Exhibit 99.1

Preliminary Prospectus Follows

The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an
offer to sell these securities and we are not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.

PRELIMINARY PROSPECTUS February 12, 2002
Subject to completion
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4,000,000 Shares

[LOGO]
Salix
Pharmaceuticals, Ltd.

Common Stock

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We are selling all of the 4,000,000 shares of common stock offered by this
prospectus.

Our common stock is quoted on the Nasdaq National Market under the symbol
"SLXP". On February 11, 2002, the last reported sale price of our common stock
on the Nasdaq National Market was $17.26 per share.

Investing in our common stock involves a high degree of risk. Before buying any
shares you should read the discussion of material risks of investing in our
common stock in "Risk Factors" beginning on page 8 of this prospectus.

Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is
a criminal offense.

Per share Total
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Public offering price $ $
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Underwriting discount and commissions $ $
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Proceeds, before expenses, to us $ $
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The underwriters may also purchase from us up to an additional 600,000 shares
of our common stock at the public offering price less the underwriting
discount, to cover over-allotments, if any, within 30 days of the date of this
prospectus.

The underwriters are offering the shares of our common stock as described in
"Underwriting". Delivery of the shares will be made on or about , 2002.

Joint Book-Running Managers
UBS Warburg Wachovia Securities
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Thomas Weisel Partners LLC
Leerink Swann & Company
SunTrust Robinson Humphrey

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No person has been authorized to give any information or to make any
representations other than those contained or incorporated by reference in this
prospectus and, if given or made, such information or representations must not
be relied upon as having been authorized. Neither the delivery of this
prospectus nor any sale made hereunder shall, under any circumstances, create
any implication that the information contained or incorporated by reference
herein is correct as of any time subsequent to the date of such information.

TABLE OF CONTENTS
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Prospectus summary..................... 3

Risk factors........................... 8

Special note regarding forward-looking
statements........................... 18

Use of proceeds........................ 19

Market price of common stock........... 20

Capitalization......................... 21

Dilution............................... 22

Selected consolidated financial data... 23

Management's discussion and analysis of
financial condition and results
of operations........................ 24

Management................................ 29

Underwriting.............................. 32

Where can you find more information....... 35

Incorporation of certain documents by
reference............................... 35

Legal matters............................. 36

Experts................................... 36

Index to consolidated financial statements F-1

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"Salix", "Colazal" and "Lumenax" are trademarks of Salix Pharmaceuticals, Ltd.
All other trademarks or trade names referred to in this prospectus are the
property of their respective owners.

As used in this prospectus, the terms "we," "us," "our," the "Company" and
"Salix" mean Salix Pharmaceuticals, Ltd. and its subsidiaries (unless the
context indicates a different meaning), and the term "common stock" means our
common stock, $0.001 par value per share.

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Prospectus summary

The following summary does not contain all the information you should consider
before investing in our common stock. You should read the entire prospectus,
including "Risk factors" and the financial statements, and the information
incorporated by reference in this prospectus, before making an investment
decision.

ABOUT OUR COMPANY

. identify and acquire rights to products that we believe have potential for
near-term regulatory approval or are already approved;

. apply our regulatory, product development, and sales and marketing expertise
to commercialize these products; and

. use our 60-person sales force focused on high-prescribing U.S.
gastroenterologists, who are doctors who specialize in gastrointestinal
diseases, to sell our products.

Our first two products demonstrate our ability to execute this strategy. These
products are:

. balsalazide disodium, which we sell in the United States under the brand
name Colazal(TM); and

. rifaximin, which, if approved by the U.S. Food and Drug Administration, or
FDA, we intend to sell in the United States under the brand name
Lumenax/TM. /

We licensed balsalazide from Biorex Laboratories Limited in 1992 and completed
the development work, which resulted in FDA approval in July 2000. We licensed
rifaximin from Alfa Wassermann S.p.A. in 1996. In December 2001, we submitted a
New Drug Application, or NDA, to the FDA for rifaximin as a treatment for
travelers' diarrhea. Following receipt of regulatory approval to market a drug
for an initial disease or condition, known as an indication, we might perform
clinical studies for other indications to expand the approved use of the drug.

We currently market Colazal and intend, if approved by the FDA, to market
future products to U.S. gastroenterologists through our own direct sales force,
and enter into distribution relationships outside the United States and in
markets where a larger sales organization is appropriate. In connection with
our commercial launch of Colazal, we hired approximately 30 sales
representatives in late 2000. To more effectively cover the gastroenterology
market, we expanded our sales force to over 60 people during 2001. We believe
our sales force should also position us to sell additional products.

Colazal(TM) (balsalazide disodium)

Our first marketed product, Colazal, was the first new molecular entity
approved in 10 years by the FDA for the treatment of mildly to moderately
active ulcerative colitis and the first new oral therapy approved by the FDA
for this indication in seven years. Ulcerative colitis is a chronic form of
inflammatory bowel disease characterized by inflammation of the lining of the
colon. Symptoms of active ulcerative colitis include rectal bleeding, abdominal
pain, increased stool frequency, loss of appetite, fever and weight loss. This
disease affects roughly 500,000 people in the United States, typically with
onset under the age of 40. The cause of ulcerative colitis is unknown and no
known cure exists except for the removal of the colon. Oral branded
prescription products containing the active therapeutic agent 5-ASA are the
first line of

treatment and most frequently prescribed class of drugs for ulcerative colitis,
with 2001 U.S. retail sales of approximately $390 million. In terms of
prescription dollar sales, the market for 5-ASA products has been growing at an
annual compound rate exceeding 25% for the last 10 years. Colazal contains
5-ASA, as does Asacol(R), the market-leading drug with retail sales of
approximately $280 million in 2001.

