<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, 1997 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>
<CAPTION>
<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
           ---------------------------------------------------------
                                (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 February 28, 1998 at a closing sale price of $6.875 as reported
by the Nasdaq National Market was approximately $64,435,000.

     As of February 28, 1998 the registrant had 14,587,624 shares of Common
Stock 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 21, 1998
(the "Proxy Statement") are incorporated by reference in Part III and portions
of the Registrant's 1997 Annual Report to Stockholders are incorporated by
reference in part II.

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

                                  AKSYS, LTD.

                      INDEX TO ANNUAL REPORT ON FORM 10-K
<TABLE>
<CAPTION>
                                                                                        Page No.
                                                                                        --------
<S>                                                                                     <C>
PART I...................................................................................... 1

Item 1.    Business......................................................................... 1
Item 2.    Properties.......................................................................16
Item 3.    Legal Proceedings................................................................16
Item 4.    Submission of Matters to a Vote of Security-Holders..............................17

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.......................21
Item 8.    Financial Statements and Supplementary Data......................................21
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 costs and enhance the patients' quality of
life. All of 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. The Company is in the process of compiling data requested by the
FDA and working with the FDA to develop a mutually agreeable scope for a
clinical evaluation planned to commence in the fourth quarter of 1998. The
Company expects to have production systems available and the necessary data
collected for the filing of an Investigational Device Exemption (an "IDE") with
the FDA in the third quarter of 1998. The Company expects the clinical
evaluation will be approximately 90-120 days in length. Upon completion of the
clinical evaluation, the data compiled will be submitted along with other
requested data in a new 510(k) Premarket Notification, which the Company expects
to file in early 1999. 510(k) clearance by the FDA is required prior to the U.S.
commercialization of the PHD system.

In parallel with its U.S. regulatory efforts, the Company plans to obtain ISO
9001 certification in 1998, and to also submit final production systems for CE
mark approval (the European equivalent to 510(k) clearance) during this same
time frame. The Company is anticipating CE mark approval in late 1998 or early
1999, followed by a product launch in select European countries.

Japan is also a significant market where Aksys plans to seek regulatory
approval. On January 7, 1998, the Company entered into a strategic alliance with
Teijin Limited of Osaka Japan (see "Foreign Operations" for a description of the
agreements which represent the strategic alliance.) Although the regulatory
approval cycle in Japan is much longer than in the U.S., the Company is
currently working with Teijin to finalize its regulatory strategy for 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 $13 billion was spent in the U.S. during 1997 for the
treatment of patients suffering from ESRD, of which approximately $4 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 214,000 at the end of 1996, representing a compound
annual growth rate of approximately 9%. In addition, it is estimated that there
were approximately 339,000 dialysis patients in Europe and Japan in 1996. The
Company believes that the sustained

                                       1
<PAGE>

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.

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, Medicare is responsible for payment of 80% of the rate set
by HCFA for reimbursement of outpatient dialysis. Although this program brought
dialysis 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 has capped the Medicare reimbursement rate for
outpatient dialysis since 1983 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 encourage
dialysis providers to seek ways of reducing dialysis 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 often 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.

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

                                       2
<PAGE>

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.

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. The Medicare base composite rates for outpatient dialysis services
currently are $126 per treatment for hospitals and $122 for independent
facilities (equivalent to approximately $20,000 per year) and are adjusted
depending on regional wage differences. Reimbursement rates are subject to
periodic adjustment based on certain factors, including legislation and
executive and congressional budget reduction and control processes, inflation
and costs incurred in rendering the services, but in the past have had little
relationship to the cost of conducting business. 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 the current average rate of $126 per treatment.

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. 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 dialysis.

The Medicare ESRD composite reimbursement rate has been the subject of a number
of reports and studies. Any actions to change such rate will not be known until
the 1999 federal budget is finalized.

