AKSYS LTD - 10-K Annual Report

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o

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.

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes ý No o

The aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $131,382,000 as of June 30, 2003, based on the closing sale price of $12.90 as reported by the Nasdaq National Market. This calculation of market value has been made for the purpose of this report only and should not be considered as an admission or conclusion by the registrant that any person is in fact an affiliate of the registrant.

As of March 8, 2004 the registrant had 29,806,475 shares of Common Stock issued and outstanding.

Aksys, Ltd. 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. We have developed an automated personal hemodialysis system, known as the Aksys Personal Hemodialysis (PHD™) System (the "PHD System"), which is designed to enable patients to perform frequent hemodialysis at alternate sites (such as their own homes) and to thereby improve clinical outcomes, reduce total ESRD treatment costs and enhance the quality of life of patients. The terms "Aksys," the "Company," "we," "us" and "our" as used in this report refer to Aksys, Ltd., a Delaware corporation, and, unless we state otherwise or the context otherwise requires, its subsidiaries.

On March 27, 2002, we announced receipt of Food and Drug Administration ("FDA") clearance to market the PHD System in the United States. The FDA clearance had no restrictions and included authorization to use the product in the home. 510(k) clearance by the FDA was required prior to the commercialization of the PHD System in the United States.

During the quarter ended September 30, 2002, we commenced commercial activities and are no longer considered to be in the development stage.

On October 7, 2002, we announced the receipt of EC Certification for CE Mark approval pursuant to the Medical Device Directive of the European Economic Area. The certification approved the PHD System for home use. Such approval was required prior to the commercialization of the PHD System in the European Economic Area.

Our target market 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 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.

We estimate that over $23 billion was spent in the U.S. during 2001 for the treatment of patients suffering from ESRD, of which more than $7 billion was directly related to dialysis treatment. Based upon information published by The Centers for Medicare and Medical Services ("CMS"), the approximate number of ESRD patients in the United States requiring dialysis treatments has grown from 66,000 at the end of 1982 to an estimated 292,000 at the end of 2001. The current estimated annual growth rate of ESRD patients in the U.S. is approximately 5%. In addition, it is estimated that there were approximately 486,000 dialysis patients in Europe and Japan at the end of 2001. We believe that the sustained growth in the ESRD population, especially in the United States, has been caused by (i) the aging of the population (the median age of newly diagnosed ESRD patients in the United States is 62), (ii) the longer average life expectancy of patients with diabetes and hypertension (two patient groups at high risk for ESRD), (iii) the relatively more rapid growth in the general population of certain ethnic subsets that have a higher incidence of ESRD, (iv) competing risk (i.e., 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, after the first 30 months of treatment Medicare is responsible for payment of 80% of the rate set by CMS for reimbursement of outpatient dialysis. Although this program made dialysis available to virtually all patients in need of treatment, the cost of funding the program grew rapidly, quickly exceeding original expectations. In an effort to hold down these costs, Congress, in 1983, capped the Medicare reimbursement rate for outpatient dialysis at approximately $21,000 per patient per year. The costs of operating dialysis centers, however, such as capital, labor and facility overhead, have continued to rise. These circumstances have forced dialysis providers to seek ways to reduce dialysis treatment costs.

Demand for our products and services is influenced by governmental and other third-party reimbursement programs because providers of ESRD treatment are reimbursed by Medicare, Medicaid and private insurers.

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

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

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

When Medicare is the primary payer, it reimburses 80% of the composite rate set by the Medicare prospective reimbursement system for each dialysis treatment. The beneficiary is responsible for the remaining 20%, as well as any unmet Medicare deductible amount, although an approved Medicare

supplement insurance policy, other private health insurance or Medicaid may pay on the beneficiary's behalf. Reimbursement rates are subject to periodic adjustment based on certain factors, including budget and other legislation and costs incurred in rendering the services if tied to certain criteria. The composite reimbursement rate was unchanged from commencement of the program in 1972 until 1983. From 1983 through December 1990, numerous Congressional actions resulted in net reductions of the average composite reimbursement rate from a fixed fee of $138 per treatment in 1983 to approximately $125 per treatment in December 1990. Effective January 1, 1991, Congress increased the ESRD composite reimbursement rate, resulting in an average rate of $126 per treatment. The Balanced Budget Refinement Act of 1999 raised the composite rate by 1.2% in 2000 and an additional 2.8% in 2001.

Reimbursement for home dialysis can be made in two ways. A beneficiary may choose to receive home dialysis equipment, supplies and support services directly from a facility or they may choose to make arrangements with a single supplier for equipment and supplies. If the beneficiary chooses to use a facility, the facility receives the composite rate for each treatment the patient performs at home. If the beneficiary chooses to make independent arrangements, the supplier bills Medicare on an assignment basis and payment is made at a capped rate of no more than $1,481, except for continuous cycling peritoneal dialysis ("CCPD"). There is a monthly payment cap of $1,975 for CCPD.

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

We cannot 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 our prospects, revenues and earnings. In addition, there have been various legislative proposals for the reform of numerous aspects of Medicare—the occurrence and effect of which are uncertain. See "—Potential Health Care Legislation."

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

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" of 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.

We believe 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.

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

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

CMS estimates that as of December 31, 2001, approximately 90% (263,000) of the ESRD dialysis patients in the United States were receiving hemodialysis. Fewer than 1% of these patients performed treatment in their homes, and all others received treatment at outpatient facilities. Outpatient hemodialysis requires that a patient travel to a dialysis clinic three times per week for dialysis sessions lasting three to four hours. In each session, the patient's blood is cleansed by circulation through an artificial kidney controlled by a dialysis machine.

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

CMS estimates that as of December 31, 2001, approximately 10% (29,000) of the ESRD dialysis patients in the United States were receiving peritoneal dialysis, with over 99% performing such treatment in their homes. There are two principal forms of peritoneal dialysis, and all forms use the patient's peritoneum, a large membrane rich in blood vessels that surrounds many of the body's internal organs, as a filter to eliminate toxins and excess fluids from the patient's blood. Dialysate, a blood-cleansing electrolyte solution, is infused through a catheter into the patient's peritoneal cavity. Once this fluid absorbs the toxins and excess water that are filtered from the blood through the peritoneum, it is drained from the peritoneal cavity through a catheter. In the most common form of peritoneal dialysis, Continuous Ambulatory Peritoneal Dialysis ("CAPD"), the process of exchanging dialysate into and out of the patient's peritoneal cavity occurs four times daily, seven days per week. The other form, Continuous Cycling Peritoneal Dialysis ("CCPD"), uses an instrument to automatically perform exchanges of solution through the peritoneal cavity overnight, while the patient sleeps. Both forms of treatment require strict aseptic technique.

Hemodialysis. Patients receiving outpatient hemodialysis often experience a number of chronic and acute health problems. The chronic problems include hypertension, anemia (low red blood cell count), malnutrition, fluid and electrolyte imbalance, calcium deficiency, insomnia, sexual impotency, decreased mental acuity and lower energy levels. The acute problems include headaches, nausea, hypotension and asthenia (a general lack of strength and vitality), which are associated with thrice weekly dialysis sessions. In addition, a general feeling of ill health tends to increase between dialysis treatments as a result of toxins, sodium and water building up in the patient's blood. These side effects have a significant impact on (i) clinical outcomes, with the leading cause of death among ESRD patients being cardiovascular disease, which many clinicians believe is caused in large part by oscillations in toxins, sodium and body fluid levels, (ii) total patient costs, resulting from the frequent need to hospitalize ESRD patients as well as the need to treat anemia and hypertension with

medication and (iii) patient quality of life, with patients having to not only suffer through these chronic and acute health problems and related "hangover" frequently following each treatment, but also to essentially devote three days per week to the treatment regimen.

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

The clinical outcomes of conventional dialysis have contributed to the significant patient treatment cost. According to CMS, total annual treatment costs per dialysis patient have risen from $33,400 in 1988 to $70,200 in 2000. The cost of hospitalization on a fee for service basis represents the most significant component of this increase. While reimbursement for outpatient hemodialysis treatment (the "composite rate") has been capped since 1983, reimbursement for the associated cost of care due to chronic and acute health problems and other complications continues to be reimbursed on a fee for service basis. Under this reimbursement scheme, providers have an incentive to reduce the cost of outpatient dialysis rather than the total cost of treating dialysis patients.

Peritoneal Dialysis. Although peritoneal dialysis accounted for 10% of the dialysis patient population in 2001 according to CMS, approximately 22% (or 6,000) of the patients in the United States switched to outpatient in-center hemodialysis annually. We believe 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.

We believe 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.

We believe 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. We completed a clinical trial of the PHD System in November 2000, whereby a total of 23 patients converted from three times per week dialysis at home to a treatment regimen of more frequent dialysis on the PHD System. Patients showed better clinical outcomes and improved quality of life on more frequent dialysis. Since then, more than 8,000 dialysis

treatments have been performed by patients on the PHD System, including over 7,000 treatments at home.

Several other studies over the past 34 years indicate that increasing the number of dialysis treatments per week leads to dramatic improvements in patients. Several study centers report that most of the ESRD patients who performed hemodialysis on a daily basis reported that daily hemodialysis gave them a more positive attitude toward treatment and a higher quality of life. Neither we nor the PHD System was involved in the treatments received by patients in these other studies and we did not fund these studies. Moreover, patient selection for these studies was not randomized; we gathered the data on a retrospective basis from providers that we 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.

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. We believe 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. We have 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. We have a license agreement with Dr. Twardowski. See "—Intellectual Property—Twardowski License."

We believe 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 standard alternative therapy for the general dialysis patient population.

By addressing the many drawbacks of conventional hemodialysis systems, which have prevented the widespread use of daily home hemodialysis, we believe our products and services can be instrumental in improving clinical outcomes, decreasing the total treatment costs and improving quality of life for

dialysis patients. The following chart describes how the PHD System addresses the drawbacks presented when ESRD patients and helpers use conventional systems for home hemodialysis:

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

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

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

At the end of a treatment session, the operator reconnects the blood tubing set to the system and replaces the two small bottles of acid and bicarbonate powder, which are used to produce the dialysate for the patient's next 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 for the next treatment session without further patient involvement.

To fully service hemodialysis patients, we are developing a service network to provide support for patients and dialysis providers in all aspects relating to the use and maintenance of the PHD System. Our service network provides the following: (i) delivery and installation of the PHD System,

(ii) technical service through a 24 hour call center and through field representatives who 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 and (iv) customer service representatives who interface with the dialysis provider to address the status of, and any necessary changes in, the patient's treatment as ordered by the patient's physician. We believe 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, we can establish and maintain lasting relationships with patients and dialysis providers.

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

Although we believe 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 in order for the PHD System to succeed, including, among others, achieving market acceptance and the uncertainty of obtaining regulatory clearance or approval in jurisdictions other than the United States and the European Economic Area.

During 2004, we expect that approximately $30 million of cash and short-term investments will be devoted to expanded commercialization of the PHD System, including sales and marketing activities, and service and support of the PHD System. Resources will also be directed toward using the platform technology incorporated in the PHD System to develop follow-on products.

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. This recommendation supports our belief that patients who receive a higher dose as a result of daily dialysis will benefit through improved clinical outcomes. We believe 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, we intend to capitalize on this demand by pursuing the following strategies.

Target Specific Market Segments. We currently market our products and services directly to providers of dialysis services; these providers may be independent businesses or national chains. We are staging the product availability across target geographies in order to develop efficiencies in our service network. We believe the PHD System will be particularly well received by patients living far from their dialysis centers, and we want to first have a service network that is well positioned to support these patients. In the meantime, we are focusing on core geographies with a high density of potential patients.

Provide a Broad Range of Dialysis Products and Services. We have developed a portfolio of services surrounding the PHD System. These services include the delivery, installation and maintenance of the equipment as well as training, technical support, nurse administration support and delivery of consumable supplies. The PHD may be sold or rented, and the services and additional products are provided for a single monthly fee.

Measuring Quality of Patient Care. The PHD System monitors many components of patient treatments. These patient treatment metrics allow the health care provider to record and document quality of care. There are well-established CMS guidelines for treating ESRD patients and we anticipate future payment structures will require documentation of quality measurements.

Clinical and Patient Education. Although home hemodialysis was an established modality in the 1970's, many of today's healthcare practitioners are unfamiliar with the requirements for establishing a home program and the process of managing patients in a home environment. We intend to focus a portion of the marketing effort on directly educating health care professionals about the benefits of more frequent dialysis and the benefits of treating patients at home. In addition, we intend to educate the patient population about this treatment modality as an option to be considered in conjunction with their physician.

Phased Domestic and International Market Launch. We believe that there is worldwide demand for a cost effective, more clinically effective approach to dialysis. In addition to our market launch in the United States, we have also begun selling in the United Kingdom, and have established marketing and regulatory resources in Japan. As of December 31, 2001, we estimate that there were approximately 286,000 dialysis patients in Europe and 200,000 dialysis patients in Japan.

We operate with a relatively small direct sales force to market our products and services, primarily to healthcare providers such as hospitals, dialysis clinics, managed care organizations and nephrology

physician groups. We distribute and provide technical support for the PHD System through a combination of in-house resources and contracted third parties.

Our largest customers, the Northwest Kidney Center, Dialysis Centers of Lincoln, Berkshire Medical Dialysis Center and Satellite Healthcare, Inc. accounted for 31%, 13%, 12% and 11%, respectively, of our revenues (by dollar volume) for fiscal year 2003.

On October 20, 2003, we announced that we had signed a market assessment agreement with Gambro Healthcare, Inc., a national chain of dialysis clinics serving over 40,000 patients in the United States. The revenues generated by this agreement in fiscal year 2003 were not material to us.

We do not currently manufacture any component of the PHD System or related consumables. With respect to the PHD System, we have contracted with Peak Industries, Inc. ("Peak"), a contract manufacturer of medical devices, to assemble and produce the dialysis machine. Our agreement with Peak remains in effect through February 28, 2005, subject to earlier termination under specified circumstances. Peak specializes in the custom manufacturing of medical instrumentation and is certified to ISO 13485 for manufacture of such products. ISO 13485 is an internationally recognized quality systems standard for the medical device industry. Peak is also FDA registered and quality system regulations ("QSR") compliant. We may identify additional manufacturing locations in the future, whether or not owned by Peak, to avoid having to rely on a single location. There can be no assurances that we will be able to do so on acceptable terms. The manufacturing of our products is subject to quality regulations and other requirements prescribed by regulatory agencies. There can be no assurance that Peak or any other manufacturer of our products will continue to comply with applicable regulatory requirements or that Peak or any other manufacturer will be able to supply us with products in sufficient quantity or at all.

Certain key accessories of the PHD System, such as the dialyzer, are available from other manufacturers. Other accessories and supplies, such as the blood tubing set and the dialysate chemicals supplied to people using the PHD System are custom made and packaged to our specifications by FDA-registered and QSR-compliant companies. There can be no assurances that any of these accessories and supplies will continue to be available on terms acceptable to us or at all.

As of December 31, 2003, we employed a research and development staff of 36 full time employees, most of whom are engineers and technicians. In addition, we used contractors on an as needed basis to assist in the 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, 2003, 2002 and 2001, we incurred total research and development expenditures of approximately $6,691,000, $5,792,000, and $10,883,000, respectively.

We compete in the kidney dialysis market with suppliers of hemodialysis and peritoneal dialysis devices, supplies and services. We do not compete with providers of dialysis services such as the national dialysis providers or managed care companies. Rather, we are marketing our products and services to these providers and working with them to make home hemodialysis a viable alternative to currently available treatment methods.

Our primary competitors in supplying dialysis equipment, supplies and services are Baxter International Inc., Fresenius Medical Care AG and Gambro AB. These companies and most of our

other potential competitors have substantially greater financial, scientific and technical resources, research and development capabilities, marketing and manufacturing resources and experience than we have, and greater experience in developing products, providing services and obtaining regulatory approvals.

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

We believe 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 competition in the home hemodialysis market will be based on these 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, our ability to sell our products and services to these providers may be adversely affected.

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 in, among other things, fines, injunctions and civil penalties; recall or seizure of products; total or partial suspension of production; denial or withdrawal of pre-market clearance or approval of devices; recommendations by the FDA that we 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 us.