In clinical trials, Colazal demonstrated at least comparable efficacy and had
an improved safety profile as compared to some other oral 5-ASA products. Other
5-ASA products often do not deliver optimal doses of the active therapeutic
agent to the colon. However, because Colazal's proprietary formulation allows
99% of the drug to reach the colon, it can work more quickly and effectively
than comparable doses of other 5-ASA products that deliver less drug to the
diseased area. In addition, some other 5-ASA products have historically been
associated with side effects that cause up to 30-40% of patients to discontinue
treatment.

We launched Colazal in the United States in January 2001 using our own sales
force. We sold $14.1 million worth of Colazal in the United States in the year
ended December 31, 2001.

Lumenax(TM) (rifaximin)

Our second drug, Lumenax, is an antibiotic that, if approved by the FDA, we
intend to establish as the drug of choice for the treatment of travelers'
diarrhea and a broad range of other gastrointestinal bacterial infections.
According to the National Ambulatory Medical Care and National Hospital
Ambulatory Medical Care surveys, between 1992 and 1996 (the most recent period
for which we are aware there is publicly available information) patients
visited physicians on average over 15 million times annually in the United
States due to diarrhea, vomiting or gastrointestinal infections. According to
the Centers for Disease Control, each year between 20% and 50% of international
travelers, an estimated 10 million people, develop diarrhea, with approximately
80% of the cases caused by bacteria. Based upon recent data, between 4 million
and 5 million people sought treatment in the United States for diarrhea in 2001
and approximately 3.3 million of those patients were prescribed a drug.

We believe the advantages of Lumenax to treat these infections are two-fold:
(1) site-targeted antibiotic delivery; and (2) improved tolerability compared
to other treatments. Less than 0.1% of the drug is absorbed into the
bloodstream when it is taken orally, which means that substantially all of the
drug is available to destroy bacteria at the site of the infection. In
addition, the drug might also cause fewer side effects or discomforts such as
nausea, headache or dizziness than observed with currently available, more
highly-absorbed antibiotics. Furthermore, we believe Lumenax is also less
likely to cause systemic resistance, in which the body blocks the effectiveness
of the drug, or harmful interaction with other drugs a patient is taking.

We have completed two Phase III clinical studies of Lumenax for the treatment
of travelers' diarrhea. Data from these Phase III studies indicated that
Lumenax is statistically more effective than placebo and that it had comparable
efficacy and tolerability to ciprofloxacin, the market leader for the treatment
of travelers' diarrhea. We submitted an NDA for the treatment of travelers'
diarrhea to the FDA in December 2001. Based on a pre-submission review of
portions of the NDA, the FDA has indicated that additional clinical data might
be necessary to gain approval for Lumenax. Accordingly, we intend to commence
an additional clinical study to supplement the NDA. The protocol for this study
is under review by the FDA.

We also intend to investigate the use of Lumenax in other indications,
including bacterial overgrowth of the small intestine, antibiotic-associated
and other forms of colitis, pouchitis, Crohn's disease, diverticular disease
and hepatic encephalopathy. The FDA has granted Lumenax Orphan Drug status for
the treatment of hepatic encephalopathy, which might allow for priority review
and, if approved by the FDA, would provide for seven years of market
exclusivity for this indication. Hepatic encephalopathy is a rare syndrome
caused by a build-up of toxic products, such as ammonia, due to advanced liver
disease.

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Our principal executive offices are located at 8540 Colonnade Center Drive,
Suite 501, Raleigh, North Carolina 27615 and our telephone number at that
location is (919) 862-1000. Information contained on our website,
www.salixpharm.com, is not part of this prospectus.

The offering

Common stock offered..................... 4,000,000 shares
Common stock to be outstanding after this
offering............................... 20,713,544 shares
Use of proceeds.......................... Potential acquisition of additional new
products; marketing and, if necessary,
development of these products; development
and commercialization of Lumenax as a
treatment for travelers' diarrhea; development
and commercialization of additional
indications for both Colazal and Lumenax;
general corporate purposes; and working
capital. See "Use of Proceeds".

Nasdaq National Market Symbol............ SLXP

The number of shares of our common stock to be outstanding after this offering
in the table above is based on the number of shares outstanding as of February
8, 2002, and does not include, as of that date:

. 16,667 shares of common stock issuable upon exercise of an outstanding
warrant at an exercise price of $3.00 per share;

. 2,160,603 shares of our common stock issuable upon exercise of outstanding
options issued under our stock option plans at a weighted average exercise
price of $8.41 per share; and

. an additional 987,823 shares of common stock available for future issuance
under our stock option plans.

Unless otherwise stated, all information contained in this prospectus assumes
no exercise of the over-allotment option we granted to the underwriters.

Summary consolidated financial data

Year Ended December 31,
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Consolidated Statement of Operations Data 1999 2000 2001
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(U.S. dollars, in thousands, excep
per share data)

Revenues:
Product revenue............................................ $ 491 $ 6,307 $ 14,129
Revenues from collaborative agreements..................... 2,602 8,235 8,221
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Total revenues......................................... 3,093 14,542 22,350
Expenses:
Cost of products sold...................................... 878 2,287 3,495
License fees and costs related to collaborative agreements. 297 4,173 5,583
Research and development................................... 4,787 3,844 6,629
Selling, general and administrative........................ 1,932 7,412 24,688
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Total expenses......................................... 7,894 17,716 40,395
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Loss from operations.......................................... (4,801) (3,174) (18,045)
Interest, other income (expense), net......................... 190 208 547
Income taxes.................................................. -- (9) --
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Net loss...................................................... $(4,611) $(2,975) $(17,498)
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Net loss per share, basic and diluted /(1)/................... $ (0.45) $ (0.26) $ (1.13)
======= ======= ========
Shares used in computing net loss per share /(1)/............. 10,209 11,356 15,456

As of December 31, 2001
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Consolidated Balance Sheet Data Actual As Adjusted/(2)/
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Cash and cash equivalents... $ 27,868 $ 92,842
Working capital............. 26,308 91,282
Total assets................ 38,590 103,564
Accumulated deficit......... (45,884) (45,884)
Stockholders' equity........ 27,594 92,568

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(1) See Note 2 of Notes to Consolidated Financial Statements for an
explanation of shares used in computing net loss per share.
(2) Assumes the issuance and sale of 4,000,000 shares of common stock in this
offering at an assumed price of $17.40 per share, after deducting the
underwriting discount and estimated offering expenses payable by us.

