otherwise.

Results of Operations

Year Ended December 31, 1999 Compared to Year Ended December 31, 1998

Net loss for the year ended December 31, 1999 was $11.3 million ($0.76 per
share), compared with $17.2 million ($1.17 per share), for the year ended
December 31, 1998.  The decrease in net loss during 1999 compared with 1998 is
due to $9.6 million of revenue recognized under the co-development and licensing
agreement with Teijin Limited, offset by increased operating expenses.  The
Company's use of cash to fund operations resulted in a reduction of interest
bearing investments and a related decrease in interest income during 1999 as
compared to 1998.

Joint development income.  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 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

                                       19
<PAGE>

revenue as development costs on the PHD System are incurred. The Company has
recognized $2.6 million of revenue related to co-development of the PHD System
in 1999.

Research and development expenses.   For the year ended December 31, 1999,
----------------------------------
research and development expenses increased to $15.9 million from $15.3 million
for the year ended December 31, 1998. The increase of $0.6 million in 1999
included a one-time charge 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 1999, business development expenses
-----------------------------
increased $0.5 million, from $1.2 million in 1998 to $1.7 million in 1999.  The
increase is primarily attributable to costs related to execution of the co-
development and licensing agreement with Teijin.

General and administrative expenses.   For the year ended December 31, 1999,
-------------------------------------
general and administrative expenses increased from $3.3 million in 1998 to $4.3
in 1999.  The increase of $1.0 million is primarily a result of the transition
costs of hiring a new President and CEO during 1999.

Interest income.  For the year ended December 31, 1999, interest income was $1.0
---------------
million, compared with $1.7 million for the year ended December 31, 1998, a
decrease of $0.7 million. The Company's use of cash to fund operations resulted
in a reduction of interest bearing investments and a related decrease in
interest income during the year ended December 31, 1999.

Year Ended December 31, 1998 Compared to Year Ended December 31, 1997

Net loss for the year ended December 31, 1998 was $17.2 million ($1.17 per
share), compared with $13.5 million ($0.98 per share), 1997 fiscal year.  The
increase in net loss during 1998 compared with 1997 is due to increased
operating expenses, offset by income from the Company's joint development
agreement with Teijin Limited of Osaka, Japan.  The Company's use of cash to
fund operations resulted in a reduction of interest bearing investments and a
related decrease in interest income during 1998 as compared to 1997.

Joint development income.  During July 1998, the Company received a milestone
-------------------------
payment of $1.0 million under the terms of a joint development agreement entered
into during January 1998.  The milestone payment signifies the completion of a
written strategy for Aksys and Teijin to develop the PHD System for use in
Japan.

Research and development expenses.   For the year ended December 31, 1998,
----------------------------------
research and development expenses increased to $15.3 million from $10.9 million
for the year ended December 31, 1997. The increase of $4.4 million included one-
time charges related to delivery of PHD Systems to be used during the 1999
clinical evaluation.  Excluding the one-time charge, research and development
expenses increased by $2.8 million, reflecting increased activity as the Company
completes development work and prepares for clinical trials in 1999.

Business development expenses.   During 1998, business development expenses
-----------------------------
increased $0.2 million, from $1.0 million in 1997 to $1.2 million in 1998.  The
increase is attributable to the Company preparing for commercialization of the
PHD System in Europe and expenses related to operations of Aksys Japan, K.K.,
the Company's wholly-owned subsidiary in Japan.

General and administrative expenses.   For the year ended December 31, 1998,
-------------------------------------
general and administrative expenses decreased from $3.8 million in 1997 to $3.3
in 1998.  The decrease of $0.5 million results from the Company's efforts to
keep administrative and overhead costs to a minimum and direct its funds toward
the Company's development efforts.

                                       20
<PAGE>

Interest income.  For the year ended December 31, 1998, interest income was $1.7
---------------
million, compared with $2.3 million for the year ended December 31, 1997, a
decrease of $0.6 million. The Company's use of cash to fund operations resulted
in a reduction of interest bearing investments and a related decrease in
interest income during the year ended December 31, 1998.

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, 1999, the Company
had received net offering proceeds from public and private sales of equity
securities of approximately $71.2 million.  Since its inception in 1991 through
December 31, 1999, the Company made $6.7 million of capital expenditures and
used $47.8 million in cash to support its operations.  At December 31, 1999, the
Company had cash, cash equivalents and short-term investments of $14.8 million,
working capital of $9.2 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.

The Company estimates that during 2000 it will spend approximately $14 to $15
million for operations, clinical evaluation and preparation for
commercialization of the PHD System. The Company expects that substantially all
of this amount will be used to (i) conduct clinical studies using the PHD
System, and (ii) develop the next generation PHD System to be used for
commercialization in the U.S., Japan and worldwide.  The Company expects to
continue to incur substantial expenses related to manufacturing scale-up and
commercialization of the PHD System and the protection of patent and other
proprietary rights.  The Company believes that cash and short-term investments
as of December 31, 1999 are sufficient to finance the Company's operations
through December 31, 2000, and that additional capital will be required to fund
operations beyond December 31, 2000.