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 addition to the HCFA ESRD Managed Care Demonstration Project, private
companies have recently initiated managed care 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 coverages (e.g., oral
medications) that are not covered by Medicare. State regulations

                                       3
<PAGE>

generally follow Medicare reimbursement levels and coverages 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.

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, 1996, approximately 85% (182,000) 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 was 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, 1996, approximately 15% (32,000) 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

                                       4
<PAGE>

blood vessels that surrounds many of the body's internal organs, as a filter to
eliminate toxins and excess fluids from the patient's blood. Dialysate, a blood-
cleansing electrolyte solution, is infused through a catheter into the patient's
peritoneal cavity. Once this fluid absorbs the toxins and excess water that are
filtered from the blood through the peritoneum, it is drained from the
peritoneal cavity through a catheter. In the most common form of peritoneal
dialysis, Continuous Ambulatory Peritoneal Dialysis ("CAPD"), the process of
exchanging dialysate into and out of 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 require strict aseptic technique.

Limitations of Prevailing Treatment Methods

Hemodialysis. Patients receiving outpatient hemodialysis 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, 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 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.
For example, one informal study has indicated that six sessions lasting two
hours are able to remove over 40% more urea than three sessions lasting four
hours using common dialysis parameters. More frequent sessions also decrease the
severe oscillations in toxin and hydration levels associated with the prevailing
thrice weekly dialysis regimen and should result in fewer side effects.

The clinical outcomes of conventional dialysis have contributed to the
significant patient treatment cost to Medicare. According to HCFA, total
treatment costs per dialysis patient paid by Medicare have risen from $33,400 in
1988 to $62,000 in 1996. 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 is scheduled to begin in 1998 and
to run for three years.

Peritoneal Dialysis. Although peritoneal dialysis accounted for 15% (or 32,000)
of the dialysis patient population in 1996 according to HCFA, approximately 21%
(or 7,000) of the patients in the United States switched to

                                       5
<PAGE>

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

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

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 25 years have shown 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
rapidly growing.  There are initiatives in the U.S. and worldwide to study the
benefits of daily hemodialysis.  The Company estimates that in early 1998, there
are 12 centers worldwide, 6 of which are in North America, treating over 100
patients with daily hemodialysis.  The Company believes that the clinical and
economic benefits of daily hemodialysis is demonstrated by these studies.

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

                                       6
<PAGE>

that vascular access complications should not increase with more frequent
hemodialysis sessions in a home or self-care setting and such complications may
in fact decrease, that belief is based on data collected from patients using a
native fistula. The Company has collected little data from patients using
artificial blood vessel grafts or central venous catheters, and there is no
assurance that such grafts or catheters will withstand daily treatment. There
are a number of approaches to vascular access that may enhance more frequent
treatments, including (i) the use of "single needle" vascular access devices
which reduce the number of punctures by half, (ii) the use of central venous
catheters which eliminate the need to use needles at all, (iii) novel graft
materials, (iv) new, totally implanted central venous catheters with titanium
ports and (v) the practice of inserting needles in the same site each day, which
has been demonstrated to have several benefits according to publications by Dr.
Zbylut J. Twardowski, a leading dialysis researcher and the Chairman 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 in the final stages of developing the PHD system.  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 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 by patients
                             operation only by trained personnel.        at home, including computerized, user-
                                                                         friendly interface.

Time and Effort              Difficult and time consuming to setup,      Fully automated, reducing patient
                             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.

Clinical Monitoring          Patient treatment compliance monitoring     Patient monitored by, and able to
                             and patient ability to consult with         communicate with, clinic by fax or modem
                             clinic not available unless treatment       (and eventually through real time on-line
                             received in an outpatient facility.         monitoring system.)

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.

                                       7
<PAGE>

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 patients 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 and to be operated
by the patient with minimal or no assistance. Through a touch sensitive display
screen with instructions available on a graphic video display, the PHD system is
designed to be less intimidating and easier to use than current hemodialysis
systems. The system can be separated into three modules to facilitate
transportability.