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

The PHD System is classified as a Class II device. On March 30, 1999, we filed an Investigational Device Exemption ("IDE") with the FDA, a prerequisite for conducting a clinical evaluation of the PHD System. We received full IDE approval in July 1999, and in September 1999 began the clinical trial of the PHD System. Twenty-five patients participated in the trial at three centers. The protocol for the study called for patients to dialyze at home on existing hemodialysis equipment for 10 weeks, followed by one month in the center on the PHD System and two months at home on the PHD System. The clinical trial was completed in November 2000, with 23 patients receiving dialysis on the PHD System. Over 8,000 dialysis treatments have now been performed by patients on the PHD System, including over 7,000 in the home.

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

The FDC Act requires that medical devices be manufactured in accordance with the FDA's current QSRs. These regulations require, among other things, that (i) the manufacturing process 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 QSRs. If violations of the applicable regulations are noted during FDA inspections of the manufacturing facilities of our contract manufacturers, there may be a material adverse effect on the continued marketing of our products.

Even though the FDA has cleared the PHD System, the FDA will periodically inspect the manufacturing facilities and processes for compliance with QSRs. In addition, in the event that additional manufacturing sites are added or manufacturing processes are changed, such new facilities and processes may be subject to FDA inspection for compliance with QSRs.

On October 7, 2002, we announced receipt of EC Certification for CE Mark approval pursuant to the Medical Device Directive of the European Economic Area. The certification approved the PHD System for home use. Such approval was required prior to the commercialization of the PHD System in the European Economic Area.

We plan to market the PHD System in several foreign markets, including continental Europe and Japan, either through subsidiaries or through partnerships with others. Requirements pertaining to the PHD System vary widely from country to country. We believe the extent and complexity of regulations of medical devices such as the PHD System is increasing worldwide. We anticipate 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.

As of March 1, 2004, we either owned or had exclusive rights to 47 U.S. patents and 30 foreign patents for technologies that are important to developing a safe, convenient, self-contained hemodialysis system. We have filed one additional patent application in the United States, and have additional patent applications pending in several other countries that have significant hemodialysis markets. We expect to file additional patent applications in the United States with respect to the PHD System as new technology is developed.

Twardowski License. On April 1, 1993, we entered into a License Agreement (the "Twardowski License") with Dr. Zbylut Twardowski, a member of our Scientific Advisory Board, granting to us worldwide exclusive license to the patent issued on August 9, 1994 entitled "Artificial Kidney for Frequent (Daily) Hemodialysis" expiring August 9, 2011, and several subsequent patents (the "Twardowski Patents"), the latest of which expires October 17, 2017. The Twardowski Patents relate to an artificial kidney intended to provide frequent (daily) home hemodialysis. The Twardowski License continues for as long as the Twardowski Patents remain in effect. The Twardowski License provides for royalty payments to Dr. Twardowski based on the revenue we receive from the sale or lease of the licensed product, with certain minimum semiannual royalty payments. If we fail to make any such

minimum royalty payment, Dr. 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 us significant exclusivity or benefit in our markets. Furthermore, competitors may develop alternative technology that achieves the same advantages as the Twardowski Patents.

Boag License. On April 1, 1993, we 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 April 29, 2005 (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 continues for as long as the Boag Patent remains in effect. The Boag License provides for royalty payments to Ms. Walters based on the revenue we receive 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 we pay 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 we pay 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, our 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 us. There can be no assurance that the Boag Patent will provide us significant exclusivity or benefit in our markets. Furthermore, competitors may develop alternative technology that achieves the same advantages as the Boag Patent.

Allergan License. On March 11, 1996, we 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, which expires on February 28, 2012, and its foreign counterparts (the "Allergan Patent"). We have exclusive worldwide rights to the patented technology, limited to the field of use of kidney dialysis machines and methods. The Allergan License continues 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 we fail to pay the full minimum annual royalties, the License Agreement will terminate. If we pay at least half of the minimum annual royalties but do 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 us significant exclusivity or benefits in our markets. Furthermore, competitors may develop alternative technology that achieves the same advantages as the Allergan Patent.

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

Our commercial success depends, in part, on our ability to avoid infringing patents issued to others. The field of dialysis includes a significant number of patents that have been issued to third parties. We may receive from third parties, including potential or actual competitors, notices claiming that we are infringing third party patents or other proprietary rights. If it was determined that we were infringing any third-party patent, we could be required to pay substantial damages, alter our 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 our licensed patents or patent applications, and such competing or conflicting claims are ultimately determined to be valid, we 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 we are required to obtain any licenses, there can be no assurance that we will be able to do so on commercially favorable terms, if at all. Our failure to obtain a license to any technology that we may require to commercialize our products could have a material adverse impact on our business, operating results and financial condition.

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

As of December 31, 2003, we had 103 full-time employees, 36 of whom were employed in research and development capacities, 20 of whom were employed in the technical and clinical services area, 19 of whom were employed in sales and marketing efforts, 13 of whom were employed in the general and administrative area, 16 of whom were employed in manufacturing, operations and regulatory groups and 4 of whom were employed in the United Kingdom subsidiary. We consider our employee relations to be good.

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

In April 1996, we established Aksys Japan, K.K. ("AJKK"), our indirect, wholly owned Japanese subsidiary. AJKK had no employees as of December 31, 2003. We have 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 we progresses through the stages of clinical studies, regulatory approval and market launch. All efforts and decisions are directed from our headquarters in Lincolnshire, Illinois.

In 1999, we entered into a co-development and license agreement with Teijin Limited of Osaka, Japan. Under the agreement, Teijin has the right to develop, manufacture, seek regulatory approval, and upon such approval, to market, rent and sell the PHD System in Japan. In exchange, Teijin paid us a $7.0 million co-development fee, and will pay royalties to us of 10% of revenues received in connection with their sales and rentals of PHD Systems in Japan. Under the agreement, we have an option to sell the PHD System in Japan, but our exercise of this option would cause the royalty rate to drop to 5%. Teijin is a leading Japanese manufacturer of synthetic fibers, chemicals and plastics, with annual sales in excess of $8 billion, of which over $860 million is derived from pharmaceuticals and medical products.

In August 1998, we established Aksys Healthcare, Ltd. ("AHL"), our indirect, wholly owned subsidiary in the United Kingdom. AHL employed four individuals at December 31, 2003. The primary purpose of AHL is to establish and develop our business in the United Kingdom and ultimately, continental Europe. In 2003, AHL recorded two sales and one rental agreement.

We file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission ("SEC"). You may read and copy any document we file at the SEC's public reference room at Room 1024, 450 Fifth Street, NW, Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for information on the public reference room. The SEC maintains a web site (www.sec.gov) that contains annual, quarterly and current reports, proxy statements and other information that issuers (including us) file electronically with the SEC.

We make available free of charge, through a direct link from our website (www.aksys.com) to the SEC's web site, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, Forms 3, 4 and 5 filed on behalf of directors and executive officers, and any amendments to those reports filed or furnished pursuant to the Securities Exchange Act of 1934 as soon as reasonably practicable after such documents are electronically filed with, or furnished to, the SEC.

We lease approximately 41,500 square feet of office space in Lincolnshire, Illinois to conduct our research, development, marketing and administrative functions. This lease was initiated September 1, 1996 and expires August 31, 2006. We believe that our present facilities are adequate for our operations. At present, all manufacturing has been contracted out to third party subcontractors.

In February 2004, we announced the final settlement of all of our outstanding claims against Durus Life Sciences Master Fund Ltd. and other defendants for an aggregate payment to us of $48.7 million, which includes the purchase by certain defendants of $16.1 million of unsecured subordinated promissory notes and an earlier $4.6 million payment to settle claims under Section 16(b) of the Securities Exchange Act of 1934. We had filed a lawsuit in August 2003 after learning that Durus Life Sciences Master Fund Ltd. (the "Master Fund"), Scott Sacane, Durus Capital Management, LLC ("Durus Capital"), Durus Capital Management (N.A.), LLC ("Durus Capital (N.A.)") and Artal Long Biotech Portfolio LLC ("Artal") had acquired over 70% of our outstanding common stock. We refer to the Master Fund, Mr. Sacane, Durus Capital, Durus Capital (N.A.) and Artal collectively as "defendants" and individually as a "defendant."

Background to the Litigation. In April 2003, we entered into an agreement with Mr. Sacane and Durus Capital relating to shares of our common stock they then controlled through the Master Fund

(the "April 2003 Agreement"). We entered into the April 2003 Agreement after we learned that certain of the defendants had accumulated a position in our common stock in excess of the 15% ownership level that would potentially trigger our shareholder Rights Agreement.

Pursuant to the terms of the April 2003 Agreement, Mr. Sacane and Durus Capital represented that they: (1) then owned 5,238,248 shares (approximately 19.5%) of our outstanding common stock, (2) crossed the 15% ownership level inadvertently, and (3) held this investment in the Company in the ordinary course of business and not for the purpose or with the effect of changing or influencing the control of the Company. In addition, they agreed to reduce their holdings to below 15% over a two-year period and not to purchase any additional shares of our common stock until such time as their ownership was less than 15% of the shares then-outstanding (and thereafter not in excess of 15% without the consent of our board of directors).

After the close of business on July 24, 2003, Mr. Sacane informed us that he, together with the other defendants, had accumulated in excess of 19 million shares of our common stock in transactions he described as inadvertent. In a Schedule 13D filed with the SEC on July 28, 2003, the defendants disclosed that they owned 21,831,218 shares, or approximately 73%, of our then-outstanding common stock. The Master Fund owned 21,333,118 of these shares and Artal owned 498,100.

In August 2003, we filed a lawsuit against the defendants in the United States District Court for the District of Connecticut. Our lawsuit sought injunctive relief and damages arising from the defendants' alleged violation of federal securities laws and the alleged breach of the April 2003 Agreement. In addition, our lawsuit sought recovery of short-swing trading profits under Section 16(b) of the Securities Exchange Act of 1934.

In September 2003, we believe that certain investors in the Durus funds removed the Master Fund's board of directors and appointed a new board of directors. We believe that the new board took control of the Master Fund, including control over the 21,333,118 shares of our common stock owned by the Master Fund, and that Mr. Sacane, Durus Capital and Durus Capital (N.A.) ceased to exercise control over these shares. In October 2003, we entered into a standstill agreement with the Master Fund. This agreement served as a temporary measure designed to maintain the status quo while we sought to negotiate a settlement with the defendants.

In January 2004, we settled the Section 16 claim against the defendants for $4.6 million. In February 2004, we settled all other claims against the defendants, and received as part of that settlement an additional $34.1 million in cash, of which $16.1 million was in exchange for unsecured subordinated promissory notes.

Summary of the Settlement. Pursuant to the settlement agreement, the Master Fund, among other things, agreed to pay us $28 million in cash (in addition to the $4.6 million paid by the Master Fund in respect of the Section 16 claim) to settle the remaining claims in our lawsuit and release any other potential claims against the defendants. In addition, the defendants agreed that they would not seek to exercise control over the Company and that they would not hold the shares or our common stock with the purpose or intent of changing or influencing the control or management of the Company. In furtherance of this agreement, the Master Fund and Artal agreed to execute irrevocable proxies directing that the shares of our common stock that they own be voted: (1) in favor of our nominees for our board of directors, William C. Dow (our President and Chief Executive Officer and a Class II director) and W. Dekle Rountree, Jr. (a Class II director), at our 2004 annual meeting of stockholders, (2) as directed by a majority of our independent directors with respect to any stockholder proposals at our 2004 annual meeting and (3) in proportion to the votes cast by all other holders of our common stock (other than the defendants) in future stockholder votes and with respect to other matters at the 2004 annual meeting. The authority granted by the proxies continues until the defendants' aggregate ownership of our common stock decreases below 15%, provided that once the defendants' aggregate ownership of our common stock decreases below 50% of the outstanding common stock, the authority

granted by the proxies will apply only to those shares of common stock owned by the defendants in the aggregate in excess of 14.99% of our outstanding common stock. As of February 23, 2004, the Master Fund owned 21,333,118 shares of our common stock (which includes 281,454 shares issuable upon exercise of immediately exercisable warrants), and Artal owned 498,100 shares of our common stock, collectively representing approximately 73% of the outstanding shares of our common stock as of such date. Mr. Sacane, Durus Capital and Durus Capital (N.A.) have represented to us that they do not own any shares of our common stock, other than indirect interests in the shares of our common stock owned by the Master Fund, and the Master Fund and Artal have represented to us that Mr. Sacane, Durus Capital and Durus Capital (N.A.) do not exercise voting or dispositive power over any of the shares owned by the Master Fund or Artal. Pursuant to the settlement agreement, a representative of the Master Fund will have the opportunity to meet with our board of directors before or after each board meeting. In addition, we have amended our Rights Agreement to conditionally exempt the defendants therefrom.

As part of the settlement, we entered into a registration rights agreement with the Master Fund and Artal whereby we agreed to use reasonable best efforts to register the shares held by them in one or more shelf registration statements and to keep these registration statement(s) effective for two years (the "effectiveness period"), subject to extension in the event that (1) we issue a blackout notice pursuant to the terms of the agreement (in which case the effectiveness period will be extended by the duration of such blackout), (2) the SEC imposes a stop order on the registration statement(s) or the registration statement(s) otherwise become ineffective (in which case the effectiveness period will be extended by the duration of such stop order or period of ineffectiveness), (3) we experience a material adverse event related to certain FDA matters and similar government regulatory matters (in which case the effectiveness period will be extended for up to 180 days) or (4) we effect the registration of our common stock for our own account or the account of another third party (in which case the effectiveness period will be extended for up to 180 days). The Master Fund has agreed that it will reduce its ownership of our common stock over time and that its position in our common stock will be under 15% by the end of the effectiveness period. During the first year of the effectiveness period, we may not effect the registration of any shares of our common stock without the Master Fund's consent. We have agreed to pay the first $500,000 of expenses associated with the registration of the Master Fund's and Artal's shares. The Master Fund and Artal will pay all fees and expenses of their counsel, all underwriting discounts and commissions, and any of our expenses in excess of $500,000. The registration rights agreement also contains customary indemnification provisions.

We have also entered into a note purchase agreement with the Master Fund and Artal whereby the Master Fund and Artal purchased approximately $15.8 million and $0.3 million, respectively, of unsecured subordinated promissory notes (the "Notes") from us. The Notes are subordinated and junior in right of payment to all of our creditors, including trade creditors, and do not bear interest. We may repay the notes in cash at any time. After the later of (1) August 30, 2005 and (2) the first trading day on which the holders of the Notes own less than 10% of our then-outstanding common stock, we may repay the Notes in stock. Any stock issued in repayment of the Notes will be subject to registration rights pursuant to the registration rights agreement. The Notes will become due and payable one year after the later of the two dates above and in no event later than February 23, 2009. If we elect to repay the notes in stock, the number of shares that we must deliver for payment will be determined based on the average of the closing prices of our common stock on the Nasdaq National Market over the twenty trading days preceding our election to repay in stock. The Notes will also become due and payable in cash upon a change of control. In the event of a change of control repayment, in addition to repayment of the then-outstanding principal amount of the Notes, we are required to pay to the holders of the an amount equal to (1) 5% of the consideration received by (a) the Company in the case of an asset sale transaction constituting a change of control (net of corporate taxes, transaction expenses and indebtedness of the Company) or (b) our stockholders and

the holders of the Notes in a merger or other type of transaction constituting a change of control, less (2) the principal amount repaid.

The foregoing summaries of the settlement agreement, the amendment to our Rights Agreement, the registration rights agreement and the note purchase agreement do not purport to be complete and are subject to, and qualified in their entirety by reference to, complete copies of these documents filed as exhibits to this report and deemed to be incorporated herein in their entirety.

In May 2001, we signed an engagement letter with an investment banking firm to raise capital through the sale of common stock. A dispute arose as to whether a fee was payable under this letter, and litigation ensued. In March 2003, we and the investment banking firm settled this litigation. We agreed to pay $75,000 upon settlement and an additional $75,000 in November 2003. We also issued the investment banking firm 26,500 shares of our common stock upon settlement and agreed to pay the investment banking firm future advisory fees of up to $160,000 in connection with future financings. An estimated liability was recorded in our consolidated financial statements as of December 31, 2002 related to this settlement. At December 31, 2003, all amounts owed had been paid.

There were no matters submitted for a vote of our stockholders during the quarter ended December 31, 2003.

Investing in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below before investing. If any of the following risks actually occur, our business, financial condition or results of operations would likely suffer. In that case, the market price of the common stock could fall, and you may lose all or part of the money you paid to buy such common stock. Also consider carefully the statements under the heading "Note on Forward-Looking Information" below. You should be prepared to accept the occurrence of any and all of the risks associated with purchasing our common stock, including a loss of all of your investment.