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 service.  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 equipment and
receivable financing with a commercial lender.  If the Company is unable to
obtain such equipment financing, it would need to seek other forms of financing,
through the sale of equity securities or otherwise, to achieve its business
objectives.  The Company has not yet obtained a commitment for such equipment
financing, and there can be no assurance that the Company will be able to obtain
equipment financing or alternative financing on acceptable terms or at all.

The Company's funding needs will depend on many factors, including the timing
and costs associated with obtaining FDA clearance or approval, 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.  There can be no assurance that FDA clearance
or approval will be obtained in a timely manner or at all or that additional
financing will be available to the Company when needed, on commercially
reasonable terms, or at all.

The Company has not generated taxable income to date.  At December 31, 1999, the
net operating losses available to offset future taxable income were
approximately $60.5 million.  Because the Company has experienced

                                       21
<PAGE>

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 2008. As a result of the annual limitation,
a portion of these carryforwards may expire before ultimately becoming available
to reduce federal income tax liabilities.

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
18 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, 1999 and 1998, and the
Consolidated Statements of Operations, Stockholders' Equity and Cash Flows for
the years ended December 31, 1999, 1998 and 1997 and for the period from January
18, 1991 (inception) through December 31, 1999, the Notes to the Consolidated
Financial Statements and the Independent Auditors' Report set forth on pages 13
through 23 of the 1999 Annual Report to Stockholders of the Registrant 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
and certain key employees is set forth above under "Business - Executive
Officers and Key Employees."  Information required by Item 405 of 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.

Information with respect to certain relationships and related transactions is
set forth in the Proxy Statement  under the heading "Election of Directors -
Certain Relationships and Related Transactions," which information is
incorporated herein by reference.

                                       22
<PAGE>

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, 1999 and 1998, and
         the Consolidated Statements of Operations, Stockholders' Equity and
         Cash Flows for the years ended December 31, 1999, 1998 and 1997 and for
         the period from January 18, 1991 (inception) through December 31, 1999,
         the Notes to the Consolidated Financial Statements and the Independent
         Auditors' Report set forth on pages 13 through 23 of the 1999 Annual
         Report to Stockholders of the Registrant are incorporated herein by
         reference.

     2.  Financial Statement Schedules.

         None.

(b)  Reports on Form 8-K.

     None.

(c)  Exhibits.

     See "Exhibits Index" below.



                                       23
<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 30th day of
March, 2000.

                                           AKSYS, LTD.

                                           By   /s/ Steven A. Bourne
                                             ------------------------------
                                                  Steven A. Bourne
                                                  Controller and Acting
                                                  Chief Financial Officer

   Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant in the capacities indicated on this 30th day of March, 2000.

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


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



 /s/ Steven A. Bourne          Controller  and Acting Chief Financial Officer
-----------------------------
     Steven A. Bourne



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


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


 /s/ K. Shan Padda             Director
-----------------------------
       K. Shan Padda


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


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

                                       24
<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).................................................
10.1       Aksys, Ltd. 1993 Stock Option Plan (1).................................................
10.5       Manufacturing Agreement, dated as of November 15, 1994,
                  between the Company and SeaMED Corporation (1)..................................
10.6       Manufacturing Agreement, dated as of January 23, 1996,
                  between the Company and Texas Medical Products, Inc. (1)........................
10.7       License Agreement, dated as of April 1, 1993, between the
                  Company and Zbylut J. Twardowski (1)............................................
10.8       License Agreement, dated as of April 1, 1993, between the
                  Company and Cynthia P. Walters (1)..............................................
10.9       Form of Indemnification Agreement (1)..................................................
10.10      License Agreement, dated as of March 11, 1996, between the
                  Company and Allergan, Inc. (1)..................................................
10.11      Lease for Property at Two Marriott Drive (3)...........................................
10.12      Severance, Confidentiality and Post-Employment
                  Restrictions Agreement, dated as of October 12, 1998
                  between the Company and Bruce E. Dobsch (4).....................................
10.13      Severance, Confidentiality and Post-Employment
                  Restrictions Agreement, dated as of October 4, 1999
                  Between the Company and William C. Dow (5)......................................
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 (5)..................................
21         Subsidiaries of the Company (1)........................................................
23         Consent of KPMG LLP (5)................................................................
27         Financial Data Schedule (5)............................................................
</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 Registration Statement on Form
    S-8 (Registration No. 333-18073).
(3) Incorporated by reference to the Company's Annual Report on Form 10-K for
    the year Ended December 31, 1997.
(4) Incorporated by reference to the Company's Annual Report on Form 10-K for
    the year Ended December 31, 1998.
(5) Filed herewith. Exhibit 10.13

                                       25