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 patient would connect the
blood tubing to the vascular access device and attach an integrated blood
pressure cuff. 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 pressure and 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 and can be
communicated by modem or fax to the dialysis provider or other healthcare
personnel at pre-determined intervals.

At the end of a treatment session, the patient 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 costs. 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 to be little or
no reduction in dialysis cost (as opposed to total treatment costs) associated
with the PHD system.

                                       8
<PAGE>

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.

Other Product Development

During 1998, 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, (iii) ESRD patients
currently enrolled in a managed care program, such as a health maintenance
organization and (iv) ESRD patients who are just beginning dialysis treatment.
In the United States, these segments accounted for approximately 2,000, 7,000,
8,000 and 74,000 dialysis patients, respectively, in 1996 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 the 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. Outcome data can 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

                                       9
<PAGE>

the clinical and cost benefits it believes will result from frequent home
hemodialysis using the PHD system. In the first quarter of 1998, the Company
began sponsoring 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. 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 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 lower cost, 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. According to international patient registries compiled by the USRDS,
there were approximately 169,000 dialysis patients in Europe and 170,000
dialysis patients in Japan, both as of December 31, 1996.

Sales and Marketing

The Company 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 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 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 circuit, however, is custom made to the
Company's specifications by a single supplier. The Company has entered into a
contract with Texas Medical Products, Inc. to supply this product. 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, 1997, the Company employed a research and development staff
of 61 full time employees, most of whom are engineers and technicians. In
addition, the Company used contractors on an as needed basis to

                                      10
<PAGE>

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, 1997, 1996 and 1995, the
Company incurred total research and development expenditures of approximately
$10,887,000, $6,515,000 and $4,261,000, respectively. During 1998, research and
development expenditures are expected to increase above historical levels
reported for the year ended December 31, 1997.

                                  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 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.
In addition, the Company is aware of at least one other company that may be
developing a machine that could be used for daily home hemodialysis.

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 pressures 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.

                                      11
<PAGE>

                             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
premarket 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 premarket 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) premarket 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) premarket 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) premarket notification submission.   While the FDA
withdrew 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) premarket notification.   The Company believes that a
clinical trial with a duration of 90-120 days will satisfy the FDA's
requirements and that the clinical trial will commence during the fourth quarter
of 1998.

The Company is in the process of compiling the additional data requested by the
FDA on the PHD system and working with the FDA to develop a mutually agreeable
scope for a clinical study planned for the fourth quarter of 1998.   The Company
anticipates compiling the clinical study data shortly thereafter and
resubmitting such data in the form of a new 510(k) premarket 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 either process could occur as a result
of the FDA's failure to schedule 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

                                      12
<PAGE>

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

In parallel with U.S. regulatory efforts, the Company expects to obtain ISO 9001
certification in 1998, and also to submit final production systems for CE mark
approval (the European equivalent to 510(k) clearance in the U.S.) during this
same time frame.  The Company is anticipating CE mark approval in late 1998 or
early 1999, followed by a controlled product launch in select European
countries.

                             Intellectual Property

As of February 10, 1998, the Company either owns or has exclusive rights to 21
U.S. patents and four foreign patents for technologies that are essential to
developing a safe, convenient, self-contained hemodialysis system. The U.S.
Patent and Trademark Office has also allowed claims on three 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.

                                      13
<PAGE>

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

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

                                      14
<PAGE>

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, 1997, the Company had 72 full-time employees, 61 of whom were
employed in research and development capacities. The Company considers its
employee relations to be good.

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.

Lawrence H.N. Kinet was appointed Chairman of the Board of Directors and Chief
Executive Officer of the Company in December 1994, and served as a director of
the Company since April 1993. From July 1991 through December 1994, he served as
Chairman of the Board of Directors and Chief Executive Officer of Oculon
Corporation, a pharmaceutical development company engaged in the field of anti-
cataract drugs. He was a Managing Partner of The Kensington Group, a provider of
management services to health care companies, from 1989 to 1992. From 1985
through 1988, he was President of Baxter World Trade Corporation, the
international division of Baxter International Inc. and corporate Group Vice
President of Baxter International Inc. Mr. Kinet is a director of NeoRx
Corporation.