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Risk factors

You should be aware that there are various risks to an investment in our common
stock, including the material ones described below. Other risks we are not
aware of or that we currently believe immaterial could affect your investment.
You should carefully consider these risk factors, together with all of the
other information included and incorporated by reference in this prospectus.

If any of the following risks or other risks not known to us now or that we
currently believe immaterial develop into actual events, then our business,
financial condition, results of operations or prospects could be negatively
affected. If that happens, the market price of our common stock could decline
and you might lose all or part of your investment.

RISKS RELATING TO OUR BUSINESS

We have a history of operating losses and negative cash flow from operations
and expect future losses and negative cash flow from operations, which could
have an adverse impact on your investment.
We have had net losses in all but one quarter since our inception in 1992 and
until December 2000 we had not realized any material operating revenues from
product sales. We have also experienced negative cash flows from operations in
each year since we became a public company. We have spent and will continue to
be required to spend substantial funds to continue development and marketing
activities. To the extent we acquire rights to additional products, our costs
associated with these activities can be expected to increase further. We
currently expect operating losses and negative cash flow from operations to
continue for the forseeable future, and our losses could be greater than those
realized by us historically. We might never be profitable or generate positive
cash flow from operations on a consistent or predictable basis. As of December
31, 2001, we had incurred cumulative losses since inception of approximately
$45.9 million.

Regulatory approval of our products is time-consuming, expensive and uncertain,
and could result in unexpectedly high expenses and delay our ability to sell
our products.
Development, manufacture and marketing of our products are subject to extensive
regulation by governmental authorities in the United States and other
countries. This regulation could require us to incur significant unexpected
expenses or delay or limit our ability to sell our products. We submitted an
NDA for Lumenax to the FDA in December 2001. Based on a pre-submission review
of portions of the NDA, the FDA has indicated that additional clinical data
might be necessary to gain approval for Lumenax. Accordingly, we intend to
commence an additional clinical study to supplement the NDA. The protocol for
this study is under review by the FDA. The study results might not be positive
and we might not be able to provide the FDA with results in time to be
considered by the FDA within the review period. Even if the study results are
positive, our NDA might not be approved. Our clinical studies for Lumenax or
any other product might be delayed or halted for various reasons, including:

. the drug is not effective;

. patients experience severe side effects during treatment;

. patients do not enroll in the studies at the rate we expect;

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Risk factors
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. drug supplies are not sufficient to treat the patients in the studies;

. we decide to modify the drug during testing; or

. we do not have adequate funds to continue the testing.

If regulatory approval of Lumenax or any other product is granted, it will be
limited to those indications for which the product has been shown to be safe
and effective, as demonstrated to the FDA's satisfaction through clinical
studies. Approval might entail ongoing requirements for post-marketing studies.
Even if regulatory approval is obtained, such as with Colazal, labeling and
promotional activities are subject to continual scrutiny by the FDA and state
regulatory agencies and, in some circumstances, the Federal Trade Commission.
FDA enforcement policy prohibits the marketing of approved products for
unapproved, or off-label, uses. Marketing an approved product for a new use
requires a separate approval by the FDA. These regulations and the FDA's
interpretation of them might impair our ability to effectively market our
products. We and our third-party manufacturers are also required to comply with
the applicable FDA current Good Manufacturing Practices, or cGMP, regulations
which include requirements relating to quality control and quality assurance,
as well as the corresponding maintenance of records and documentation. Further,
manufacturing facilities must be approved by the FDA before they can be used to
manufacture our products, and they are subject to additional FDA inspection. If
we fail to comply with any of the FDA's continuing regulations, we could be
subject to sanctions, including:

. delays, warning letters and fines;

. product recalls or seizures and injunctions on sales;

. refusal of the FDA to review pending applications;

. total or partial suspension of production;

. withdrawals of previously approved marketing applications; and

. civil penalties and criminal prosecutions.

In addition, identification of side effects after a drug is on the market or
the occurrence of manufacturing problems could cause subsequent withdrawal of
approval, reformulation of the drug, additional testing or changes in labeling
of the product.

Balsalazide is approved as a treatment for acute ulcerative colitis in Austria,
Belgium, Denmark, Italy, Luxembourg and Sweden through the mutual recognition
process of the European Union. In 1998, our then licensee withdrew marketing
applications from other European Union countries because of a failure to meet
time constraints of the review period required by the mutual recognition
process. These countries are Finland, France, Germany, Greece, Ireland, The
Netherlands, Portugal and Spain. Resubmission in these countries will primarily
be the responsibility of our current licensees for these countries, Shire
Pharmaceuticals and Menarini, and they might not pursue these applications.
Balsalazide might not receive approval from regulatory agencies in any member
country of the European Union where the marketing application was withdrawn.

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Risk factors
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We began a Phase III clinical trial for rifaximin as a treatment for hepatic
encephalopathy in Europe during the first quarter of 2001 and in the United
States during the second quarter of 2001. The European arm of the trial was
terminated in the summer of 2001 due to low enrollment. We are seeking to
increase enrollment in the U.S. arm of the trial, but we might not be
successful in reaching the needed patient enrollment, which might negatively
impact the trial.