We have a history of operating losses and a significant accumulated deficit, and we may not achieve or maintain profitability in the future.

We have not been profitable since our inception in January 1991. As of December 31, 2003, we had an accumulated deficit of approximately $129 million. We expect to continue to incur additional losses for the foreseeable future as a result of a high level of operating expenses, significant up-front expenditures, production and marketing activities and very limited revenue from our core business. We may never realize significant revenues from our core business or be profitable. Factors that will influence the timing and amount of our profitability include:

We face significant challenges in shifting from the development stage to the commercialization stage for the PHD System. Our prospects must be considered in light of the risks, expenses and difficulties frequently encountered in such a transition, and there can be no assurance that we will have any significant revenues or that we will ever achieve profitable operations.

Our cost to produce the PHD System and deliver related services and supplies currently exceeds the market price of the PHD System and related services and supplies.

The pricing of the PHD System and related services and supplies is constrained by limitations on governmental and third party reimbursement programs. Although a team of our engineering personnel is currently implementing plans to reduce costs through redesign of PHD subsystems and we are attempting to source alternative materials and suppliers, there can be no assurance that we will be successful in these efforts.

In addition, the cost of services and supplies for the PHD System currently exceeds the market price as a result of the need to have a local presence of field service and clinical service personnel in each geographical area that PHD Systems are sold. Although we anticipate that as more PHD units are placed in these geographical areas the per unit cost of services and supplies will decrease, there can be no assurance that we will be successful in placing a sufficient number of PHD units in the field to achieve these per unit cost reductions. Furthermore, the PHD System is comprised of new, complex, highly automated technologies, which operate in a rigorous process. While we continue to realize

improvements in the PHD System's reliability as a result of the acquisition and development of new parts and subsystems, there can be no assurance that we will be successful in reaching industry norms for reliability. The reliability of the PHD System has a significant impact on our service cost.

If a PHD is unavailable for treatments for more than a few days, the patient assigned to the machine must go back to his dialysis clinic for in-center treatment until his PHD is repaired. Although we have experienced infrequent incidents of patients on the PHD System needing to go back in center for treatments to date, we cannot assure you, based on our limited experience, that such incidents will not occur more frequently in the future.

Our business will fail if we cannot successfully commercialize the PHD System; because we have only recently begun this commercialization process, our success cannot be predicted and is uncertain. Our success is dependent on many variables entirely outside of our control.

Acceptance of the PHD System in the marketplace by both potential users and purchasers (two separate groups with at times conflicting interests) is uncertain, and failure to achieve sufficient market acceptance will significantly limit our ability to generate revenue and become profitable. The success of the PHD System is dependent on many variables, including its safety, effectiveness and cost-effectiveness as an alternative dialysis modality. The failure to conclusively demonstrate each of these factors could significantly hinder market acceptance of our PHD System, and the failure of our PHD System to achieve sustained commercial viability or market acceptance would have a material adverse effect on us and your investment in Aksys. Moreover, successful commercialization will depend upon, among other things, market acceptance of the efficacy of daily hemodialysis. This will require substantial marketing efforts and the expenditure of significant funds by us to inform nephrologists, dialysis clinics, other healthcare providers and dialysis patients of the benefits of daily hemodialysis, and thus the benefits of the PHD System. In marketing the PHD system, we may encounter significant clinical and market resistance to:

There can be no assurance that our efforts will be successful or that the PHD System will ever achieve market acceptance. In addition, the PHD System is a personal system, designed for use by a single patient, and requires several hours after a dialysis treatment to prepare itself for the next treatment session. As such, it is very unlikely to be used in the prevailing method of outpatient hemodialysis, which generally involves treating patients three times per week for treatment sessions lasting between three and four hours. In this prevailing method of hemodialysis, patients receiving treatment on a given day are treated in shifts, with patients on succeeding shifts using dialysis machines employed during prior shifts.

A number of other factors will affect the future success and sales of our product. These factors include:

Since our inception, we have devoted substantially all of our efforts to the development of the PHD System. We expect to be entirely dependent for the foreseeable future on sales of, and services relating to, the PHD System for revenues. Our dependence on a single product creates significant risk for our company and stockholders.

Uncertainty and amount of third-party reimbursement could affect our profitability.

Although most private insurance policies cover a substantial portion of the cost of dialysis treatment in the United States, most patients receiving dialysis treatment in the United States are insured by Medicare or Medicaid. Medicare and Medicaid provide reimbursement for dialysis treatment at set composite rates, which have not increased significantly since 1983. There can be no assurance that the current limitations or requirements on Medicare and Medicaid reimbursement for dialysis will not have a materially adverse effect on the market for the PHD System, that health administration authorities outside of the United States will provide reimbursement at acceptable levels or at all or that any such reimbursement will be continued at rates sufficient to enable us to maintain prices at levels sufficient to become profitable.

Competitors and technological advances could cause us to lose current and future business opportunities and materially harm our results of operations and ability to grow.

The dialysis industry is characterized by competition for financing, executive talent, intellectual property and product sales. Most of our competitors have substantially greater financial, scientific and technical resources, research and development capabilities, manufacturing and marketing resources, technical and service networks and experience than us, and greater experience in developing products, providing services and obtaining regulatory approvals. Our competitors may succeed in developing products that are more effective and/or less costly than any that we may develop. We also expect that the number of our competitors and potential competitors will increase. There can be no assurance that we will be able to compete successfully against any existing or potential competitors.

In order to compete effectively, we will need, among other things, to demonstrate the clinical and cost effectiveness of daily home hemodialysis using the PHD System. Our ability to successfully market our products and services could be adversely impacted by pharmacological and technological advances in preventing the progression of ESRD in patients (such as those with diabetes and hypertension), technological developments by others, 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.

If we cannot develop adequate distribution, customer service and technical support networks, we may not be able to market and distribute our PHD System effectively.

Our strategy involves contracting with dialysis providers to have us supply to dialysis patients the PHD System, dialysate and other consumables, patient training, customer service and maintenance and other technical service. To provide these services, we must develop networks of employees or independent contractors in each of the areas in which we intend to operate. There can be no assurance

that we will be able to organize these networks on a cost-effective basis, or at all. The failure to establish these networks would have a materially adverse effect on us.

Our future sales could be adversely affected due to our limited marketing experience.

We currently market our products and services primarily through our own sales force. We have limited experience in sales, marketing and distribution. There can be no assurance that we will be able to build an adequate marketing staff or sales force or that the cost of such will not be prohibitive, or that our direct sales and marketing efforts will be successful.

We are subject to extensive government regulation which can be costly, time consuming and subject us to unanticipated interruptions or delays in our commercial operations.

The PHD System, our sole product, is subject to stringent government regulation in the United States and other countries. In the United States, the PHD System is regulated as a medical device by the FDA. In March 2002, we announced receipt of clearance from the FDA to market the PHD System in the United States. The FDA clearance had no restrictions and included authorization to use the product in the home; however, FDA clearance under 510(k) is subject to continual review and later discovery of previously unknown problems may result in restrictions on product marketing or withdrawal of the product from the market.

In the European Economic Area, the PHD System is regulated as a medical device under the Medical Device Directive. In October 2002, we announced receipt of EC Certification for CE Mark approval pursuant to the Medical Device Directive. The certification approved the PHD System for home use. Such approval was required prior to the commercialization of the PHD System in the European Economic Area.

Additional government regulations may be established or imposed in the United States or the European Economic Area, or the interpretation or enforcement of such regulations may change, which could materially impact the regulatory clearances we have received for the PHD System and its continued commercialization.

In addition, various statutes and regulations also govern the testing, labeling, storage, record keeping, distribution, sale, marketing, advertising and promotion of our products, which present significant compliance burdens for our company. Failure to comply with applicable requirements can result in fines, recalls or seizures of products, total or partial suspension of production, withdrawal of existing product approvals or clearances, refusal to approve or clear new applications or notices and criminal prosecution.

The manufacture of the PHD System must also comply or ensure compliance with current QSR regulations promulgated by the FDA. We may be required to expend time, resources and effort in product manufacturing and quality control to ensure compliance even though our PHD System is manufactured currently by an independent contractor. If violations of the applicable regulations are noted during FDA inspections of manufacturing facilities, it may have a materially adverse effect on the continued marketing of our products.

You should also be aware that proper regulatory approvals have not been completed in any jurisdictions other than the United States and the European Economic Area. There can be no assurance or guarantee that any of these approvals will be obtained in a timely manner or at all.

We rely on independent contract manufacturers for the manufacture of our PHD System. Our inability to manufacture the PHD System, and our dependence on independent contractors, may delay or impair our ability to generate revenues, or adversely affect our profitability.

To be successful, our PHD System must be manufactured in commercial quantities and at acceptable cost. Production of this product, especially in commercial quantities, will create technical as well as financial challenges for us. We may encounter unexpected delays or costs in the scale-up of manufacturing operations. Further, no assurance can be given that manufacturing or quality control problems will not arise (and among other things increase our costs) as we increase production of this product or as additional manufacturing capacity is required in the future.

We currently rely on single contract manufacturers to manufacture each of the major components of the PHD System. Such contractors are not employed or otherwise controlled by us and are generally free to conduct their business at their own discretion. Although certain of our contract manufacturers have entered into contracts with us to manufacture components of the PHD System, such contracts can be terminated at any time under certain circumstances by us or by the contractors, and can be breached at any time. Further, work stoppages and the slowing of production at a single independent contractor would have a materially adverse effect on us.

There are also other risks inherent in using single sources of supply. We have not made alternative arrangements for the manufacture of the major components of the PHD System and there can be no assurance that acceptable alternative arrangements could be made on a timely basis, or at all. It is likely that a significant interruption in supply would result if we utilize or were required to utilize a different manufacturing contractor for any of the major components of the PHD System. The loss of the services of any of our contract manufacturers would have a materially adverse effect on us. In addition, no assurance can be given that we or our manufacturers will be able to obtain on a timely basis components or other supplies necessary to manufacture or use the PHD System.

We may need additional capital which, if not available to us, may alter our business plans or limit our ability to achieve growth and which, if raised, will dilute your ownership interest in us.

Our capital requirements have been and will continue to be significant. Prior to the receipt of the settlement payments from the Master Fund in February 2004, we have been dependent primarily on the net proceeds of public and private sales of our equity securities. Our proceeds to date from equity offerings are approximately $152 million. See "Legal Proceedings—Durus Settlement." Other than the final $10 million settlement payment we will receive from the Master Fund upon the effectiveness of the registration statement covering shares of our common stock held by the Master Fund and Artal that we are required to file under the registration rights agreement, we currently have no committed sources of, or other arrangements with respect to, additional financing. See "Legal Proceedings—Durus Settlement." There can be no assurance that our existing capital resources, together with future operating cash flows, will be sufficient to fund our future operations. Our capital requirements will depend on many factors, including without limitation:

In the event that our plans change, our assumptions change or prove inaccurate or we are unable to obtain production financing on commercially reasonable terms, we could be required to seek additional financing sooner than currently anticipated and on less favorable terms than anticipated. Any

necessary additional equity financing may involve substantial dilution to our then existing stockholders, and debt financing could result in the imposition of significant financial and operational restrictions on us.

As discussed under "Legal Proceedings—Durus Settlement," under the terms of our settlement with the Durus funds, we are prohibited from registering shares of our common stock under the registration rights agreement until one year after the registration statement covering the Master Fund's and Artal's shares is declared effective, which has not yet occurred.

We may not be able to protect our intellectual property rights and, as a result, we could lose competitive advantages that could adversely affect our operating results.

Our success depends, in part, on our ability and the ability of our licensors to obtain, assert and defend patent rights, protect trade secrets and operate without infringing the proprietary rights of others. We currently own or have rights to 47 U.S. patents and 30 foreign patents. There can be no assurance, however, that:

We are aware that numerous patents have been issued relating to methods of dialysis. Although we endeavor to protect our patent rights from infringement, it is possible that by virtue of the numerous patents that have been, or potentially will be, issued relating to hemodialysis methods, we may not be aware, or become aware, of patents issued to our competitors or others that conflict with our own or those of our licensors. Such conflicts could result in a rejection of important patent applications or the invalidation of important patents, which could have a materially adverse effect on our competitive position. In the event of such conflicts, or in the event we believe that competitive products infringe patents to which we hold rights, we may pursue patent infringement litigation or interference proceedings against, or may be required to defend against such litigation or proceedings involving, holders of such conflicting patents or competing products. Such litigation or proceedings may have a materially adverse effect on our competitive position, and there can be no assurance that we will be successful in any such litigation or proceeding. Litigation and other proceedings relating to patent matters, whether initiated by us or a third party, can be expensive and time consuming, regardless of whether the outcome is favorable to us, and can result in the diversion of substantial financial, managerial and other resources. An adverse outcome could subject us to significant liabilities to third parties or require us to cease any related development or commercialization activities. In addition, if patents that contain dominating or conflicting claims have been or are subsequently issued to others and such claims are ultimately determined to be valid, we may be required to obtain licenses under patents or other proprietary rights of others. No assurance can be given that any licenses required under any such patents or proprietary rights would be made available on terms acceptable to us, if at all. If we do not obtain such licenses, we could encounter delays or could find that the development, manufacture or sale of products requiring such licenses is foreclosed.

We rely on proprietary know-how and confidential information and employ various methods, such as entering into confidentiality and noncompete agreements with our current employees and with certain third parties to whom we have divulged proprietary information, to protect the processes, concepts, ideas and documentation associated with our technologies. Such methods may not afford significant protection to us, and there can be no assurance that we will be able to protect adequately our trade secrets or that other companies will not acquire information that we consider proprietary.

If we become subject to product liability claims, they may reduce demand for the PHD System or result in damages that exceed our insurance coverage.

Our business exposes us to potential product liability risks that are inherent in the production, marketing and sale of dialysis products. There can be no assurance that we will be able to avoid significant product liability exposure. We currently maintain product liability insurance with a coverage limit of $10 million. There can be no assurance that the insurance policy will provide adequate protection against potential claims. Furthermore, our agreements with contract manufacturers require us to maintain product liability insurance, and the failure to obtain such insurance could materially and adversely affect our ability to produce our PHD System. A successful claim brought against us in excess of any insurance coverage obtained by us could have a materially adverse effect upon our business, financial condition and results of operations. In addition, we have agreed to indemnify certain of our contract manufacturers against certain liabilities resulting from the use of our PHD System.

Our business is likely to be hurt if we are unable to keep our senior executive officers and key scientific personnel.

We are dependent upon the services of our senior executives, such as William C. Dow, our President and Chief Executive Officer, and key scientific personnel. We do not maintain key-man life insurance on our senior executives. In addition, we do not have employment agreements, other than certain severance, confidentiality and non-competition agreements, with any of our personnel. The loss of the services of Mr. Dow or any other senior executive or key employee could have a materially adverse effect on us. Also, our continued commercialization will depend upon, among other things, the successful recruiting and retention of highly skilled managerial and marketing personnel with experience in business activities such as those we contemplate. Competition for the type of highly skilled individuals sought by us is intense. There can be no assurance that we will be able to retain existing employees or that we will be able to find, attract and retain skilled personnel on acceptable terms.

The market price of our common stock may be subject to significant volatility.

The price of our common stock may fluctuate widely depending upon many factors, including our perceived prospects and those of the dialysis market in general. Since our initial public offering in May 1996, our common stock price has traded between $3.50 and $23.50 per share and we have generally experienced relatively low trading volume in relation to the aggregate number of shares outstanding.

Factors that may have a significant impact on the market price or liquidity of our common stock include:

External factors may also adversely affect the market price for the common stock. The common stock currently trades on the Nasdaq National Market. The price and liquidity of the common stock may be significantly affected by the overall trading activity and market factors on the Nasdaq National Market.

Future sales of substantial amounts of our common stock in the public market and the existence of a substantial number of authorized but unissued shares of our common stock could adversely affect market price of the common stock, and also could impair our ability to raise additional capital through the sale of our equity securities.

The resale by the Master Fund and Artal of a substantial number of shares of our common stock could adversely impact the market price of our common stock.