Rodney S. Kenley founded the Company in January 1991 and has served as a
director since such date. Mr. Kenley has served as Vice President of Business
Development since November 1997. Mr. Kenley served as the Company's Executive
Vice President and Chief Technical Officer from June 1997 until November 1997,
as its President and Chief Operating Officer from October 1994 until June 1997,
and as its President and Chief Executive Officer from January 1991 to October
1994. Prior to founding the Company, Mr. Kenley worked for over 12 years at
Baxter International Inc., where he was involved principally in the development
and product management of dialysis therapies and products, including from
January 1990 until January 1991, when he served as Vice President of Electronic
Drug Infusion.

The following individuals are key employees of the Company:

John R. LaLonde joined the Company in March 1998 as Vice President of Research
and Development. Prior to joining the Company, from 1994 until 1998, he held
various senior management engineering roles at GE Medical Systems, most recently
as Global Engineering Manager, Integrated Imaging Solutions.

Manuel Avila has served as Vice President of Manufacturing and Hardware
Development since July 1997. From January 1997 until July 1997, he served as
Director of Purchasing. Prior to joining the Company, Mr. Avila worked at
Haemonetics Corporation from 1993 until 1996, most recently as Director of
Operations. Prior to joining Haemonetics, Mr. Avila held various engineering
positions with Polaroid Corporation.

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.

                                      15
<PAGE>

                          Product Liability Exposure

The Company's business exposes it to potential product liability risks which 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. The Company currently does not maintain product liability
insurance, but expects to acquire product liability insurance upon
commercialization of the PHD system. There can be no assurance that it will be
able to obtain such insurance 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 such insurance 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, 1997. The
Company has engaged the services of a business consultant to act on behalf of
AJKK in pursuing business opportunities in Japan. The primary purpose of AJKK is
to establish a presence for regulatory, business development and eventual
technical and customer support as the Company progresses through the stages of
clinical studies, regulatory approval and market launch. All efforts and
decisions are directed from the Company's headquarters in Lincolnshire,
Illinois.

On 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 provides that, conditional on the achievement of
certain milestones, Teijin will make additional cash payments to Aksys totaling
up to $5,000,000.

Pursuant to the Joint Development Agreement, Aksys and Teijin will cooperate to
commercialize the PHD system in Japan and will share equally the costs of
obtaining the necessary regulatory approvals. While the Joint Development
Agreement remains effective, Aksys may not negotiate with any third party
regarding the assignment of rights to import or manufacture the PHD system for
sale in Japan.

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 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.

                                      16
<PAGE>

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, 1997.

PART II

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

The Company's Common Stock trades on the Nasdaq Stock Market under the symbol
AKSY. The following table lists the quarterly high and low prices of the Common
Stock for the period from May 17, 1996 (the date of the initial public offering)
through December 31, 1997.
<TABLE>
<CAPTION>
                    Fiscal    Fiscal
                     Year     Quarter    High       Low
                    ------    -------    ----       ---
                    <S>       <C>       <C>        <C>
                     1997       1st      13.25      8.50
                                2nd      9.875      4.00
                                3rd      8.688      4.25
                                4th     11.375      5.25

                     1996       2nd      23.50     10.75
                                3rd      17.75      8.75
                                4th     12.375     6.875
</TABLE>
There were 274 stockholders of record of the Company's Common Stock as of
February 12, 1998. In addition, the Company estimates that there were
approximately 4,100 beneficial stockholders at February 12, 1998, who held
shares in "street name." The Company has not paid cash dividends to date, and
management anticipates that all future earnings will be retained for development
of the Company's business.