Our success and revenue currently depend on two compounds; if we do not
continue to successfully market Colazal, if we do not receive FDA approval and
successfully commercialize Lumenax or if we do not acquire new products to
market, our revenue might not grow, which could negatively affect our stock
price.
We currently have rights to only two pharmaceutical compounds, balsalazide,
which we market in the United States under the brand name Colazal, and
rifaximin, which, if approved by the FDA, we intend to market in the United
States under the brand name Lumenax. Our prospects over the next three to five
years are substantially dependent on the successful commercialization of these
compounds. We expect to engage in expensive advertising, educational programs
and other means to market our future products. The degree of market acceptance
of our products among physicians, patients, healthcare payors and the medical
community will depend upon a number of factors including:

. demonstration of their clinical efficacy and safety;

. their cost effectiveness;

. their potential advantages over alternative treatment methods;

. the marketing and distribution support they receive; and

. reimbursement policies of government and third-party payors.

Virtually all of our product sales revenue to date has come from balsalazide.
We expect that a significant portion of our potential revenue for the next few
years will depend on regulatory approval of rifaximin and sales of both
balsalazide and rifaximin. Even if balsalazide and rifaximin generate revenue
and profits, our ability to increase revenue in the future will depend in part
on our success in in-licensing or acquiring additional pharmaceutical products.
Our license agreement with Alfa Wassermann provides that we may not promote,
distribute or sell any antibiotic product that competes with rifaximin in the
United States and Canada for a period of five years after the first commercial
sale of rifaximin, thereby limiting our ability to acquire, develop or market
other antibiotic products. We currently intend to in-license or acquire
pharmaceutical products that have been developed beyond the initial discovery
phase and for which late-stage human clinical data is already available or that
have already received regulatory approval. These kinds of pharmaceutical
products might not be available to us on attractive terms or at all. To the
extent we acquire rights to additional products, we might incur significant
additional expense in connection with the development and, if approved by the
FDA, marketing of these products.

Our intellectual property rights might not afford us with meaningful protection.
We cannot assure you that our intellectual property rights with respect to
balsalazide and rifaximin will afford us with meaningful protection from
competition. In addition, because our strategy is to in-license or acquire
pharmaceutical products which typically have been discovered and initially
researched by others, future products might have limited or no remaining patent
protection due to the time elapsed since their discovery. The patents for the
balsalazide composition of matter and method of treating ulcerative colitis
with balsalazide expired in July 2001 in the United States. We have obtained
patent extensions for the composition of balsalazide in Italy and the United
Kingdom until July 2006. The

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Risk factors
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patents for the rifaximin composition of matter (also covering a process of
making rifaximin and using rifaximin to treat gastrointestinal infectious
diseases) expired in May 2001 in the United States and Canada. We believe we
may be eligible for additional extensions of our patents relating to
balsalazide and rifaximin of up to five years (including extensions of our
expired patents based on patent term restoration procedures established in
Europe and in the United States under the Waxman-Hatch Act for products that
have received regulatory approval). However, these extensions might not be
granted. We have filed applications for patents for additional indications
using balsalazide and related chemical substances, but we might not be issued
any new patents. Competitors could also design around any of our intellectual
property or otherwise design competitive products that do not infringe our
intellectual property.

In 2000, the FDA granted us five years of new chemical entity data exclusivity
for balsalazide. This means that during the period of exclusivity other
companies cannot use our data to support approval of a competitive version of
balsalazide and must conduct new clinical trials to support any application
seeking approval of a competing drug. This may have the effect of excluding
others from marketing balsalazide in the United States until July 2005. We
intend to request similar exclusivity for rifaximin, although the FDA might not
grant our request.

We acquired our rights to balsalazide and rifaximin under license agreements
with Biorex and Alfa Wassermann, respectively. If either Biorex or Alfa
Wassermann terminates its license agreement with us, we would have no further
rights to use their intellectual property to manufacture and market balsalazide
or rifaximin, as the case may be, which would have a material adverse effect on
our future prospects. Our rights under these licenses are subject to early
termination by Biorex or Alfa Wassermann, as the case may be, upon material
breach by us or our bankruptcy or insolvency. Our licenses for balsalazide and
rifaximin provide that our royalty obligations extend beyond the expiration
date of the underlying patents, which could limit our ability to profitably
sell those products if a generic version were introduced. In addition, the
patent rights licensed under the license will not provide us with exclusivity
as to the treatment of any particular illness. It may be the case that another
branded or generic manufacturer may be able to lawfully compete with us. Under
existing United States patent law, in some cases a license arrangement
providing for payment of royalties beyond the expiration date of the underlying
patents could render portions of the license arrangement or the underlying
patents unenforceable. We cannot assure you that these provisions in our
license agreements would not render portions of the agreements or the
underlying patents unenforceable.

We also rely on trade secrets, proprietary know-how and technological advances
which we seek to protect, in part, through confidentiality agreements with our
collaborative partners, employees and consultants. These agreements might be
breached and we might not have adequate remedies for any breach. In addition,
our trade secrets and proprietary know-how might otherwise become known or be
independently developed by others.

Any litigation that we may become involved in order to enforce intellectual
property rights could result in substantial cost to us. In addition, our
intellectual property rights might not provide us with any meaningful
competitive protection.

Claims by others that we infringe their intellectual property could be costly
to us.
Our patent or other proprietary rights related to our products might conflict
with the current or future intellectual property rights of others. Because we
have launched our first product in the United States, and are developing one
other compound, intellectual property claims could be particularly damaging to
our business. Litigation or patent interference proceedings, either of which
could result in substantial cost

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Risk factors
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to us, might be necessary to defend any patents to which we have rights and our
other proprietary rights or to determine the scope and validity of other
parties' proprietary rights. The defense of patent and intellectual property
claims are both costly and time-consuming, even if the outcome is favorable to
us. Any adverse outcome could subject us to significant liabilities to third
parties, require disputed rights to be licensed from third parties, or require
us to cease selling our product. We might not be able to obtain a license to
any third-party technology that we require to conduct our business, or, if
obtainable, that technology might not be available at a reasonable cost.