As of February 23, 2004, the Master Fund owned 21,333,118 shares of our common stock and Artal owned 498,100 shares of our common stock, collectively representing approximately 73% of the outstanding shares of our common stock as of such date. We have agreed to file a registration statement covering these shares that, once declared effective by the SEC, would enable the Master Fund and Artal to resell their shares in public offerings at their discretion. As part of the settlement, the Master Fund has agreed that it will reduce its ownership of our common stock over time and that its position in our common stock would be under 15% within two years after the registration statement has become effective, subject to extensions under various circumstances. See "Legal Proceedings—Durus Settlement." Although we believe that the Master Fund and Artal will effectuate the sale of their shares in an orderly manner and will seek to obtain the best prices available in connection with any sales, the timing, volume and manner of any sales is within their discretion.

The Master Fund's and Artal's sale of their shares may have a negative effect on the market price of our common stock due to, among other factors, the selling pressure such sales may cause. Moreover, the perception in the market that a significant portion of our outstanding shares may soon be sold may also have a negative effect on the market price of our common stock. These events may cause other holders of our common stock to sell their shares, or it may encourage short sales, all of which could contribute to a decline in the market price of our stock.

We do not intend to pay cash dividends on our common stock in the foreseeable future.

We have never declared or paid any cash dividends on our common stock. For the foreseeable future, we intend to retain any earnings to finance the development of our business, and we do not anticipate paying any cash dividends on our common stock. Payment of any future dividends on our common stock will depend upon our earnings and capital requirements, the terms of any indebtedness we incur and other factors our board of directors considers appropriate.

We may issue additional shares of our common stock and/or preferred stock, which would dilute your voting and ownership percentage.

Certain events over which you have no control could result in the issuance of additional shares of our common stock, which would dilute your voting and ownership interest in our Company. As of March 8, 2004, there were 29,806,475 shares of our common stock issued and outstanding and there

were 527,598 shares of common stock reserved for issuance under our equity incentive and stock purchase plans. As of March 8, 2004, there were outstanding options, warrants and other rights to acquire up to approximately 2,239,088 shares of common stock. We may also issue additional shares of common stock or preferred stock:

However, under the terms of the registration rights agreement we entered into with the Master Fund and Artal, we may not register shares of our capital stock for our own account or for the account of another third party for the first year after the shelf registration statement we file covering their shares has been declared effective. See "Legal Proceedings—Durus Settlement."

Our charter documents, rights agreement and Section 203 of the DGCL could make it more difficult for a third party to acquire us.

Our Restated Certificate of Incorporation ("Charter") and Amended and Restated Bylaws ("Bylaws") contain certain provisions that are intended to enhance the likelihood of continuity and stability in the composition of our board of directors and which may have the effect of delaying, deferring or preventing a future takeover or change in control of the Company unless the takeover or change of control is approved by our board of directors. Such provisions may also render the removal of the current board of directors and of management more difficult. These provisions provide for, among other things:

Each outstanding share of our common stock includes one preferred stock purchase right (individually a "Right" and collectively the "Rights") as provided under our Rights Agreement. Each Right entitles the holder, until the earlier of October 28, 2006 or the redemption of the Rights, to purchase one one-thousandth of a share of Junior Participating Preferred Stock, Series A, par value $1.00 per share (the "Series A Preferred Stock"), at a price of $85.00 per one one-thousandth of a share (as may be adjusted to reflect stock splits, stock dividends or certain other dilutive events since the issuance of the Rights). The Series A Preferred Stock is nonredeemable and will have 1,000 votes per share (subject to adjustment). We have reserved 50,000 shares of Series A Preferred Stock for issuance upon exercise of such Rights. In the event that any person becomes the beneficial owner of 15% or more of our common stock, the Rights (other than Rights held by the acquiring stockholder) would become exercisable for a number of shares of common stock having a market value of two times

the exercise price of the Right. Furthermore, if after any person becomes the beneficial owner of 15% or more of our common stock, we are acquired in a merger or other business combination or 50% or more of our assets or earnings power were sold, each Right (other than Rights held by the acquiring person) would become exercisable for that number of shares of common stock (or securities of the surviving company in a business combination) having a market value of two times the exercise price of the Right.

One Right will be issued in respect of each share of common stock issued before the earlier of October 28, 2006 or the redemption of the Rights. As of the date hereof, the Rights are not exercisable, certificates representing the Rights have not been issued and the Rights automatically trade with shares of common stock.

The Rights have certain anti-takeover effects. The Rights may cause substantial dilution to a person that attempts to acquire the Company on terms not approved by the board of directors, except pursuant to an offer conditioned on a substantial number of Rights being acquired. The Rights should not interfere with any merger or other business combination approved by the board of directors prior to the time a person has acquired beneficial ownership of 15% or more of the common stock, because until such time the Rights may generally be redeemed by the Company at one cent per Right.

As discussed under "Legal Proceedings—Durus Settlement," we have amended our Rights Agreement to conditionally exempt the Master Fund and the other defendants therefrom.

We are subject to the "business combination" statute of the General Corporation Law of the State of Delaware (the "DGCL"). In general, Section 203 of the DGCL prohibits a publicly-held Delaware corporation from engaging in a "business combination" with an "interested stockholder," for a period of three years after the date of the transaction in which a person became an "interested stockholder," unless:

A "business combination" includes mergers, stock or asset sales and other transactions resulting in a financial benefit to the "interested stockholders." An "interested stockholder" is a person who, together with affiliates and associates, owns (or within three years, did own) 15% or more of the voting stock of the subject corporation. Although Section 203 permits us to elect not to be governed by its provisions, we have not made this election. As a result of the application of Section 203, potential acquirors of our company may be discouraged from attempting to effect an acquisition transaction with us, thereby possibly depriving holders of our securities of certain opportunities to sell or otherwise dispose of such securities at above-market prices pursuant to such transactions.

The foregoing summaries do not purport to be complete and are subject to, and are qualified in their entirety by reference to, our Charter and Bylaws, our Rights Agreement and the DGCL. Copies of our Charter, Bylaws and Rights Agreement are filed as exhibits to filed as exhibits to this report and deemed to be incorporated herein in their entirety.

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

Our common stock trades on the Nasdaq National Market under the symbol "AKSY". The following table lists the quarterly high and low prices of the common stock for the period from January 1, 2002 through December 31, 2003.

Fiscal Year	Fiscal Quarter	High Closing Price		Low Closing Price
2003	1st	$	7.17	$	4.79
	2nd		12.90		7.00
	3rd		15.75		7.60
	4th		10.05		6.62
2002	1st	$	8.990	$	3.650
	2nd		10.400		4.560
	3rd		8.000		5.000
	4th		6.230		3.520

There were 219 stockholders of record of our common stock as of March 8, 2004. In addition, we estimate that there were approximately 7,000 holders of our common stock at March 8, 2004, who held shares in "street name." We have not paid cash dividends to date, and management anticipates that all future earnings will be retained for development of our business.

The following table sets forth information about the Company's common stock that may be issued under all of the Company's existing equity compensation plans as of December 31, 2003, including the 1993 Stock Option Plan, the 1996 Stock Awards Plan and the 2001 Employee Stock Purchase Plan.

The selected statements of operations data as of December 31, 2003, 2002 and 2001 and balance sheet data as of December 31, 2003 and 2002 set forth below have been derived from our audited financial statements included as Exhibit 13 to this Annual Report on Form 10-K. The selected statements of operations data as of December 31, 2000 and 1999 and balance sheet data as of December 31, 2001, 2000 and 1999 set forth below have been derived from our audited financial statements that have not been included in this Annual Report on Form 10-K. Our historical financial data is not necessarily indicative of future results and should be read in conjunction with the financial statements and notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Annual Report on Form 10-K.

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

Since our inception in January 1991, we have been engaged in the development of hemodialysis products and services for patients suffering from ESRD. We have 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 frequent hemodialysis at alternate sites (such as their own homes) and to thereby improve clinical outcomes, reduce total ESRD treatment costs and enhance the quality of life of patients. During the quarter ended September 30, 2002, we commenced commercial activities and are no longer considered to be in the development stage. We have not been profitable since we commenced operations and we expect to incur additional losses in the foreseeable future.

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

We recognize revenue in accordance with Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition, and its related interpretations. Revenue is recognized when the following conditions exist: (1) there is persuasive evidence of an arrangement, (2) the product has been delivered and installed or services and supplies have been provided to the customer, (3) the sales price is fixed or determinable and (4) collectability is reasonably assured.

During the quarter ended September 30, 2003, we adopted Emerging Issues Task Force (EITF) Issue No. 00-21, Accounting for Revenue Arrangements with Multiple Deliverables, which did not have an impact on our financial position, results of operations or cash flows.

We recognize revenue from product sales at the time of installation of the PHD System. Services and supplies are sold to customers in a monthly service agreement, not dependent on service time incurred or materials used. Services and supplies revenue is recognized uniformly over the term of the agreement.

We also lease the PHD System to customers on a short-term basis (12 months or less) and long-term basis (up to 24 months) and recognize revenue on these contracts on a straight-line basis over the lease term. We have no contracts with distributors and sell our product directly to our customers through our own sales force.

We are required to make certain estimates and assumptions that affect the amounts recorded as accrued liabilities and contingencies. We base our estimates on historical experience and on various other factors such as changing business conditions and management expectations, that we believe to be reasonable to determine the amount of accrued liabilities and contingencies to be recorded. If actual results differ from these estimates, additional expenses might be recorded.

We record our net deferred tax assets in the amount that we expect to realize based on projected future taxable income. In assessing the appropriateness of our valuation, assumptions and estimates are required such as our ability to generate future taxable income. In the event that we were to determine that we would be able to realize deferred tax assets in the future in excess of our net recorded amount, an adjustment to the deferred tax asset would increase our income in the period such determination was made. Given our historical losses and uncertainty with respect to our ability to generate taxable income, we have established a full valuation allowance at December 31, 2003 and 2002 to reduce the net deferred tax asset to zero.

The following table reflects a summary of our contractual cash obligations as of December 31, 2003:

Contractual Cash Obligations	Total			1-3 years	4-5 years
Operating Leases	$	1,204,755	$	438,610	$	766,145		-0-
Royalties	$	1,231,421	$	253,750	$	750,000	$	227,671
Purchase Obligations	$	5,259,000	$	5,259,000		- -0-		- -0-

Total Contractual Cash Obligations	$	7,695,176	$	5,951,360	$	1,516,145	$	227,671

We do not have any off-balance sheet arrangements, as such term is defined in recently enacted rules by the SEC, that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.

Certain statements in this Annual Report on Form 10-K and in future filings made by us with the Securities and Exchange Commission and in our written and oral statements made by or with the approval of an officer of ours 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 we intend 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 us or on our behalf. These forward-looking statements reflect our views as of the date they are made with respect to future events and financial performance, but are subject to many uncertainties and factors that may cause our actual results to be materially different from any future results expressed or implied by such forward-looking statements. Factors that could cause such a difference include, but are not limited to, the following: (i) uncertainty about the acceptance of the PHD System by both potential users and purchasers, including without limitation

patients, clinics and other health care providers; (ii) risks related to uncertain unit pricing and product cost, which may not be at levels that permit us to be profitable; (iii) market, regulatory, reimbursement and competitive conditions; (iv) risks related to a failure to meet additional development and manufacturing milestones, including, without limitation, cost reduction efforts, for the PHD System on a timely basis, (v) our ability to obtain sufficient capital on acceptable terms to run our business; (vi) risks inherent in relying on a third party to manufacture the PHD System; (vii) changes in QSR requirements; and (viii) risks related to the disposition of our common stock by Durus Life Sciences Master Fund, Ltd. and its affiliates.

The forward-looking statements made in this report speak only as of the date that they are made. We do not undertake to publicly update or revise our forward-looking statements even if experience or future changes make it clear that any projected results or events expressed or implied therein will not be realized.

Net loss for the year ended December 31, 2003 was $22.3 million ($0.79 per share), compared with $15.7 million ($0.65 per share), for the year ended December 31, 2002.

Our cost to manufacture the PHD system exceeds its selling price, and our cost to service and supply active machines on a per-unit basis exceeds the per-unit revenue generated by those machines. The first full year in which we recorded sales was 2003. As volumes increased from seven active machines at year-end 2002 to 67 active machines at year-end 2003, our net loss also increased. We completed cost reductions to the PHD System in late 2003 that reduced the cost of the machine from approximately $60,000 to approximately $45,000. We plan to reduce the cost to below the selling price of approximately $40,000 by the end of 2004. We expect to rely primarily on reductions in the production and service costs of the PHD System in order to realize a positive gross margin on sales. We continue to work diligently to achieve manufacturing and service cost reductions on the PHD System. However, no assurance can be given that such cost reduction plans or efforts will be successful, or that we will be able to achieve a positive gross margin on product sales or service of the PHD System in the future.

Clinic Partnership Agreements. We added 23 clinic partnership agreements in the year ended December 31, 2003, bringing the total number of signed partnership agreements to 30. A typical clinic relationship may include an initial market assessment of the PHD System and allows a clinic to lease PHD Systems on a long-term basis or purchase multiple units over time, with the additional option to purchase service and supplies at an additional charge. A customer may also enter into a short-term rental agreement with the expectation that a long-term lease or purchase arrangement will follow. The clinics and we will jointly determine the number of PHD Systems that a clinic buys, leases or rents over time. For reimbursement, Medicare requires that the clinic be home certified. We provide training to the clinic, which then provides training to patients. We have technicians available to support clinics or patients 24 hours a day, seven days a week.

Revenue. For the year ended December 31, 2003, revenue was $1.5 million, a 400% increase from revenue of $0.3 million for the year ended December 31, 2002. Product revenue of $1.2 million resulted primarily from the sale or lease of 28 PHD Systems. This is an increase of $0.9 million, or 300%, over 2002 when seven machines were sold.

Twenty-six of the product sales recorded in fiscal 2003 were for PHD Systems sold in the United States. Two sales were made in the United Kingdom. The sales recorded were made pursuant to an agreement with a third party leasing provider or through direct sales to customers.

We also recognized revenue under short-term and long-term operating leases in 2003. We placed 24 units under operating leases, 23 in the United States and one in the United Kingdom. We maintain ownership of the units and classify them as fixed assets. Depreciation expense is recorded monthly.

Service and supplies sold during fiscal 2003 specifically relate to the PHD Systems in use. Service and supply revenue is contracted under a separate agreement with a dialysis center at an established monthly amount. Supplies, such as blood tubing sets, dialyzers and acid and bicarbonate preparations, are required to perform dialysis treatments. Service on the PHD System is for scheduled and unscheduled maintenance and repairs, and is provided by our service technicians 24 hours a day, seven days a week. Service and supplies revenue totaled $299,000 for fiscal 2003, an increase of $277,000, or 1259%, from $22,000 in 2002. The increase in revenue is attributed to the growth in product placement and service and supply agreements.

We are not dependent upon reimbursement from insurance providers as a source of revenue. Rather, we generate revenue from dialysis centers, which provide dialysis services through the use of the PHD System. The dialysis center is reimbursed on a per treatment basis by the insurance provider. Accordingly, reimbursement rates may influence customers' demand for our product and our pricing of the PHD System and related supplies and service.

Cost of sales. Total cost of sales for fiscal 2003 was $5.9 million compared to $2.3 million in fiscal 2002, an increase of 156%. Product cost of sales for 2003 were $3.1 million compared to $1.7 million in 2002, an 82% increase. The increase is due to additional machines produced and sold during 2003. Specifically, 127 machines were produced in 2003 and 71 machines were produced during 2002. Included in product cost of sales for 2003 is an inventory adjustment in the amount of $1.4 million, in order to value the PHD machines in inventory at the lower of cost or market. The 2002 inventory cost adjustment was $1.3 million. While the number of units produced has increased, the production cost per unit decreased during 2003.

Service and supplies costs were $2.8 million in 2003, a 367% increase from $0.6 million in 2002. The increase is due to additional units in service during the current year compared to the prior year. The majority of these costs are for field service personnel to install and service the PHD machines and for clinical support staff necessary to train the customers' nursing staff.

Research and development expenses. For the year ended December 31, 2003, research and development expenses increased 16% to $6.7 million from $5.8 million for the year ended December 31, 2002. The increase of $0.9 million in 2003 was primarily attributable to the donation of two PHD units to be used for clinical research and costs associated with improving PHD performance.

Sales and marketing expenses. During 2003, sales and marketing expenses increased 92% or $2.3 million, to $4.8 million in 2003, from $2.5 million in 2002. The increase is attributable to personnel additions, advertising and marketing promotions in 2003 associated with the scaling up of the commercialization of the PHD System.