On January 7, 1998 the Registrant sold to Teijin Limited of Osaka, Japan 493,097
shares of its Common Stock for $5 million (or $10.14 per share) in a private
placement under Section 4(2) of the Securities Act of 1933, as amended. See
"Business - Foreign Operations."

With respect to the use of proceeds of the initial public offering of the
Registrant in May 1996 (Registration Statement on Form S-1, Registration No.
333-2492, effective May 16, 1996), the proceeds therefrom have been and are
currently being used to fund the operation and development of the business of
the Registrant as it currently is experiencing no revenues from operations. See
"Item 1. Business - Background," "Item 6. Selected Financial Data" and "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations."

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>
                                                                                                                    Cumulative from
                                                                                                                    January 18, 1991
                                                                   Year Ended December 31,                             (inception)
                                          -----------------------------------------------------------------------        through
                                            1993          1994           1995           1996            1997       December 31, 1997
                                          ---------    -----------    -----------    -----------     ------------  -----------------
<S>                                       <C>          <C>            <C>            <C>             <C>           <C>
Consolidated Statement of
  Operations Data:
Operating costs and expenses:
  Research and development                $ 598,748    $ 1,808,638    $ 4,261,230    $ 6,515,485     $ 10,886,803     $ 24,070,904
  Business development                           --             --        359,530        547,767        1,043,867        1,951,164
  General and administrative                213,923        266,418        876,613      2,559,441        3,848,701        7,881,164
                                          ---------    -----------    -----------     ----------     ------------     ------------
Operating loss                             (812,671)    (2,075,056)    (5,497,373)    (9,622,693)     (15,779,371)     (33,903,232)
Other income, net                            31,582         40,174        152,710      1,803,656        2,272,769        4,370,064
                                          ---------    -----------    -----------     ----------     ------------     ------------
Net loss                                  $(781,089)   $(2,034,882)   $(5,344,663)   $(7,819,037)    $(13,506,602)    $(29,533,168)
                                          =========    ===========    ===========    ===========     ============     ============

Net loss per share/(1)/                                                             $      (0.63)    $      (0.98)
                                                                                     ===========     ============
Weighted average shares
outstanding/(1)/                                                                      12,441,718       13,791,236
                                                                                     ===========     ============
</TABLE>
<TABLE>
<CAPTION>
                                                                                      December 31,
                                                      ----------------------------------------------------------------------------
                                                         1993           1994            1995             1996             1997
                                                      ----------     -----------     -----------     ------------     ------------
<S>                                                   <C>            <C>             <C>             <C>              <C>
Consolidated Balance Sheet Data:
Cash, cash equivalents and short-term investments     $  648,193     $ 1,007,015     $ 3,957,105     $ 45,649,934     $ 29,195,656
Working capital                                          539,127         723,512       3,565,263       45,041,960       28,432,501
Total assets                                             845,679       1,476,892       4,693,450       50,147,510       36,647,251
Long-term liabilities/(2)/                                22,861          84,436          35,761           19,630           77,269
Redeemable preferred stock                             1,500,000       3,900,000      12,406,761               --               --
Deficit accumulated during development stage            (827,984)     (2,862,866)     (8,210,562)     (16,029,599)     (29,536,201)
Total stockholders' equity (deficit)                    (807,928)     (2,845,166)     (8,201,948)      48,684,094       35,287,989
</TABLE>
(1)  Computed on the basis described in Note 1 of Notes to Consolidated
     Financial Statements.
(2)  Consists primarily of installment notes payable and capital lease
     obligations.

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, 1997, the Company had a deficit accumulated
during the development stage of $29.5 million. The Company expects to incur
additional losses in the foreseeable future at least until such time, if ever,
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.