We could be exposed to significant product liability claims that could prevent
or interfere with our product commercialization efforts.
We might be subjected to product liability claims that arise through the
testing, manufacturing, marketing and sale of our products. These claims could
expose us to significant liabilities that could prevent or interfere with our
product commercialization efforts. Product liability claims could require us to
spend significant time and money in litigation or to pay significant damages.
Although we currently maintain liability coverage for both clinical trials and
the commercialization of our products, it is possible that this coverage will
be insufficient to satisfy any liabilities that may arise. In the future we
might not be able to obtain adequate coverage at an acceptable cost or we might
be unable to obtain adequate coverage at all.

Intense competition might render our products noncompetitive or obsolete.
Competition in our business is intense and characterized by extensive research
efforts and rapid technological progress. Technological developments by
competitors, earlier regulatory approval for marketing competitive products, or
superior marketing capabilities possessed by competitors could adversely affect
the commercial potential of our products and could have a material adverse
effect on our revenue and results of operations. We believe that there are
numerous pharmaceutical and biotechnology companies, including large well-known
pharmaceutical companies, as well as academic research groups throughout the
world, engaged in research and development efforts with respect to
pharmaceutical products targeted at gastrointestinal diseases and conditions
addressed by our current and potential products. In particular, we are aware of
products in research or development by competitors that address the diseases
being targeted by our products. Developments by others might render our current
and potential products obsolete or non-competitive. Competitors might be able
to complete the development and regulatory approval process sooner and,
therefore, market their products earlier than us. Many of our competitors have
substantially greater financial, marketing and personnel resources and
development capabilities than we do. For example, many large, well capitalized
companies already offer products in the United States and Europe that target
the indications for balsalazide, including mesalamine (GlaxoSmithKline plc, Dr.
Falk Pharma GmbH, Axcan Pharma, Inc., Solvay S.A., The Procter & Gamble Company
and Shire Pharmaceuticals Group plc), sulfasalazine (Pharmacia & Upjohn, Inc.),
and olsalazine (Pharmacia & Upjohn, Inc.). Asacol, marketed by Proctor &
Gamble, is currently the most prescribed product for the treatment of
ulcerative colitis in the United States. The most frequently prescribed product
for treatment of travelers' diarrhea in the United States currently is
ciprofloxacin, commonly known as "cipro."

If third-party payors do not provide coverage or reimburse patients for our
products, our ability to derive revenues will suffer.
Our success will depend in part on the extent to which government and health
administration authorities, private health insurers and other third-party
payors will pay for our products. Reimbursement for newly approved healthcare
products is uncertain. In the United States and elsewhere, third-party payors,
such as Medicare, are increasingly challenging the prices charged for medical
products and services. Government and other third-party payors are increasingly
attempting to contain

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healthcare costs by limiting both coverage and the level of reimbursement for
new therapeutic products. In the United States, a number of legislative and
regulatory proposals aimed at changing the healthcare system have been proposed
in recent years. In addition, an increasing emphasis on managed care in the
United States has and will continue to increase pressure on pharmaceutical
pricing. While we cannot predict whether legislative or regulatory proposals
will be adopted or what effect those proposals or managed care efforts,
including those relating to Medicare payments, might have on our business, the
announcement and/or adoption of such proposals or efforts could increase our
costs and reduce or eliminate profit margins. Third party insurance coverage
might not be available to patients for our products. If government and other
third party payors do not provide adequate coverage and reimbursement levels
for our products, the market acceptance of these products might be reduced.

Our limited sales and marketing experience could limit our revenue.
We have limited experience in marketing and selling our products either
directly or through our relationships with licensees, which could materially
and adversely impact our ability to generate significant revenue. We hired our
first 30 sales representatives in late 2000 and hired approximately 30 more
during 2001 for the purpose of achieving direct sales of Colazal, rifaximin and
other future products in the United States. Many of our competitors have
considerably more experience marketing to gastroenterologists than we do, and
longer physician relationships than ours. Our marketing and direct sales
efforts might not be successful.

We do not receive product royalties from sales of balsalazide outside the
United States under our current distribution relationships; and other
distribution relationships for products outside the United States might not be
available to us or, if entered into, might not be successful.
Our strategy for the sale of our products outside the United States is to enter
into distribution relationships. As a result, we expect that any revenue
relating to foreign sales of our products will depend on relationships with
third parties. We do not expect significant future revenue from our existing
distribution relationships for balsalazide with Menarini and Shire. Our license
agreements with Shire and Menarini entitle us to milestone payments, but not
royalties from sales of balsalazide by Shire and Menarini. The remaining
milestone payments relate to approvals of balsalazide for marketing in certain
European countries where balsalazide currently is not approved. The additional
milestones might not be obtained and the decision to seek approval in these
countries is not within our control. While we are entitled to additional
royalties on the sale of bulk product to Menarini, we do not expect any
additional bulk sales for at least two years because of Menarini's current
supply surplus. There are no specific financial thresholds that Shire must
achieve to maintain its exclusivity. In addition, although Menarini has agreed
to use its best endeavors to promote, market and sell balsalazide in its
exclusive markets, there are no specified financial thresholds that Menarini
must achieve to maintain its exclusivity. The Shire agreement and the Menarini
agreement currently have no set expiration dates. Upon the expiration or
termination of these agreements, we might not be able to negotiate new
distribution arrangements for balsalazide and any new arrangements might not be
successful.