Advertising costs are expensed as incurred. Advertising expense for the years ended December 31, 2003, 2002 and 2001 was $608,000, $223,000 and $91,000, respectively.

General and administrative expenses. For the year ended December 31, 2003, general and administrative expenses increased $1.0 million to $6.7 million, an 18% increase. We incurred approximately $700,000 in legal and advisory costs related to the Durus situation in 2003. The remaining increase is primarily a result of personnel additions necessary to support commercialization efforts.

Interest income. For the year ended December 31, 2003, interest income was $0.3 million, unchanged from the year ended December 31, 2002. While average cash balances were higher in 2003 than in 2002, average interest rates were lower during 2003.

Net loss for the year ended December 31, 2002 was $15.7 million ($0.65 per share), compared with $17.2 million ($0.94 per share), for the year ended December 31, 2001. The factors contributing to the decrease in net loss are explained below.

Revenue. For the year ended December 31, 2002, revenue was $0.3 million compared to no revenue for the year ended December 31, 2001. Product revenue of $277,000 resulted primarily from the sale of seven PHD Systems. Service and supplies revenue totaled $22,000 for fiscal 2002.

The product sales recorded in fiscal 2002 were for PHD Systems sold in the United States. The sales recorded were made pursuant to an agreement between with a third party leasing provider (4 units) and through direct sales to two customers (3 units).

Service and supplies sold during fiscal 2002 specifically relate to the PHD Systems placed during the year. Service and supply revenue is contracted under a separate agreement with a dialysis center at an established monthly amount. Supplies, such as blood tubing sets, dialyzers and acid and bicarbonate solutions, are required to perform dialysis treatments. Service on the PHD System is for scheduled and unscheduled maintenance and repairs and is provided by our service technicians 24 hours a day, seven days a week.

Cost of sales. Total cost of sales for fiscal 2002 was $2.3 million compared to no cost of sales in fiscal 2001. Product cost of sales for 2002 was $1.7 million and service and supplies costs were $0.6 million. Included in product cost of sales is an inventory adjustment of $1.3 million, in order to value the PHD machines in inventory at the lower of cost or market.

Service and supplies costs for the year ended December 31, 2002 were $0.6 million compared to no service and supplies costs for the year ended December 31, 2001. The majority of these costs are for field service personnel to install and service the PHD machines and for clinical support staff necessary to train the customers' nursing staff during the early phases of the product launch.

Research and development expenses. For the year ended December 31, 2002, research and development expenses decreased to $5.8 million from $10.9 million for the year ended December 31, 2001. The decrease of $5.1 million in 2002 was attributable to reduced research and development activities due to receipt of FDA approval in March 2002 and our related shift in focus from product development to commercialization and sales activities.

Sales and marketing expenses. During 2002, sales and marketing expenses increased $0.7 million, from $1.8 million in 2001 to $2.5 million in 2002. The increase is attributable to personnel additions and other costs in 2002 associated with the scaling up of the commercialization of the PHD System.

General and administrative expenses. For the year ended December 31, 2002, general and administrative expenses increased $0.6 million to $5.7 million. The increase is primarily a result of personnel additions necessary to support the commercialization efforts.

Interest income. For the year ended December 31, 2002, interest income was $0.3 million, compared with $0.5 million for the year ended December 31, 2001, a decrease of $0.2 million. The decrease is primarily attributable to lower interest rates on investments and our use of cash and cash equivalents to fund operations during 2002.

We have financed our operations to date primarily through public and private sales of equity securities. At December 31, 2003, we had cash and cash equivalents of $15.4 million, short-term investments of $4.8 million, working capital of $20.4 million and restricted long-term investments of $0.6 million. We believe that inflation generally has not had a material impact on our operations or liquidity to date.

Net cash used in operating activities was $21.4 million in fiscal 2003 compared to $16.2 million in fiscal 2002 and $18.3 million in fiscal 2001. The increase in 2003 compared to 2002 is primarily due to increased expenditures relating to commercialization and an increase in inventory in anticipation of increased sales. The increase in inventory of $3.3 million in 2003 compared to 2002 is attributable to the production of Phase II PHD machines during the last quarter of 2003, and an increase throughout the year of parts and consumables inventory required to service additional machines in use. Accounts payable also increased $3.0 million in 2003 compared to 2002 due to increased PHD production in the last quarter of 2003. Payment for these machines was not made until 2004. Accrued and other liabilities increased in by $0.6 million compared to 2002. This increase is due to an increase in accrued vacation and bonuses relating to 23 additional employees at December 31, 2003 compared to December 31, 2002. Other sources and uses of cash were consistent in 2003 compared to 2002.

Net cash provided by investing activities was $4.2 million in fiscal 2003 compared to cash used of $9.8 million in fiscal 2002. In 2002, we had increased our investments in marketable securities, primarily as a result of a private placement of common stock in May 2002 that netted $16.5 million. In 2003, we used cash from investments to fund operations. Net cash provided by financing activities was $31.6 million and $16.7 million in fiscal years 2003 and 2002, respectively. Cash provided from financing activities resulted from the issuance of common stock.

On January 22, 2003, we entered into a $15 million equity line of credit arrangement with Kingsbridge Capital Limited ("Kingsbridge"). Pursuant to the terms of our Amended and Restated Common Stock Purchase Agreement with Kingsbridge, we could sell common stock at our sole discretion over a 24-month period on a "when and if needed" basis, and Kingsbridge was required under the terms of the agreement to purchase this stock, subject to the satisfaction of certain conditions contained in the agreement. We had no obligation to draw down all or any portion of the commitment. As partial consideration for entering into the equity line arrangement, we issued warrants to Kingsbridge to purchase 200,000 shares of our common stock at an exercise price of $5.75 per share. These warrants had a fair value of $881,000 using the Black Scholes pricing model.

We filed a registration statement with the SEC covering the equity line arrangement that was declared effective by the SEC on February 14, 2003. During 2003, we issued 2,489,408 shares of common stock to Kingsbridge under the equity line arrangement and received $15 million in proceeds. As of December 31, 2003, we had fully drawn the equity line with Kingsbridge and do not currently have a similar arrangement with Kingsbridge or any other entity.

On June 30, 2003 we issued 1,363,637 shares of common stock and a warrant to purchase 204,546 shares of stock at an exercise price of $13.75 per share to a single investor and received net proceeds of $13.8 million dollars. This warrant had a fair value of $1,007,745 using the Black Scholes pricing model. We also issued a warrant to purchase 136,364 shares of common stock at an exercise price of $15.00 per share to an investment banking firm that acted as placement agent in this transaction as partial consideration for their services. This warrant had a fair value of $622,908 using the Black Scholes pricing model. We offered the foregoing securities in a public offering.

We estimate that during fiscal 2004 we will spend approximately $30 million for operations, including U.S. and international commercialization activities of the PHD System. We expect to substantially increase our cash outlays related to manufacturing scale-up and commercialization of the PHD System. We believe that cash and short-term investments as of December 31, 2003 coupled with the $38.7 million from the Durus settlement already received through February 2004 are sufficient to finance our commercial and operating plans through December 31, 2004. Other than the $10 million settlement payment that we will receive from the Master Fund upon the effectiveness of the registration statement covering shares of our common stock held by the Master Fund and Artal that we are required to file under the registration rights agreement, we currently have no committed sources of, or other arrangement with respect to, additional financing. See "Legal Proceedings—Durus Settlement" for more information regarding the settlement and our receipt of funds as a result of it.

Our future funding needs will depend on many factors, including the timing and costs associated with continued progress in research and development, manufacturing scale-up, increased sales and marketing activities, the cost involved in filing and enforcing patent claims and the status of competitive products. In the event that our plans change, our assumptions change or prove inaccurate or we are unable to obtain financing on commercially reasonable terms, we could be required to seek additional financing. The additional capital required may not be available on acceptable terms or may not be available at all.

We have not generated taxable income to date. At December 31, 2003, the net operating losses available to offset future taxable income were approximately $134.7 million. Because we have experienced ownership changes, future utilization of the carryforwards may be limited in any one fiscal year pursuant to Internal Revenue Code regulations. The carryforwards expire at various dates beginning in 2012. As a result of the annual limitation, a portion of these carryforwards may expire before becoming available to reduce federal income tax liabilities. Given our historical losses and uncertainty with respect to our ability to generate taxable income, management has established a full valuation allowance at December 31, 2003 and 2002, respectively.

otherwise is effective at the beginning of the first interim period beginning after June 15, 2003, except for mandatorily redeemable financial for certain mandatorily redeemable financial instruments. For certain mandatorily redeemable financial instruments the Statement will be effective on January 1, 2005. The effective date has been deferred indefinitely for certain other types of mandatorily redeemable financial instruments. The adoption of SFAS No. 150 did not have a significant impact on our consolidated financial position or results from operations.

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

We have audited the accompanying consolidated balance sheets of Aksys, Ltd. and subsidiaries as of December 31, 2003 and 2002, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2003. These consolidated financial statements are the responsibility of Aksys, Ltd.'s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Aksys, Ltd. and subsidiaries as of December 31, 2003 and 2002, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States of America.

Aksys, Ltd. (the Company) was originally incorporated in Illinois on January 18, 1991. In March 1993, the Company merged into a Delaware corporation. During the quarter ended September 30, 2002, the Company commenced commercial activities and was no longer considered to be in the development stage. The Company is involved in the sale and marketing of its sole product, the PHD System. In addition, the Company continues devoting some of its efforts to product development. The Company operates in one industry segment and substantially all of its long-lived assets are located in the United States.

Certain reclassifications have been made to the 2001 and 2002 consolidated financial statements in order to conform to the 2003 presentation.

A summary of the significant accounting policies applied in the preparation of the accompanying consolidated financial statements of the Company follows:

On April 18, 1996 the Company established a subsidiary in Tokyo, Japan, and on August 8, 1998, the Company established a subsidiary in the United Kingdom. The consolidated financial statements include the financial statements of the Company and its wholly owned subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation.

Preparation of the consolidated financial statements requires management of the Company to make estimates and assumptions relating to the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenue and expenses during the period. Significant items subject to such estimates and assumptions include the carrying amount of property, equipment and intangible assets and valuation allowances for receivables, inventories and deferred income tax assets. Actual results could differ from those estimates.

Cash equivalents of $15,247,962 and $646,130 at December 31, 2003 and 2002, respectively, consist of certain highly liquid investments with maturities of less than three months when purchased.

Investments at December 31, 2003 and 2002 consist of debt securities that are classified as short-term (mature in no more than one year) or long-term (maturities beyond one year). Such investments are classified as held-to-maturity, as the Company has the ability and intent to hold them until maturity. Investments held-to-maturity are carried at amortized cost, adjusted for the amortization or accretion of discounts or premiums without recognition of gains or losses that are deemed to be temporary. Discounts and premiums are amortized or accreted over the lives of the related instruments

as an adjustment to yield. Interest income is recognized when earned. At December 31, 2003 and 2002, long-term investments include certificates of deposit to secure a letter of credit for the required security deposit on the Company's leased facilities. Fair value of investments is calculated as market value, based on quoted market prices, and approximates carrying value for all investments.

Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out method (FIFO) for all inventories.

Property, equipment and leased assets are recorded at cost and depreciated using the straight-line method over the estimated useful lives of the assets, ranging from three to seven years. Leasehold improvements are amortized over the life of the lease. The Company leases PHD Systems to customers on a short-term basis (12 months or less) or long-term basis (up to 24 months). Leased assets include PHD Systems currently on operating leases and machines held for leases. Expenditures for repairs and maintenance are charged to operations as incurred.

The Company adopted Financial Accounting Standards Board (FASB) Statement 144, Accounting for the Impairment of Long-Lived Assets, on January 1, 2002. The adoption of Statement 144 did not affect the Company's financial statements. In accordance with Statement 144, long lived assets, such as property, plant, and equipment, and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of would be separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. The assets and liabilities of a disposed group classified as held for sale would be presented separately in the appropriate asset and liability sections of the balance sheet.

The Company recognizes revenue in accordance with Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition, and its related interpretations. Revenue is recognized when the following conditions exist: (1) there is persuasive evidence of an arrangement, (2) the product has been delivered and accepted or services and supplies have been provided to the customer, (3) the sales price is fixed or determinable and (4) collectability is reasonably assured.

During the quarter ended September 30, 2003, the Company adopted Emerging Issues Task Force (EITF) Issue No. 00-21, Accounting for Revenue Arrangements with Multiple Deliverables, which did not have an impact on financial position, results of operations or cash flows. The Company recognizes revenue from product sales at the time of installation of the PHD System. Services and supplies are sold to customers in a monthly service agreement, not dependent on service time incurred or materials used. Services and supplies revenue is recognized uniformly over the term of the agreement.

The Company also leases the PHD System to customers on a short-term basis (12 months or less) and long-term basis (up to 24 months) and recognizes revenue on these contracts on a straight-line basis over the lease term. The Company has no contracts with distributors and sells its product directly to its customers through its own sales force.

Our largest customers, the Northwest Kidney Center, Dialysis Centers of Lincoln, Berkshire Medical Dialysis Center and Satellite Healthcare, Inc. accounted for 31%, 13%, 12%, and 11%, respectively, of our revenues (by dollar volume) for fiscal year 2003.

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to the difference between the financial statement carrying amount of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

Net loss per share is based on the weighted average number of shares outstanding with common equivalent shares from stock options and warrants excluded from the computation because their effect is antidilutive. At December 31, 2003, 2002 and 2001, the number of common equivalent shares from stock options and warrants excluded from the computation were 2,239,088, 1,800,653 and 1,465,984, respectively.

The Company applies the intrinsic value based method of accounting prescribed by Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations including FASB Interpretation No. 44, Accounting for Certain Transactions involving Stock Compensation, an interpretation of APB Opinion No. 25, to account for its fixed plan stock options. Under this method, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. FASB Statement No. 123, Accounting for Stock Based Compensation and FASB Statement No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure, an amendment of FASB Statement No. 123, established accounting and disclosure requirements using a fair value based method of accounting for stock based employee compensation plans. As permitted by existing accounting standards, the Company has elected to continue to apply the intrinsic value based method of accounting described above, and has adopted only the disclosure requirements of FASB Statement 123, as amended. The following table illustrates

the effect on net losses if the fair value based method had been applied to all outstanding and unvested awards in each period.

	2003		2002		2001
Net loss as reported	$	(22,282,478	)	$	(15,704,544	)	$	(17,241,626	)
Add: Total stock-based employee compensation expense determined under fair value based method for all awards		(1,779,380	)		(1,947,769	)		(1,603,144	)

Pro forma net loss	$	(24,061,858	)	$	(17,652,312	)	$	(18,844,770	)

Loss per share as reported	$	(0.79	)	$	(0.65	)	$	(0.94	)
Pro forma loss per share	$	(0.85	)	$	(0.73	)	$	(1.02	)

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liability and Equity. SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It also requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Many of those instruments were previously classified as equity. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003, except for mandatorily redeemable financial instruments. For certain mandatorily redeemable financial instruments, the Statement will be effective for the Company on January 1, 2005. The effective date has been deferred indefinitely for certain other types of mandatorily redeemable financial instruments. The adoption of SFAS No. 150 did not have a significant impact on the Company's consolidated financial position or results from operations.

Short-term investments consisted of commercial paper and U.S. Treasury securities at December 31, 2003, with a market value of $4,777,644 and amortized cost of $4,770,962. Short-term investments consisted of commercial paper, corporate bonds and U.S. Treasury securities at December 31, 2002 with a market value of $10,569,469 and amortized cost of $10,555,978.

Inventories at December 31, 2003 and December 31, 2002, respectively, are as follows:

	December 31, 2003		December 31, 2002
PHD machines—finished goods	$	4,780,000	$	2,200,000
PHD machines spare parts		918,557		274,686
Consumables		252,354		162,478
Raw materials		44,527		44,527

	$	5,995,438	$	2,681,691

The cost of producing the PHD System is currently in excess of its market price. During the year ended December 31, 2003 and 2002, an inventory adjustment was recorded as product cost of sales in the amount of $1,431,079 and $1,322,197, respectively, in order to value the PHD machines produced and purchased during the year in inventory at the lower of cost or market.

Property, equipment and leased assets at December 31, 2003 and 2002, respectively, are as follows:

Leased assets at December 31, 2003 were $1,237,792 with related accumulated depreciation of $105,259. At December 31, 2002 leased assets were $280,000 with accumulated depreciation of $1,333.