                                      18
<PAGE>

Note on Forward-Looking Information

Certain statements in this Form 10-K and in the 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) whether and when the Company
will obtain clearance from the FDA of a 510(k) premarket 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; (iii) the Company's need to achieve manufacturing
scale-up in a timely manner with its primary manufacturing contractor, SeaMED
Corporation, and its need to provide for the efficient manufacturing of
sufficient quantities of its products, (iv) changes in GMP requirements, (v) 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, (vi) the uncertainty regarding the effectiveness and ultimate
market acceptance of the PHD system, the Company's primary product in
development, (vii) changing market conditions, (viii) the need to further
establish the clinical benefits of daily hemodialysis, (ix) 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, (x) the potential adverse
impact of possible changes to Medicare reimbursement policies and rates and (xi)
the Company's dependence on key personnel and on patents and proprietary
information. 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, 1997 Compared to Year Ended December 31, 1996

Research and development expenses were $10.9 million for the year ended December
31, 1997 compared to $6.5 million for the year ended December 31, 1996, an
increase of $4.4 million. The increase was primarily due to hiring additional
research and development personnel, making prototypes of the PHD system and
otherwise preparing for manufacturing scale-up.

Business development expenses increased $0.5 million from $0.5 million in 1996
to $1.0 million in 1997. The increase is due to business development expenses in
Japan and Europe.

General and administrative expenses were $3.8 million for the year ended
December 31, 1997 compared to $2.6 million for the year ended December 31, 1996,
an increase of $1.2 million. The increase was primarily due to hiring additional
management personnel and related support of the Company's continued development
of the PHD system.

Net interest income was $2.3 million for the year ended December 31, 1997
compared to $1.8 million for the year ended December 31, 1996, an increase of
$0.5 million. The increase in net interest income was primarily due to the
investment of proceeds from the Company's initial public offering in May 1996
for a full year in fiscal 1997, as

                                      19
<PAGE>

opposed to only approximately 7 months in fiscal 1996, offset by funds expended
on the development of the PHD system.

As a result of the foregoing, the Company's net loss was $13.5 million ($0.98
per share) for the year ended December 31, 1997, an increase of $5.7 million
($0.35 per share) from the net loss of $7.8 million ($0.63 per share) for the
year ended December 31, 1996.

Year Ended December 31, 1996 Compared to Year Ended December 31, 1995

Research and development expenses were $6.5 million for the year ended December
31, 1996 compared to $4.3 million for the year ended December 31, 1995, an
increase of $2.2 million.  The increase was primarily due to hiring additional
research and development personnel, making prototypes of the PHD system and pre-
production tooling and otherwise preparing for manufacturing scale-up.

Business development expenses increased $0.2 million from $0.4 million in 1995
to $0.6 million in 1996.  The increase is due to business development expenses
in Japan and Europe.

General and administrative expenses were $2.6 million for the year ended
December 31, 1996 compared to $0.9 million for the year ended December 31, 1995,
an increase of $1.7 million.  The increase was primarily due to hiring
additional management personnel, consolidating facilities into one location and
developing necessary infrastructure to support the future growth of the
Company.

Net interest income was $1.8 million for the year ended December 31, 1996
compared to $153,000 for the year ended December 31, 1995, an increase of $1.6
million.  The increase in net interest income was due to interest earned on the
investment of the net proceeds from the Company's initial public offering in May
1996.

As a result of the foregoing, the Company's net loss was $7.8 million for the
year ended December 31, 1996, an increase of $2.5 million from the $5.3 million
net loss for the year ended December 31, 1995.

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, 1997, the Company
had received net offering proceeds from public and private sales of equity
securities of approximately $64.6 million.  Since its inception in 1991 through
December 31, 1997, the Company made $4.9 million of capital expenditures and
used $27.7 million in cash to support its operations.  At December 31, 1997, the
Company had cash, cash equivalents and short-term investments of $29.2 million,
working capital of $28.4 million and long-term investments of $2.8 million.  In
January 1998, the Company also received $5 million in proceeds from its sale of
common stock to Teijin Limited of Osaka, Japan (see also "Business - Foreign
Operations.")