We might not be able to negotiate acceptable distribution arrangements for
Lumenax or any other future product outside the United States. Any future
distribution arrangements might not be successful or might be terminated by the
other party. The amount and timing of resources to be devoted to distribution
of our products outside the United States in most instances will not be within
our control.

- --------------------------------------------------------------------------------

Risk factors
- --------------------------------------------------------------------------------

We are dependent on third parties to manufacture our products.
We have limited experience and capabilities in manufacturing of pharmaceutical
products. We do not generally expect to engage directly in the manufacturing of
products, but instead contract with others for these services. Our
manufacturing strategy presents the following risks:

. the manufacture of our products might be difficult to scale-up when large
scale production is required and subject to delays, inefficiencies and poor
or low yields of quality products;

. some of our contracts contain purchase commitments that require us to make
minimum purchases that might exceed our needs or limit our ability to
negotiate with other manufacturers, which might increase our costs;

. the cost of manufacturing certain of our products might make them
prohibitively expensive;

. delays in scale-up to commercial quantities and any change in manufacturers
could delay clinical studies, regulatory submissions and commercialization
of our products;

. manufacturers of our products are subject to the FDA's cGMP regulations and
similar foreign standards, and we do not have control over compliance with
these regulations by the third-party manufacturers; and

. if we need to change manufacturers, FDA and comparable foreign regulators
would require new testing and compliance inspections and the new
manufacturers would have to be educated in the processes necessary for the
production of our products.

We contract with Diosynth Limited and OmniChem s.a. for the manufacture of
balsalazide. If our supply of balsalazide were interrupted, we could be
materially adversely affected until we could make alternative arrangements for
supply. While we believe alternative suppliers could be identified, it could
take significant time for any alternate supplier to scale-up its manufacturing
of balsalazide. In addition, balsalazide might not be available from an
alternate supplier at a favorable price.

If we make any acquisitions, we will incur a variety of costs and might never
successfully integrate the acquired product or business into ours.
We might attempt to acquire products or businesses that we believe are a
strategic complement to our business model. We might encounter operating
difficulties and expenditures relating to integrating an acquired product or
business. These acquisitions might require significant management attention
that would otherwise be available for ongoing development of our business. In
addition, we might never realize the anticipated benefits of any acquisition.
We might also make dilutive issuances of equity securities, incur debt or
experience a decrease in cash available for our operations, or incur contingent
liabilities and/or amortization expenses relating to goodwill and other
intangible assets, in connection with any future acquisitions.

Failure to manage our growth could increase our expenses faster than our
revenue.
We have experienced significant growth in the number of our employees and the
scope of our operations. In support of the January 2001 launch of Colazal in
the United States, our number of employees has increased from approximately 15
on September 30, 2000 to approximately 110 on December 31, 2001. This growth
and expansion placed a significant strain on our management and operations. For
example, in mid-2001 we reorganized and doubled the size of our sales force,
which contributed to a temporary slowdown in the growth of our sales. Our
continued growth might place further strains on our management and operations.
Our ability to manage growth effectively will depend upon our ability to
broaden our management team and our ability to attract, hire, and retain
skilled employees. Our success will also depend on the ability of our officers
and key employees to continue to implement and improve

- --------------------------------------------------------------------------------

Risk factors
- --------------------------------------------------------------------------------

our operational, management information and financial control systems and to
expand, train and manage our employee base.

Our results of operations have fluctuated significantly from period to period,
and a failure to meet the expectations of investors or the financial community
at large could result in a decline in our stock price.
Our results of operations might fluctuate significantly on a quarterly and
annual basis due to, among other factors:

. the timing of any up-front payments that we might be required to pay in
connection with any future acquisition of product rights;

. the timing of milestone payments that we might be required to pay to our
current or future licensors;

. fluctuations in our research and development and other costs in connection
with ongoing product development programs;

. the timing of regulatory approvals and product launches;

. the level of marketing and other expenses required in connection with
product launches and ongoing product growth;

. the level of revenue generated by commercialized products;

. the timing of the acquisition and integration of businesses, assets,
products and technologies; and

. general and industry-specific business and economic conditions.

Any adverse fluctuations in our results of operations, or failure to meet
analyst or investor expectations, could cause our stock price to decline.

Our actual financial results might vary from those anticipated by us.
Our actual financial results might vary from those anticipated by us, and these
variations could be material. Our 2001 earnings release, which is incorporated
by reference in this prospectus, contained our forecasted revenues for 2002.
This forecast reflects numerous assumptions concerning our anticipated future
performance and with respect to the prevailing market and economic conditions
which are beyond our control and which might not turn out to have been correct.
Although we believe that the assumptions underlying the projections are
reasonable, actual results could be materially different. Our revenues and
expenses are subject to numerous risks and uncertainties, including those
identified throughout these "Risk factors" and elsewhere in this prospectus and
the documents incorporated by reference.

RISKS RELATED TO OWNING OUR STOCK

Our stock price is volatile, which makes investing in our common stock risky.
Our stock price has been extremely volatile and might continue to be, making an
investment in our company risky. Between February 26, 2001, when our common
stock started trading on the Nasdaq National Market, and February 11, 2002, the
price of a share of our common stock varied from $9.15 to $25.23. Between
November 20, 2000, when our common stock started trading on the Nasdaq SmallCap
Market, and February 23, 2001, the price of a share of our common stock varied
from $5.75 to $15.50. In the last 12 months that our common stock was traded on
the Toronto Stock Exchange, ending November 24, 2000, the price per share
dropped as low as $0.18 Canadian. Trading volume in our common stock has been
low.