On January 22, 2003, the Company entered into a $15 million equity line of credit arrangement with Kingsbridge Capital Limited ("Kingsbridge"). This arrangement superceded a similar arrangement entered into between the Company and Kingsbridge on October 15, 2002. Pursuant to the terms of the Amended and Restated Common Stock Purchase Agreement between the Company and Kingsbridge, the Company could sell common stock at its sole discretion over a 24-month period on a "when and if needed" basis, and Kingsbridge was required under the terms of the agreement to purchase this stock, subject to the satisfaction of certain conditions contained in the agreement. During the year ended December 31, 2003, the Company has issued 2,489,408 shares of common stock to Kingsbridge under the equity line arrangement and received $15.0 million in proceeds. As of December 31, 2003, the Company had fully drawn the equity line with Kingsbridge and does not currently have a similar arrangement with Kingsbridge or any other entity.

On June 30, 2003, the Company issued 1,363,637 shares of common stock to a single investor and received net proceeds of $13.8 million. In addition, the Company issued a warrant to purchase 204,546 shares of stock at an exercise price of $13.75 per share. This warrant had a fair value of $1,007,745 using the Black Scholes pricing model. The Company also issued a warrant to purchase 136,364 shares of common stock at an exercise price of $15.00 per share to an investment banking firm that acted as placement agent in this transaction. This warrant had a fair value of $622,908 using the Black Scholes pricing model. The Company offered the foregoing securities in a public offering.

On May 10, 2002, the Company completed a private placement to institutional investors of 3,319,396 shares of its common stock, at a per share price of $5.29, resulting in gross proceeds of approximately $17.6 million. After offering costs, net proceeds to the Company were approximately

$16.5 million. The shares were sold with the assistance of U.S. Bancorp Piper Jaffray ("Piper Jaffray"). As the placement agent, Piper Jaffray received fees of approximately $1.1 million.

On December 14, 2001, the Company completed a private placement to several institutional investors of 3,195,230 shares of its common stock, at a per share price of $3.25, resulting in gross proceeds of approximately $10.4 million. The investors were also issued stock purchase warrants for the right to acquire an aggregate of 584,728 shares of common stock at an exercise price of $3.25 per share. These warrants had a fair value of approximately $2,047,000 at the date of issuance using the Black Scholes pricing model.

The shares were sold with the assistance of Piper Jaffray. As the placement agent, Piper Jaffray received fees of approximately $0.6 million and stock purchase warrants to acquire an aggregate of 159,762 shares of common stock at $4.90 per share, with a fair value of approximately $532,000 using the Black Scholes model.

The rights represented by these warrants may be exercised by the holder thereof, in whole or in part, by written notice of exercise delivered to the Company and by the surrender of these warrants (properly endorsed if required) at the principal office of the Company and upon payment to it by wire transfer of the purchase price for such shares. The Company agrees that the shares so purchased shall be and are deemed to be issued to the holder thereof as the record owner of such shares as of the close of business on the date on which these warrants shall have been surrendered and payment made for such shares as aforesaid.

During 2003 and 2002, the Company issued 28,764 and 6,240 shares of Common Stock at a fair value of $154,570 and $35,007 respectively, in exchange for services rendered.

The Company established a nonqualified stock option plan in 1993 (the "1993 Stock Option Plan"), which provides for the granting of options to purchase shares of the Company's common stock to the employees, scientific advisory board members, other associates, and members of the board of directors. In March 1996, the Company established the 1996 Stock Awards Plan (together with the 1993 Stock Option Plan, the "Stock Plans") to provide incentive awards to directors, employees and other key individuals in the form of stock options, SARs, restricted stock and performance grants. Options vest over various periods as set forth in agreements relating to a particular option grant and expire as determined by the board on an individual basis, but not to exceed 10 years. At the time the 1996 Stock Awards Plan was established, the 1993 Stock Option Plan was terminated, except with respect to options then outstanding. At December 31, 2003, 1,837,074 shares of common stock have been reserved for issuance under the Stock Plans, including 497,322 shares available for future grants under the 1996 Stock Awards Plan.

During 2001, the Company issued a total of 3,315 non-qualified stock options at a price below fair market value at the time of the option awards, resulting in a non-cash compensation charge, recorded in operating expenses, of approximately $41,000.

The per share weighted-average fair value of stock options granted during 2003, 2002 and 2001 was $4.63, $5.16 and $7.55, respectively, on the dates of grant using the Black Scholes option-pricing model with the following weighted-average assumptions: 2003—expected dividend yield of 0%, expected volatility of 65.05% risk-free interest rate averaging 2.1% and an expected life of 5 years; 2002—

expected dividend yield of 0%, expected volatility of 131%, risk-free interest rate averaging 1.20% and an expected life of 5 years; 2001—expected dividend yield of 0%, expected volatility of 113%,risk-free interest rate of 3.89%, and an expected life of 5 years.

The following table summarizes information about stock options outstanding at December 31, 2003:

In 1995 the Company adopted a tax-qualified employee savings and retirement plan (the "401(k) Plan") covering all full-time employees. The 401(k) Plan provides a match of 100% of the employees' contributions up to 2% of an employee's salary. Total expense for the years ended December 31, 2003, 2002 and 2001 was $85,370, $62,521 and $89,214, respectively.

On March 4, 1996, the Company established the 1996 Employee Stock Purchase Plan (the "1996 Stock Purchase Plan") covering all employees. The 1996 Stock Purchase Plan allowed employees to purchase Company common stock at a 15% discount to market, based on eligible payroll deductions.

On April 26, 2001, the Company established the 2001 Employee Stock Purchase Plan (the "2001 Stock Purchase Plan") covering all employees. The 2001 Stock Purchase Plan superceded the Company's 1996 Stock Purchase Plan. The 2001 Stock Purchase Plan allows employees to purchase Company common stock at a 15% discount to market, based on eligible payroll deductions. There are four plan periods in each calendar year, with each such plan period corresponding with a calendar quarter. Market price is calculated as the fair market value of the common stock as of the last trading day of such plan period less the discount to the market. A total of 250,000 shares of common stock were reserved for issuance under the 2001 Stock Purchase Plan. Total shares issued based on payroll withholdings for the years ended December 31, 2003, 2002 and 2001 were 16,394 (4,071 issued January 2004), 24,358 (6,645 issued January 2003) and 40,441 (7,126 issued January 2002), respectively. As of December 31, 2003, there are 172,878 shares remaining under the 2001 Stock Purchase Plan.

On October 28, 1996 the Company adopted a stockholder rights plan and declared a dividend to be made to stockholders of record on November 8, 1996 of one preferred share purchase right on each outstanding share of the Company's common stock. The stockholder rights plan was adopted to preserve for the stockholders of the Company the long-term value of the Company in the event of a takeover of the Company or the purchase of a significant block of the Company's common stock and to protect the Company and its stockholders against coercive takeover tactics. Prior to the time the rights become exercisable, the rights will be evidenced by the certificates representing shares of common stock

of the Company and will be transferable only in connection with the transfer of shares of common stock. If a person acquires 15% of the Company's common stock the rights will then be exercisable, and each right will entitle the holder thereof to purchase for an exercise price of $85.00 (subject to adjustment), shares of the Company's common stock having a market value of twice such exercise price, valued as of the date of occurrence of such triggering event, subject to the right of the Company to exchange the rights for common stock of the Company on a one-for-one basis. The Company will be entitled to redeem the rights at $0.01 per right at any time before public disclosure that a 15% position has been acquired. The rights will expire on October 28, 2006, unless previously redeemed or exercised. As part of the settlement agreement with the Durus funds, as discussed in Note 12, the Company has amended its Rights Agreement to conditionally exempt the Durus funds therefrom.

No Federal or state income taxes have been provided for in the accompanying financial statements because of net operating losses incurred to date and the establishment of a valuation allowance equal to the amount of the Company's deferred tax assets. At December 31, 2003, the Company has net operating loss and research and development credit carryforwards for Federal income tax purposes of approximately $134.7 million and $2.9 million, respectively, which expire between 2012 and 2023. Changes in the Company's ownership may cause annual limitations on the amount of loss and credit carryforwards that can be utilized to offset income in the future.

		2003			2002
Deferred tax assets:
	Net operating loss carryforwards	$	53,897,000		$	46,175,000
	Research and development credit carryforwards		2,870,000			2,870,000
	Other		603,000			721,000

Total deferred tax assets			57,370,000			49,766,000
Less valuation allowance			(57,370,000	)		(48,603,000	)

Net deferred tax assets			—			1,163,000
Deferred tax liability			—			(1,163,000	)
Net deferred taxes		$	—			—

Given the Company's historical losses and uncertainty with respect to the Company's ability to generate taxable income, management has established a valuation allowance of $57,370,000 at December 31, 2003 and $48,603,000 at December 31, 2002 to reduce the net deferred tax assets to zero. The increase in the valuation allowance was $8,767,000 and $5,126,000 in 2003 and 2002, respectively.

The Company entered into a contract manufacturing agreement with one of its vendors to produce PHD Systems. The Company has a contractual obligation to purchase raw materials and final

assemblies that are within 13 weeks of the scheduled delivery date. At December 31, 2003 there were 90 units on order with a delivery date in the first 13 weeks of 2004 for an estimated total cost of $4,059,000. In addition, the Company is obliged to pay the vendor for raw materials that have been purchased on the Company's behalf, which is estimated to be $1,200,000 as of December 31, 2003.

During September 1996, the Company entered into a new lease agreement, accounted for as an operating lease, for its offices and laboratory research facilities. The term of the lease is ten years expiring in September 2006. The Company also leases certain equipment under operating leases. Included in both research and development expenses and general and administrative expenses for the years ended December 31, 2003, 2002 and 2001 were $656,490, $654,743 and $619,645, respectively, for rent expense under operating leases for certain equipment and the Company's offices and research facilities. The Company has commitments for future minimum rent payments under these lease agreements, as follows:

The Company has been granted licenses to use certain technology in the development and sale of its products. Such license agreements provide for royalty payments to be made by the Company based on net sales over the life of any application based on the patent rights. Minimum required payments under these agreements are as follows:

2004	$	253,750
2005		250,000
2006		250,000
2007		250,000
2008		177,671
All subsequent years		247,920

Total royalty payments for the years ended December 31, 2003, 2002 and 2001 were $215,000, $185,000, and $155,000 respectively.

In May 2001, the Company signed an engagement letter with an investment banking firm to raise funding through the sale of common stock. A dispute arose as to whether a fee was payable under this letter, and litigation ensued. In March 2003, the Company and the investment banking firm settled this litigation. The Company agreed to pay $75,000 upon settlement and an additional $75,000 in November 2003. The Company also issued the investment banking firm 26,500 shares of its common stock upon settlement and agreed to pay the investment banking firm future advisory fees of up to

$160,000 in connection with future financings. All payments due in 2003 were made, and no liability was recorded in the Company's consolidated financial statements as of December 31, 2003.

In the ordinary course of business, the Company is party to employment and other legal actions as plaintiff or defendant. While management cannot determine with certainty the ultimate outcome of such lawsuits, management believes that the Company is not involved in any current litigation proceedings which, should there be an unfavorable disposition, either individually or in aggregate, would have a material adverse effect on the Company's consolidated financial position, results of operations or liquidity.

In April 2003 the Company learned that Durus Life Sciences Master Fund Ltd. (the "Master Fund"), Scott Sacane, Durus Capital Management, LLC ("Durus Capital"), Durus Capital Management (N.A.), LLC ("Durus Capital (N.A.)") and Artal Long Biotech Portfolio LLC ("Artal"), collectively known as "defendants", had accumulated a common stock position in excess of the 15% ownership level that would potentially trigger the Company's Shareholder Rights Agreement. The Company then entered into an agreement with Mr. Sacane and Durus Capital relating to shares of common stock they then controlled through the Master Fund (the "April 2003 Agreement").

Pursuant to the terms of the April 2003 Agreement, Mr. Sacane and Durus Capital represented that they: (1) then owned 5,238,248 shares (approximately 19.5%) of the outstanding common stock, (2) crossed the 15% ownership level inadvertently, and (3) held this investment in the Company in the ordinary course of business, and not for the purpose or with the effect of changing or influencing the control of the Company. In addition, they agreed to reduce their holdings to below 15% over a two-year period and not to purchase any additional shares of Aksys common stock until such time as their ownership was less than 15% of the shares then-outstanding (and thereafter not in excess of 15% without the consent of the board of directors).

After the close of business on July 24, 2003, Mr. Sacane informed the Company that he, together with the other defendants, had accumulated in excess of 19 million shares of common stock in transactions described as inadvertent. In a Schedule 13D filed with the SEC on July 28, 2003, the defendants disclosed that they owned 21,831,218 shares, or approximately 73% of the then-outstanding common stock. The Master Fund owned 21,333,118 of these shares and Artal owned 498,100 shares.

In August 2003, the Company filed a lawsuit against the defendants in United States District Court for the District of Connecticut. The lawsuit sought injunctive relief and damages arising from the defendants' alleged violation of federal securities laws and the alleged breach of the April 2003 Agreement. In addition, the lawsuit sought recovery of short-swing trading profits under Section 16(b) of the Securities Exchange Act of 1934.

In January 2004, the Company settled the Section 16 claim against the defendants for $4.6 million. In February 2004 the Company settled all other claims against the defendants, and received as part of that settlement an additional $34.1 million in cash, of which $16.1 million was in exchange for unsecured subordinated promissory notes.

The Company believes that its cash, cash equivalents and short-term investments of $20.2 million as of December 31, 2003, and the $38.7 million received in January and February 2004, as a result of the Durus settlement described in Note 12 above, are sufficient to finance the Company's operations through December 31, 2004.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

As required by Rule 13a-15 under the Securities Exchange Act, as of the end of the period covered by this report, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures. This evaluation was carried out under the supervision and with the participation of our management, including the President and Chief Executive Officer and the Senior Vice President and Chief Financial Officer. Based on this evaluation, the President and Chief Executive Officer and Senior Vice President and Chief Financial Officer concluded that our disclosure controls and procedures are effective.

Disclosure controls and procedures are designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act is accumulated and communicated to management, including the President and Chief Executive Officer and Senior Vice President and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

There have been no changes our internal controls over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our control over financial reporting.

The board of directors presently consists of five directors divided into three classes, with each class serving a three-year term. The stockholders elect approximately one-third of the board of directors each year. Our board members are as follows:

With the exception of Mr. Dow, our President and Chief Executive Officer, our board of directors has determined that each of its members meet the independence requirements of the Nasdaq Stock Market.

Our executive officers are elected by and serve at the discretion of the board of directors. Our executive officers are as follows:

Our board of directors has three standing committees: the Audit Committee, the Compensation Committee, and the Nominating Committee.

Audit Committee. The Audit Committee's functions, among others, are to appoint the Company's independent auditor and set the compensation and oversee the work performed by the independent auditor; consider the adequacy of the Company's internal controls and review any proposed corrective actions; review and monitor the Company's compliance with legal and regulatory requirements; and discuss with management and the independent auditors the Company's annual and quarterly financial statements and key accounting and/or reporting matters. The Audit Committee currently consists of Messrs. Egen, Meyer and Tresnowski, with Mr. Meyer serving as chairman of the committee and as "audit committee financial expert" as defined under SEC rules promulgated under the Sarbanes-Oxley Act of 2002. All current members of the Audit Committee are independent within the meaning of the regulations adopted by the SEC under the Sarbanes-Oxley Act of 2002 and the requirements of the Nasdaq Stock Market regarding audit committee membership. A copy of the Audit Committee's charter is available on our website at www.aksys.com.

Compensation Committee. The Compensation Committee is responsible for, among other things, approving overall compensation policy; determining and approving the compensation of the chief executive officer and other senior officers; approving appointments and promotions of senior officers and key employees; and administering the Company's stock-based, profit-sharing and incentive compensation plans, and grants of awards thereunder. The Compensation Committee currently consists of Messrs. Egen, Rountree and Tresnowski, with Mr. Roundtree serving as chairman of the committee. All current members of the Compensation Committee are independent within the meaning of the requirements of the Nasdaq Stock Market regarding Compensation Committee membership. A copy of the Compensation Committee's charter is available on our website at www.aksys.com.