The Company estimates that during 1998 it will spend approximately $16 to $18
million for operations, manufacturing scale-up and commercialization of the PHD
system. The Company expects that substantially all of this amount will be used
to (i) purchase molds, tooling and other assets to be used by independent
contractors to produce the PHD system and pay for other preproduction costs of
such contractors payable by the Company, (ii) fund product testing and
validation including the purchase of PHD systems for use in clinical trials from
such independent contractors, (iii) conduct clinical studies using the PHD
system, (iv) establish and train a sales and marketing staff and (v) establish
and train a customer service and technical support staff.  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 investments as of
December 31, 1997, together with proceeds from its sale of common stock to
Teijin and future milestone payments to be received from Teijin under the terms
of the joint development agreement, are sufficient to finance the Company's
operations, except for working capital needs related to production of machines,
through December 31, 1999.

                                      20
<PAGE>

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 is 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, 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, 1997, the
net operating losses available to offset future taxable income were
approximately $29.0 million.  Because the Company has experienced ownership
changes, future utilization of the carryforwards may be limited in any one
fiscal year pursuant to Internal Revenue Code regulations.  The carryforwards
expire at various dates beginning in 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, 1997 and 1996, and the
Consolidated Statements of Operations, Stockholders' Equity and Cash Flows for
the years ended December 31, 1997, 1996 and 1995 and for the period from January
18, 1991 (inception) through December 31, 1997, the Notes to the Consolidated
Financial Statements and the Independent Auditors' Report set forth on pages 10
through 20 of the 1997 Annual Report to Stockholders of the Registrant are
incorporated herein by reference.

                                      21
<PAGE>

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 - 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, 1997 and 1996, and
          the Consolidated Statements of Operations, Stockholders' Equity and
          Cash Flows for the years ended December 31, 1997, 1996 and 1995 and
          for the period from January 18, 1991 (inception) through December 31,
          1997, the Notes to the Consolidated Financial Statements and the
          Independent Auditors' Report set forth on pages 10 through 20 of the
          1997 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, 1998.

                                        AKSYS, LTD.

                                        By    /s/ Steven A. Bourne
                                           -----------------------------------
                                                  Steven A. Bourne
                                                     Controller

          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, 1998.
<TABLE>
<CAPTION>
                    Signature                                             Capacity
                    ---------                                             --------
<S>                                                     <C>
              /s/ Lawrence H.N. Kinet                   Chairman, Chief Executive Officer and Director
---------------------------------------------------     (Principal Executive and Financial Officer)
                Lawrence H.N. Kinet


              /s/ Steven A. Bourne                      Controller
---------------------------------------------------
                Steven A. Bourne


              /s/ Rodney S. Kenley                      Vice President, Business Development and Director
---------------------------------------------------
                Rodney S. Kenley


              /s/ Richard B. Egen                       Director
---------------------------------------------------
                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
</TABLE>
                                       24
<PAGE>

                                  AKSYS, LTD.
                                 EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit                                                                               Sequentially
Number    Description                                                                 Numbered Page
---------------------------------------------------------------------------------------------------
<S>       <C>                                                                         <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)/.........................................
10.2      Aksys, Ltd. 1996 Stock Awards Plan/(2)/.........................................
10.3      Severance, Confidentiality and Noncompetition Agreement,
             dated as of October 1, 1994, between the Company and
             Lawrence H.N. Kinet/(1)/.....................................................
10.4      Severance, Confidentiality and Noncompetition Agreement,
             dated as of April 2, 1993, between the Company and
             Rodney S. Kenley/(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)/...................................
11        Statement regarding computation of net loss per share/(3)/......................
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/(3)/.........................................
21        Subsidiaries of the Company/(1)/................................................
23        Consent of KPMG Peat Marwick LLP/(3)/...........................................
27        Financial Data Schedule/(3)/....................................................

/(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)/  Filed herewith.
</TABLE>
                                       25