- --------------------------------------------------------------------------------

Risk factors
- --------------------------------------------------------------------------------

The securities markets have experienced significant price and volume
fluctuations unrelated to the performance of particular companies. In addition,
the market prices of the common stock of many publicly traded pharmaceutical
and biotechnology companies have in the past and can in the future be expected
to be especially volatile. Announcements of prescription trends, technological
innovations or new products by us or our competitors, developments or disputes
concerning proprietary rights, publicity regarding actual or potential medical
results relating to products under development by us or our competitors,
regulatory developments in both the United States and other countries, public
concern as to the safety of pharmaceutical products, and economic and other
external factors, as well as period-to-period fluctuations in our financial
results, might have a significant impact on the market price of our common
stock.

Investors in this offering will experience immediate and substantial dilution.
The public offering price of our common stock is expected to be substantially
higher than the net tangible book value per share of our common stock.
Therefore, if you purchase shares of our common stock in this offering, you
will incur immediate and substantial dilution in the pro forma net tangible
book value per share of common stock from the price per share that you pay for
the common stock. For more details, see "Dilution." If the holders of
outstanding options or warrants exercise those options or warrants at prices
below the public offering price, you will incur further dilution.

We will have broad discretion concerning the use of the proceeds of this
offering and our results of operations might suffer if the proceeds are not
applied effectively.
We will retain broad discretion over the use of proceeds from this offering.
You might not agree with how we spend the proceeds, and our use of the proceeds
might not yield a significant return or any return at all. See "Use of
Proceeds" for a description of our current plans for using the proceeds from
this offering. Because of the number and variability of factors that determine
our use of proceeds from this offering, our ultimate use of the proceeds might
vary substantially from our currently planned uses. If we do not apply the
proceeds effectively, our results of operations could suffer.

A substantial number of our shares are eligible for future sale and the sale of
our shares into the market might negatively affect our stock price.
Our stock price may be depressed by future sales of our shares or the
perception that such sales may occur. We had 16,713,544 shares outstanding as
of February 8, 2002. Of these shares, 3,440,971 shares were owned by our
officers and directors, or their affiliates, and are considered restricted
shares. In addition, we sold a total of 4,220,000 shares of our common stock in
private placements in November 2000 and May 2001. Because we sold these shares
in private placements they also are considered restricted shares. However, we
registered all of these shares with the SEC for resale, and, as a result, they
may be sold at any time, subject to some limitations. Sales of substantial
amounts of our common stock in the public market by these holders might lower
our common stock's market price. We are unable to estimate the amount, timing
or nature of future sales of outstanding common stock.

Antitakeover provisions could discourage a takeover that you consider to be in
your best interest or prevent the removal of our current directors and
management.
We have adopted a number of provisions that could have antitakeover effects or
prevent the removal of our current directors and management. We have adopted a
stockholder protection rights plan, commonly referred to as a poison pill. The
rights plan is intended to deter an attempt to acquire Salix in a manner or on
terms not approved by the Board of Directors. The rights plan will not prevent
an acquisition that is approved by the Board of Directors. Our charter
authorizes the Board of Directors to determine the terms of up to 5,000,000
shares of undesignated preferred stock and issue them without stockholder

- --------------------------------------------------------------------------------

approval. The issuance of preferred stock could make it more difficult for a
third party to acquire, or discourage a third party from acquiring, voting
control of Salix in order to remove our current directors and management. Our
bylaws also eliminate the ability of the stockholders to act by written consent
without a meeting, which could hinder the ability of stockholders to quickly
take action that might be opposed by management. These provisions could make
more difficult the removal of our current directors and management or a
takeover of Salix, even if these events could be beneficial to our
stockholders. These provisions could also limit the price that investors might
be willing to pay for our common stock.

The September 11, 2001 terrorist attacks on the United States might have
unpredictable adverse effects on global economic conditions, the financial
markets and our business and results of operations.
The September 11, 2001 terrorist attacks on the World Trade Center in New York
and the Pentagon in Washington, D.C., have caused uncertainty and volatility in
the U.S. and international economies and financial markets, and coincided with
an overall weakening of economic conditions. In addition, there might be
further terrorist attacks against the United States or U.S. businesses
operating abroad. We cannot predict what effect these events, including the
retaliatory measures that have been taken, and those that might be taken in the
future, might have on global economic conditions, the financial markets, or on
our business and results of operations.

- --------------------------------------------------------------------------------

Special note regarding forward-looking statements

Some of the statements contained in this prospectus and in documents we
incorporate by reference discuss our plans and strategies for our business and
are "forward-looking statements" as that term is defined in the Private
Securities Litigation Reform Act. The words "anticipates," "believes,"
"estimates," "expects," "plans," "might," "intends" and similar expressions are
meant to identify these statements as forward-looking statements, but they are
not the exclusive means of identifying them. The forward-looking statements in
this prospectus and in documents we incorporate by reference reflect the
current views of our management; however, various risks, uncertainties and
contingencies could cause our actual results, performance or achievements to
differ materially from those expressed or implied by these statements,
including:

. The success or failure of our efforts to implement our business strategy;

. Our ability to manage rapid growth;

. Our limited sales and marketing experience;

. The high cost and uncertainties relating to clinical trials;

. The unpredictability of the duration and results of regulatory review;

. Our dependence on balsalazide and rifaximin, and the uncertainty of market
acceptance of those products; and

. The other factors discussed in the "Risk Factors" section and elsewhere in
this prospectus and the documents incorporated by reference.

In evaluating these forward-looking statements, you should specifically
consider the risks described above and in other parts of this prospectus,
including the "Risk Factors" section, and in the documents we incorporate by
reference. These factors might cause our actual results to differ materially
from those discussed in this prospectus and in documents we incorporate by
reference.