Nominating Committee. The Nominating Committee is responsible for, among other things, establishing criteria for board membership; considering, recommending and recruiting candidates to fill new positions on the board; reviewing candidates recommended by stockholders; and recommending the director nominees for approval by the board and the stockholders. The Nominating Committee currently consists of Messrs. Egen, Meyer, Rountree and Tresnowski, with Mr. Tresnowski serving as chairman of the committee. All current members of the Nominating Committee are independent with the meaning of the requirements of the Nasdaq Stock Market regarding Nominating Committee membership. A copy of the Nominating Committee's charter is available on our website at www.aksys.com. The Nominating Committee does not have a written policy regarding stockholder nominations for director candidates. The committee will, however, consider candidates for director nominees put forward by stockholders. Our bylaws establish an advance notice procedure with regard to certain matters, including stockholder nominations for directors, to be brought before a meeting of stockholders at which directors are to be elected. In the case of an annual meeting, notice must be received by the Secretary of the Company not less than 60 days nor more than 90 days prior to the first anniversary of the preceding year's annual meeting. In the case of a special meeting of stockholders at which directors are to be elected, notice of a stockholder nomination must be received by the Secretary of the Company no later than the close of business on the 10^th day following the earlier of the day on which notice of the date of the meeting was mailed or public disclosure of the meeting was made. A nomination will not be considered if it does not comply with these notice procedures and any additional requirements set forth in our bylaws. Please note that these requirements are separate from the SEC's requirements to have a stockholder nomination or other proposal included in our proxy statement.

Section 16(a) of the Exchange Act requires the Company's directors and officers, and persons who own more than 10% of the Common Stock, to file reports of ownership and changes in ownership of shares of the Common Stock with the SEC. Directors, officers and greater than 10% stockholders are required by SEC regulations to furnish the Company with copies of all Section 16(a) reports they file.

Based solely upon a review of the copies of such reports received by it, or written representations that no other reports were required, the Company believes that, from January 1, 2003 through December 31, 2003, its directors, executive officers and greater than 10% beneficial owners complied with the reporting requirements under Section 16(a), with the exception of (1) Mr. Rohrer, who filed a report on June 6, 2003 with respect to a grant of options to purchase 30,000 shares of common stock on May 27, 2003, and (2) Durus Capital Management LLC, who filed reports on July 31, 2003 with respect to several purchases and sales of common stock, which reports were not timely filed.

All of Aksys' employees, including its Chief Executive Officer, Chief Financial Officer and Corporate Controller, as well as its Directors, are required to comply with the Company's Standards of Business Ethics to ensure that the Company's business is conducted in a consistently legal and ethical manner. The Sarbanes-Oxley Act of 2002 requires companies to have procedures for the receipt, retention and treatment of complaints regarding accounting, internal accounting controls or auditing matters and to allow for the confidential, anonymous submission by employees of concerns regarding questionable accounting or auditing matters. Aksys currently has these procedures in place, which are set forth in the Standards of Business Ethics. The full text of the Aksys Ethics Guide, which includes the Standards of Business Ethics, is posted on the Company's web site, at www.aksys.com, under the "Corporate Information—Corporate Governance" captions. Aksys will disclose future amendments to, or waivers from, certain provisions of its Standards of Business Ethics for its Chief Executive Officer, Chief Financial Officer and Corporate Controller, if any, on its web site within five business days following the date of the amendment or waiver, or such earlier period of time that the SEC may later require.

The table below provides information relating to compensation for the Chief Executive Officer and the other highest paid executive officers of the Company earning $100,000 or more (collectively, the

"Named Executive Officers") during fiscal 2003. The amounts shown include compensation for services in all capacities that were provided to the Company.

	Annual Compensation	Long-Term Compensation Awards
Name and Principal Position	Year	Salary($)		Bonus($)		Other Annual Compensation($)	Securities Underlying Options(#)	All Other Compensation($)
William C. Dow President and Chief Executive Officer	2003 2002 2001	$ $ $	335,000 310,000 310,000		$ $ $	167,500 99,675 54,425	-0- - -0- - -0-	40,000 - -0- 22,000		-0- - -0- - -0-
Lawrence D. Damron(1) Sr. Vice President and Chief Financial Officer	2003 2002	$ $	248,000 160,000		$ $	71,136 36,000	- -0- - -0-	7,500 170,000		- -0- - -0-
Richard P. Goldhaber(2) Sr. Vice President and Chief Technical Officer	2003 2002 2001	$ $ $	233,750 224,400 220,000		$ $ $	65,031 87,231 9,670	- -0- - -0- - -0-	7,500 10,000 2,000	$	- -0- - -0- 17,156
Thomas F. Scully Sr. Vice President Operations and Manufacturing	2003 2002 2001	$ $ $	198,392 190,000 173,197		$ $	53,419 74,700 - -0-	- -0- - -0- - -0-	7,500 45,000 1,500		- -0- - -0- - -0-
Nancy S. Schmelkin(3) Sr. Vice President Global Marketing and Customer Care	2003 2002	$ $	175,833 37,575		$ $	55,200 4,599	- -0- - -0-	27,500 25,000	$	321 - -0-

The following table sets forth certain information with respect to stock options granted to the Named Executive Officers during the fiscal year ended December 31, 2003.

	Individual Grants
Name	Number of Securities Underlying Options Granted (#)	Percent of Total Options Granted to Employees in Fiscal 2003		Exercise Price (Per Share)(1)		Expiration Date(2)		Grant Date Value(3)
William C. Dow	40,000	16.5	%	$	5.61		01/31/13		$	128,400
Lawrence D. Damron	7,500	3.1			6.10		03/02/13			26,175
Richard P. Goldhaber	7,500	3.1			6.10		03/02/13			26,175
Thomas F. Scully	7,500	3.1			6.10		03/02/13			26,175
Nancy S. Schmelkin	2,500	1.0			6.10		03/02/13			8,725
Nancy S. Schmelkin	27,500	10.3			10.07		09/01/13			143,500

The following table sets forth information with respect to the Named Executive Officers concerning stock options held as of December 31, 2003.

Name	Number of Shares Acquired on Exercise	Value Realized	Number of Securities Underlying Unexercised Options at Fiscal Year-End (#) Exercisable/Unexercisable	Value of Unexercised In-the-Money Options at Fiscal Year-End (1) Exercisable/Unexercisable
William C. Dow	—	—	461,500/51,000	$	1,611,600/$96,300
Lawrence D. Damron	—	—	69,215/108,285	$	197,292/$197,116
Richard P. Goldhaber	—	—	80,979/23,521	$	51,245/$8,000
Thomas F. Scully	—	—	15,500/38,500	$	107,479/$98,229
Nancy S. Schmelkin	—	—	12,500/40,000	$	26,776/$73,526

The Company has entered into severance, confidentiality and non-competition arrangements with certain of its executive officers.

Mr. Dow's agreement provides for a non-competition period of two years following his resignation or termination by the Company for cause or for one year following termination by the Company without cause or due to disability. Severance payments are provided for in the event of termination without cause or due to a disability. Such severance payments equal Mr. Dow's aggregate base salary for the prior twelve months before termination. Customary ownership of intellectual property and confidentiality provisions are also contained in this agreement.

Mr. Damron's agreement provides for a non-competition period of one year following the date of the termination of his employment. Severance payments are provided for in the event of termination without cause or due to a disability. Such severance payments equal Mr. Damron's aggregate base salary for the prior twelve months before termination. Mr. Damron is also entitled to a lump sum payment equal to his aggregate base salary for the prior twelve months in the event that his position is eliminated after a change of control. Customary ownership of intellectual property and confidentiality provisions are also contained in this agreement.

Mr. Goldhaber's agreement provides for a non-competition period of one year following the date of the termination of his employment. Severance payments are provided for in the event of termination

without cause or due to a disability. Such severance payments equal Mr. Goldhaber's aggregate base salary for the prior six months before termination. Customary ownership of intellectual property and confidentiality provisions are also contained in this agreement.

Ms. Schmelkin's agreement provides for a non-competition period of one year following the date of the termination of his employment. Severance payments are provided for in the event of termination without cause or due to a disability. Such severance payments equal Ms. Schmelkin's aggregate base salary for the prior six months before termination. Customary ownership of intellectual property and confidentiality provisions are also contained in this agreement.

Mr. Scully's agreement provides for a non-competition period of two years following his resignation or termination by the Company for cause or for one year following termination by the Company without cause or due to disability. Severance payments are provided for in the event of termination without cause or due to a disability. Such severance payments equal Mr. Scully's aggregate base salary for the prior six months before termination. Customary ownership of intellectual property and confidentiality provisions are also contained in this agreement.

Effective January 1, 2003, the non-employee board members receive $1,000 for each board meeting they attend in person, or $500 for each board meeting they attend telephonically. The directors of the Company are also reimbursed for reasonable travel expenses incurred in attending board and board committee meetings. On the later of June 30 of each year or the day next following each annual meeting of stockholders of the Company, each non-employee director will receive an automatic option to purchase 8,000 shares of common stock. These options will vest and become exercisable in four equal installments on the first day of each calendar quarter that the director serves on the board of directors after the date of grant. Unless earlier terminated, forfeited, or surrendered pursuant to the plan, each option granted to non-employee directors will expire on the tenth anniversary date of the grant. In addition, a newly-elected non-employee director will also receive, upon his or her election to the board, an option to purchase 5,000 shares of common stock under our 1996 Stock Awards Plan.

On June 30, 2003, each non-employee director received an option to purchase 8,000 shares of common stock, at a strike price of $12.90. Those options vested and become exercisable in four equal installments on the first day of each calendar quarter that the director served on the board of directors after the date of grant. Unless earlier terminated, forfeited, or surrendered pursuant to the plan, each option granted to non-employee directors will expire on June 30, 2013.

The following Compensation Committee Report on Executive Compensation does not constitute soliciting material and should not be deemed filed or incorporated by reference into any other Company filing under Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent specifically incorporated. The material set forth below is a report submitted by the Compensation Committee regarding compensation policies and programs for executive officers for fiscal year 2003.

The management compensation program is designed to reward outstanding performance and results. The compensation philosophy and program objectives are directed by two primary guiding principles. First, the program is intended to provide fully competitive levels of compensation—at expected levels of performance—in order to attract, motivate and retain talented executives. Second, the program is intended to create an alignment of interests between the executives and stockholders such that a significant portion of compensation is directly linked to maximizing stockholder value.

In support of this philosophy, the executive compensation program is designed to reward performance that is directly relevant to the short-term and long-term success of the Company. As such, the Company attempts to provide both short-term and long-term incentive compensation that varies based on corporate and individual performance. To accomplish these objectives, the Compensation Committee has structured the executive compensation program with three primary underlying components: base salary, annual incentives and long-term incentives in the form of stock options. The following sections describe these elements of compensation and discuss how each component relates to the overall compensation philosophy.

The base salary program is based on a philosophy of providing base pay levels that are competitive with other early commercialization stage companies in the medical device industry. The Company periodically reviews its executive pay levels to ensure consistency with similarly positioned companies in such industry.

Annual salary adjustments are based on several factors: the general level of market salary increases, individual performance and long-term value provided to the Company, competitive base salary levels and the Company's overall results.

Annual bonuses are intended to (1) reward key employees based on Company and individual performance, (2) motivate key employees and (3) provide pay-for-performance cash compensation opportunities to participants. The criteria for bonus payments are based on the achievement of the specific development and Company milestones established by the Compensation Committee at the beginning of each fiscal year.

Long-term incentives are designed to focus the efforts of key employees on the long-term goals of the Company and to maximize total return to the stockholders of the Company. The Compensation Committee has relied solely on stock option awards to provide long-term incentive opportunities. Stock options align the interests of key employees and stockholders by providing value to the key employee through stock price appreciation only. Stock options issued to employees generally have a ten-year term before expiration and are fully exercisable within four years of the grant date.

In setting Mr. Dow's base salary and awarding his cash bonus for fiscal 2003, the Compensation Committee evaluated the same factors which it considers in establishing the salary levels and bonuses of the other executive officers of the Company. In addition, the Compensation Committee considered the status of Mr. Dow as the Company's most senior officer and the important role he has in achieving overall corporate goals. In granting stock options to Mr. Dow, the Compensation Committee sets no fixed guidelines, but takes into consideration his total compensation package and competitive compensation data, the long-term nature of stock options, overall corporate financial performance, his role in attaining those results, and the number of options previously granted, although no particular weighting is assigned to any factor.

Mr. Dow was awarded a base salary of $335,000 for fiscal 2003. The base salary awarded to Mr. Dow was set at a competitive level with respect to comparable companies. Mr. Dow also earned a bonus of $167,500 in 2003 in connection with the Company's achievement of milestones.

Section 162(m) of the Internal Revenue Code generally disallows deductions to public companies for executive compensation in excess of $1 million to the chief executive officer and other named executive officers. The Company's policy is to comply with the requirements of Section 162(m) and maintain deductibility for all executive compensation, except in circumstances where the Compensation Committee concludes on an informed basis, in good faith, and with the honest belief that it is in the best interest of the Company and the stockholders to take actions with regard to the payment of executive compensation which do not qualify for tax deductibility. In fiscal 2003, the Company did not pay compensation to any executive that was subject to Section 162(m).

Compensation Committee
Richard B. Egen
W. Dekle Rountree, Jr.
Bernard R. Tresnowski

None of the current members of the Compensation Committee is or has been an officer or employee of Aksys. None of the executive officers serves, or served in 2003, as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving on our board of directors or the Compensation Committee.

The following graph compares our cumulative total stockholder return since December 31, 1998 with the Nasdaq Total Return Index and an index of certain companies selected by the Company as comparative to the Company in that each is or recently has been a development stage manufacturer of medical devices. The graph assumes that the value of the investment in the common stock and each index was $100.00 on December 31, 1998, and assumes that all dividends paid were reinvested.

Comparison of Our Common Stock,
The Nasdaq Total Return Index and a Peer Group Index(1)

	12/31/98			12/31/00	12/31/01			12/31/03
Aksys, Ltd.	$	100	$	113	$	383	$	108	$	123	$	205
Nasdaq Total Return Index	$	100	$	186	$	113	$	89	$	61	$	91
Peer Group Index	$	100	$	184	$	207	$	301	$	224	$	276

Except as otherwise noted, the following table sets forth certain information as of March 8, 2004, as to the security ownership of those persons owning of record or known to the Company to be the beneficial owner of more than five percent of the voting securities of the Company and the security ownership of equity securities of the Company by (1) each of the directors of the Company, (2) each of the Named Executive Officers in the Summary Compensation Table and (3) all directors and Named Executive Officers as a group. All information with respect to beneficial ownership has been furnished by the respective director, executive officer or five percent beneficial owner, as the case may be. Unless otherwise indicated, the persons named below have sole voting and investment power with respect to the number of shares set forth opposite their names. Beneficial ownership of the common stock referenced in the following table (including those shares of common stock which were issuable pursuant to the exercise of options which vest within 60 days of March 22, 2004) has been determined for this purpose in accordance with the applicable rules and regulations promulgated under the Securities Exchange Act of 1934 (the "Exchange Act"). Except as indicated below, the address for each such person is c/o Aksys, Ltd., Two Marriott Drive, Lincolnshire, Illinois, 60069.

Name of Beneficial Owner	Beneficially Owned	Percentage Owned(1)
Durus Life Sciences Master Fund Ltd.(2)	21,331,118	71.6	%
William C. Dow(3)	490,364	1.6	%
Lawrence D. Damron(4)	95,692	*
Richard P. Goldhaber(5)	95,458	*
Thomas F. Scully(6)	33,024	*
Nancy S. Schmelkin(7)	12,500	*
Richard B. Egen(8)	85,500	*
Alan R. Meyer(9)	29,242	*
W. Dekle Rountree, Jr.(10)	88,500	*
Bernard R. Tresnowski(11)	53,250	*

All directors and executive officers as a group (9 persons)	983,530	3.3	%

The following table sets forth fees for professional services rendered by KPMG LLP to us for the audit of our annual financial statement for the years ended December 31, 2003 and 2002, and fees for other services rendered by KPMG during those periods.

Fees		2003		2002
Audit fees		$	149,130	$	112,300
Audit-related fees		$	125,710	$	63,443
Tax fees		$	10,800	$	19,860
All other fees			—		—

	Total	$	274,840	$	175,743

Audit Fees. Annual audit fees relate to services rendered in connection with the audit of the annual financial statement included in this report and the review included in our quarterly reports on Form 10-Q.

Audit-Related Fees. Audit-related fees include fees for consultations concerning financial accounting and reporting matters, including review of registration statements filed with the SEC.

Tax fees. Tax fees include fees for services rendered in connection with tax preparation and tax consultation services.

Under our pre-approval policies with respect to our independent auditor, the Audit Committee pre-approves all audit and non-audit services provided by our independent auditors prior to the engagement of the independent auditors for such services. The Chairman of the Audit Committee has the authority to approve any additional audit services and permissible non-audit services, provided the Chairman informs the Audit Committee of such approval at its next regularly scheduled meeting.

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 10th day of March, 2004.

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 10th day of March, 2004.

Delaware		36-3890205
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
Two Marriott Drive, Lincolnshire, IL		60069
(Address of Principal executive offices)		(Zip Code)

		Page No.
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	19
Item 4A	Risk Factors	20
PART II		30
Item 5.	Market for the Registrant's Common Stock and Related Stockholder Matters	30
Item 6.	Selected Financial Data	30
Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations	32
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	39
Item 8.	Financial Statements and Supplementary Data	40
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	55
Item 9A.	Controls and Procedures	55
PART III		57
Item 10.	Directors and Executive Officers of the Registrant	57
Item 11.	Executive Compensation	61
Item 12.	Security Ownership of Certain Beneficial Owners and Management	69
Item 13.	Certain Relationships and Related Transactions	70
Item 14.	Principal Accountant Fees and Services	70
PART IV		71
Item 15.	Exhibits, Financial Statement Schedules and Reports on Form 8-K	71
SIGNATURES		72
EXHIBIT INDEX		73

Drawback	Conventional Home Systems	Aksys PHD System
Complexity	Complicated equipment designed for operation only by trained personnel	Designed for ease of operation at home, including computerized, user-friendly interface.
Time and Effort	Difficult and time consuming to setup, operate, clean and maintain.	Fully automated, reducing operator involvement.
Cost of Consumables	Requires frequent replacement of blood circuit.	Integrated automatic disinfection system designed to enable safe and effective reuse of blood circuit.
Storage Requirements	Large volume of consumables and dialysate consumed each month.	Substantially fewer and smaller items consumed with each treatment.

Plan category	(a) Number of securities to be issued upon exercise of outstanding options, warrants or rights	(b) Weighted-average exercise price of outstanding option, warrants or rights		(c) Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
Equity compensation plans approved by security holders	1,433,850	$	6.7325	527,598
Equity compensation plans not approved by security holders	None		N/A	None

Total	1,433,850	$	6.7325	527,598

		Year Ended December 31,
		2003			2002(1)			2001			2000			1999
Consolidated Statement of Operations Data:
Revenues:
	Product	$	1,192,706		$	276,680		$	—		$	—		$	—
	Service and supplies		298,757			21,986			—			—			—
	Joint development income		—			—			—			3,434,809			9,609,313

Total Revenue			1,491,463			298,666			—			3,434,809			9,609,313

Cost of Sales:
	Product		3,076,841			1,685,562			—			—			—
	Service and supplies		2,786,941			577,478			—			—			—

Total Cost of Sales:			5,863,782			2,263,040			—			—			—

Operating costs and expenses:
	Research and development		6,690,581			5,792,446			10,882,796			14,541,873			15,909,993
	Sales and marketing		4,800,989			2,543,324			1,753,499			1,025,315			1,737,069
	General and administrative		6,676,665			5,699,356			5,121,223			4,738,737			4,258,162

	Total operating expenses		18,168,235			14,035,126			17,757,518			20,305,925			21,905,224

Operating loss			(22,540,554	)		(15,999,500	)		(17,757,518	)		(16,871,116	)		(12,295,911	)
Other income, net			258,076			294,956			515,892			1,159,961			997,642

Net loss		$	(22,282,478	)	$	(15,704,544	)	$	(17,241,626	)	$	(15,711,155	)	$	(11,298,269	)

Net loss per share(2)		$	(0.79	)	$	(0.65	)	$	(0.94	)	$	(0.93	)	$	(0.76	)

Weighted average shares outstanding(2)			28,218,819			24,301,029			18,418,410			16,934,532			14,885,449

ý		Annual Report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2003 or
o		Transition Report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 for the transition period from to

		2003			2002			2001
Revenue:
	Product	$	1,192,706		$	276,680		$	—
	Service and supplies		298,757			21,986			—

Total revenue			1,491,463			298,666			—

Cost of sales:
	Product		3,076,841			1,685,562			—
	Service and supplies		2,786,941			577,478			—

Total cost of sales			5,863,782			2,263,040			—

Operating expenses:
	Research and development		6,690,581			5,792,446			10,882,796
	Sales and marketing		4,800,989			2,543,324			1,753,499
	General and administrative		6,676,665			5,699,356			5,121,223

Total operating expenses			18,168,235			14,035,126			17,757,518

Operating loss			(22,540,554	)		(15,999,500	)		(17,757,518	)

Interest income			258,076			294,956			515,892

Net loss		$	(22,282,478	)	$	(15,704,544	)	$	(17,241,626	)

Net loss per share, basic and diluted		$	(0.79	)	$	(0.65	)	$	(0.94	)

Weighted average shares outstanding			28,218,819			24,301,029			18,418,410

		2003			2002
Assets
Current assets:
	Cash and cash equivalents	$	15,397,453		$	953,779
	Short-term investments		4,777,644			10,555,978
	Accounts receivable, less allowance for doubtful accounts of $14,739 in 2003 and zero in 2002		338,432			126,811
	Other receivables		5,076			130,129
	Inventories		5,995,438			2,681,691
	Prepaid expenses		101,614			126,173
	Deposits with vendors		109,541			11,998

Total current assets			26,725,198			14,586,559
Long-term investments			600,000			600,000
Leased assets, net			1,132,533			278,667
Property and equipment, net			1,139,774			1,019,302
Other assets			40,646			24,964

		$	29,638,151		$	16,509,492

Liabilities and Stockholders' Equity
Current liabilities:
	Accounts payable	$	4,940,329		$	1,971,356
	Accrued liabilities		1,298,008			732,218
	Deferred revenue		65,813			1,326
	Other liabilities		28,686			9,319

Total current liabilities			6,332,836			2,714,219
Other long-term liabilities			177,253			147,644

Total liabilities			6,510,089			2,861,863

Stockholders' equity:
	Preferred stock, par value $.01 per share, 1,000,000 shares authorized, 0 shares issued and outstanding in 2003 and 2002		—			—
	Common stock, par value $.01 per share, 50,000,000 shares authorized, 29,800,904 and 25,500,097 shares issued and outstanding in 2003 and 2002, respectively		298,009			255,001
	Additional paid-in capital		151,738,776			120,030,647
	Accumulated other comprehensive income		20,277			8,503
	Accumulated deficit		(128,929,000	)		(106,646,522	)

Total stockholders' equity			23,128,062			13,647,629

		$	29,638,151		$	16,509,492

		Common stock					Accumulated other comprehensive income
		Common stock			Additional paid-in capital					Accumulated deficit			Comprehensive income		Total stockholders' equity
		Shares	Amount		Additional paid-in capital					Accumulated deficit			Comprehensive income		Total stockholders' equity
Balance at December 31, 2000		18,317,946	$	183,179	$	92,853,229	$	12,962		$	(73,700,352	)			$	19,349,018

Comprehensive income:
	Net loss										(17,241,626	)	(17,241,626	)		(17,241,626	)
	Other comprehensive income
	Foreign currency translation adjustment							(1,539	)				(1,539	)		(1,539	)

	Comprehensive income												(17,243,165	)

Issuance of common stock		3,195,230		31,952		9,729,475										9,761,427
Exercise of stock options		484,784		4,848		202,973										207,821
Issuance of shares to Employee Stock Purchase Plan		99,564		996		527,532										528,528

Balance at December 31, 2001		22,097,524		220,975		103,313,209		11,423			(90,941,978	)				12,603,629

Comprehensive income:
	Net loss										(15,704,544	)	(15,704,544	)		(15,704,544	)
	Other comprehensive income
	Foreign currency translation adjustment							(2,920	)				(2,920	)		(2,920	)

	Comprehensive income												(15,707,464	)

Issuance of common stock		3,325,636		33,257		16,507,779										16,541,036
Exercise of stock options		52,098		521		85,135										85,656
Issuance of shares to Employee Stock Purchase Plan		24,839		248		124,524										124,772

Balance at December 31, 2002		25,500,097		255,001		120,030,647		8,503			(106,646,522	)				13,647,629

Comprehensive income:
	Net loss										(22,282,478	)	(22,282,478	)		(22,282,478	)
	Other comprehensive income
	Foreign currency translation adjustment							11,774					11,774			11,774

	Comprehensive income												(22,270,704	)

Issuance of common stock		4,133,529		41,335		30,879,499										30,920,834
Exercise of stock options		148,310		1,483		700,319										701,802
Issuance of shares to Employee Stock Purchase Plan		18,968		190		128,311										128,501

Balance at December 31, 2003		29,800,904	$	298,009	$	151,738,776	$	20,277		$	(128,929,000	)			$	23,128,062

				2003			2002			2001
Cash flows from operating activities:
	Net loss			$	(22,282,478	)	$	(15,704,544	)	$	(17,241,626	)
	Adjustments to reconcile net loss to net cash used in operating activities:
		Depreciation and amortization			565,006			566,285			753,338
		Issuance of stock in exchange for services received			154,570			35,007			—
		Changes in assets and liabilities:
			Account receivable		(211,621	)		(126,811	)		—
			Other receivables		125,053			101,759			(227,793	)
			Inventories		(3,313,747	)		(2,681,691	)		—
			Prepaid expenses and other assets		8,877			(67,786	)		6,695
			Deposits with vendors		(97,543	)		688,002			(574,216	)
			Accounts payable		2,968,973			913,447			(79,313	)
			Deferred revenue		64,487			1,326			—
			Accrued and other liabilities		626,540			93,295			(910,354	)

Net cash used in operating activities					(21,391,883	)		(16,181,711	)		(18,273,269	)

Cash flows from investing activities:
	Purchases of investments				(17,659,774	)		(25,406,457	)		(1,009,521	)
	Proceeds from maturities of investments				23,438,108			16,040,000			—
	Purchases of equipment leased to others				(959,125	)		(280,000	)		—
	Purchases of property and equipment				(580,219	)		(174,924	)		(96,269	)

Net cash provided by (used in) investing activities					4,238,990			(9,821,381	)		(1,105,790	)

Cash flows from financing activities:
	Proceeds from issuance of common stock				31,596,567			16,716,457			10,497,776

Net cash provided by financing activities					31,596,567			16,716,457			10,497,776

Net increase (decrease) in cash and cash equivalents					14,443,674			(9,286,635	)		(8,881,283	)
Cash and cash equivalents at beginning of year					953,779			10,240,414			19,121,697

Cash and cash equivalents at end of year					15,397,453			953,779			10,240,414

	Estimated useful life	2003			2002
Leased assets	5 years	$	1,237,792		$	280,000
Furniture and fixtures	7 years		1,238,586			1,238,586
Leasehold improvements	10 years		1,146,511			1,146,511
Equipment	3-7 years		4,401,309			3,819,757

			8,024,198			6,484,854
Less accumulated depreciation and amortization			(5,751,891	)		(5,186,885	)

		$	2,272,307		$	1,297,969

		Number of shares		Weighted-average exercise price
Balance at December 31, 2000		1,891,325		$	5.1477
	Granted	115,190			8.9428
	Exercised	(484,784	)		0.4287
	Canceled	(202,815	)		7.8744

Balance at December 31, 2001		1,318,916			6.7943
	Granted	383,882			6.0013
	Exercised	(52,098	)		1.6441
	Canceled	(277,490	)		9.5136

Balance at December 31, 2002		1,373,210			6.2186
	Granted	274,000			8.2601
	Exercised	(148,310	)		4.7985
	Canceled	(65,050	)		6.7274

Balance at December 31, 2003		1,433,850		$	6.7325

	Options Outstanding				Options Exercisable
Range of Exercise Prices	Number Outstanding at 12/31/03	Weighted- Average Remaining Contractual Life	Weighted- Average Exercise Price		Number Exercisable at 12/31/03	Weighted- Average Exercise Price
$0.2533 to $1.0000	1,150	1.3 years	$	0.2533	1,150	$	0.2533
$4.0000 to $5.4700	646,630	6.0 years	$	5.1676	501,030	$	5.2049
$5.5000 to $8.5625	497,737	7.5 years	$	6.6658	264,290	$	6.8695
$8.6250 to $10.5000	221,000	7.4 years	$	9.1387	108,016	$	9.1564
$11.0000 to $16.7500	67,333	7.7 years	$	14.4661	36,458	$	14.5664

$0.2533 to $16.7500	1,433,850				910,943

		AKSYS, LTD.
		By		/s/ WILLIAM C. DOW William C. Dow President and Chief Executive Officer

Signature		Capacity

/s/ WILLIAM C. DOW William C. Dow		President, Chief Executive Officer and Director (Principal Executive Officer)
/s/ LAWRENCE D. DAMRON Lawrence D. Damron		Senior Vice President and Chief Financial Officer (Principal Financial Officer)
/s/ MARK S. HASKINS Mark S. Haskins		Corporate Controller (Principal Accounting Officer)
/s/ RICHARD B. EGEN Richard B. Egen		Chairman of the Board of Directors
/s/ W. DEKLE ROUNTREE, JR. W. Dekle Rountree, Jr.		Director
/s/ BERNARD R. TRESNOWSKI Bernard R. Tresnowski		Director
/s/ ALAN R. MEYER Alan R. Meyer		Director

Exhibit Number		Description
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		Rights Agreement, dated as of October 28, 1996, by and between Aksys, Ltd. and First Chicago Trust Company of New York(2).
4.3		First Amendment to Rights Agreement, dated as of February 23, 2004, by and between Aksys, Ltd. and EquiServe Trust Company, N.A., as successor rights agent to First Chicago Trust Company of New York(3).
4.4		Note Purchase Agreement, dated as of February 23, 2004, by and among Aksys, Ltd., Durus Life Sciences Master Fund Ltd. and Artal Long Biotech Portfolio LLC (including Form of Unsecured Subordinated Promissory Note)(3).
4.5		Registration Rights Agreement, dated as of February 23, 2004, by and among Aksys, Ltd., Durus Life Sciences Master Fund Ltd. and Artal Long Biotech Portfolio LLC(3).
4.6		Common Stock Purchase Warrant, dated as of June 30, 2003, issued in favor of The Riverview Group, LLC(4).
4.7		Common Stock Purchase Warrant, dated as of June 30, 2003, issued in favor of Roth Capital Partners, LLC(4).
10.1		Aksys, Ltd. 1993 Stock Option Plan(1)
10.2		Manufacturing Agreement, dated as of January 23, 1996, between the Company and Texas Medical Products, Inc.(1)
10.3		License Agreement, dated as of April 1, 1993, between the Company and Zbylut J. Twardowski(1)
10.4		License Agreement, dated as of April 1, 1993, between the Company and Cynthia P. Walters(1)
10.5		Form of Indemnification Agreement(1)
10.6		License Agreement, dated as of March 11, 1996, between the Company and Allergan, Inc.(1)
10.7		Lease for Property at Two Marriott Drive(5)
10.8		Severance, Confidentiality and Post-Employment Restrictions Agreement, dated as of October 4, 1999 Between the Company and William C. Dow(6)
10.9		Manufacturing Agreement, dated as of February 28, 2003, Between the Company and Peak Industries, Inc.(7)
10.10		Aksys, Ltd. 1996 Stock Awards Plan, as amended(8)
10.11		Aksys, Ltd. 2001 Employee Stock Purchase Plan(8)
10.12		Settlement Agreement and Mutual Release, dated as of February 23, 2004, by and among Aksys, Ltd., Durus Life Sciences Master Fund Ltd., Scott Sacane, Durus Capital Management, LLC, Durus Capital Management (N.A.), LLC and Artal Long Biotech Portfolio LLC(3).
10.14		Codevelopment and Licensing Agreement, dated as of June 21, 1999, between the Company and Teijin Limited(9)

10.15		Stock Purchase Agreement, dated as of January 7, 1998, between the Company and Teijin Limited(9)
10.16		Development and Licensing Agreement, dated as of November 21, 2000, with Teijin Limited(9)
21		Subsidiaries of Aksys, Ltd
23		Consent of KPMG LLP
31.1		Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2		Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.