- --------------------------------------------------------------------------------

Use of proceeds

We estimate that the net proceeds from the sale of 4,000,000 shares of common
stock in this offering will be approximately $65.0 million, assuming a public
offering price of $17.40 per share, and after deduction of the underwriting
discount and our other estimated expenses in connection with the offering. If
the underwriters fully exercise their over-allotment option, we estimate that
the net proceeds from the sale of the shares in this offering will be
approximately $75.0 million.

We intend to use the net proceeds of this offering for the potential
acquisition of additional products; marketing and, if necessary, development of
these products; the development and commercialization of our second product,
Lumenax, as a treatment for travelers' diarrhea; the development and
commercialization of new indications for both Colazal and Lumenax; general
corporate purposes; and working capital.

The timing and amount of our actual expenditures are subject to change and will
be based on many factors, including:

. our ability to identify and negotiate arrangements to in-license or
otherwise acquire rights to new drugs;

. the time and cost necessary to obtain regulatory approvals;

. the time and cost necessary to respond to technological and market
developments; and

. any changes made or new developments in our existing collaborative,
licensing and other commercial relationships or any new collaborative,
licensing and other commercial relationships that we might establish.

We have discussions from time to time regarding potential acquisitions and
licensing opportunities. We might use a portion of the net proceeds for this
purpose although we currently have no material agreements or commitments of
this kind. We reserve the right, at the sole discretion of our Board of
Directors, to reallocate our use of proceeds in response to these and other
factors. Until we use the net proceeds of this offering, we intend to invest
the funds in interest-bearing securities.

- --------------------------------------------------------------------------------

Market price of common stock

Prior to November 20, 2000, our common stock traded solely on The Toronto Stock
Exchange under the symbol "SLX". On November 20, 2000, our common stock began
trading on the Nasdaq SmallCap Market under the symbol "SLXP" quoted in United
Sates dollars. On November 24, 2000, we de-listed our common stock from The
Toronto Stock Exchange and began trading our common stock on the Nasdaq
SmallCap Market exclusively. On February 26, 2001, we began trading on the
Nasdaq National Market. The following table sets forth the high and low sales
prices of our common stock, as reported on The Toronto Stock Exchange, the
Nasdaq SmallCap Market, and the Nasdaq National Market.

Shares Traded Shares Traded
Under Symbol Under Symbol
"SLX" "SLXP"
------------------ --------------
High Low High Low
---------------------------------------------------------------------------
(Canadian dollars) (U.S. dollars)

Fiscal year ended December 31, 2000
First quarter............................ $ 3.60 $0.60
Second quarter........................... 2.60 1.00
Third quarter............................ 11.00 2.30
Fourth quarter........................... 17.75 8.40 $12.00 $ 5.75
Fiscal year ended December 31, 2001
First quarter............................ $15.50 $ 8.50
Second quarter........................... 25.23 13.75
Third quarter............................ 24.95 9.15
Fourth quarter........................... 22.50 12.36
Fiscal year ending December 31, 2002
First quarter (through February 11, 2002) $20.35 $16.15

On February 11, 2002, the last reported sale price of our common stock on the
Nasdaq National Market was $17.26 per share. As of February 8, 2002, there were
approximately 3,500 stockholders of record of our common stock.

We have never paid a cash dividend on our common stock, and do not expect to do
so in the foreseeable future.

- --------------------------------------------------------------------------------

Capitalization

The following table sets forth our capitalization at December 31, 2001 on an
actual basis and on an as adjusted basis, after giving effect to the issuance
and sale of 4,000,000 shares of common stock in this offering at an assumed
public offering price of $17.40 per share, less the underwriting discount and
estimated offering expenses payable by us.

At December 31, 2001
--------------------
As
Actual Adjusted
- ------------------------------------------------------------------------------------------------------
(in thousands)

Cash and cash equivalents........................................................ $ 27,868 $ 92,842
======== ========
Stockholders' equity:
Preferred stock, par value $0.001; 5,000,000 shares authorized, no shares issued
or outstanding................................................................ -- --
Common stock, par value $0.001; 40,000,000 shares authorized; 16,708,681
shares issued and outstanding, actual, and 20,708,681 shares issued and
outstanding, as adjusted....................................................... 17 21
Additional paid in capital....................................................... 73,461 138,431
Accumulated deficit.............................................................. (45,884) (45,884)
-------- --------
Total stockholders' equity.................................................... 27,594 92,568
-------- --------
Total liabilities and stockholders' equity.................................. $ 38,590 $103,564
======== ========

The number of shares of our common stock in the actual and as adjusted columns
in the table above excludes:

. 16,667 shares of common stock issuable upon exercise of an outstanding
warrant at an exercise price of $3.00 per share;

. 2,165,466 shares of our common stock issuable upon exercise of outstanding
options issued under our stock option plans at a weighted average exercise
price of $8.41 per share at December 31, 2001; and

. an additional 987,823 shares of common stock available for future issuance
under our stock option plans at December 31, 2001.

- --------------------------------------------------------------------------------

Dilution

Our net tangible book value on December 31, 2001 was $27.6 million, or
approximately $1.65 per share. "Net tangible book value" is total assets minus
the sum of liabilities and intangible assets. "Net tangible book value per
share" is net tangible book value divided by the total number of shares of
common stock outstanding.

Net tangible book value dilution per share to new investors represents the
difference between the amount per share paid by purchasers of shares of common
stock in this offering and the net tangible book value per share of our common
stock immediately after completion of this offering. After giving effect to the
sale of 4,000,000 shares of our common stock in this offering at an assumed
public offering price of $17.40 per share and after deducting the underwriting
discount and our estimated offering expenses, our net tangible book value as of
December 31, 2001 would have been $5.53 per share. This amount represents an
immediate increase in net tangible book value of $3.88 per share to existing
stockholders and an immediate dilution in net tangible book value of $11.87 per
share to purchasers of common stock in this offering, as illustrated in the
following table:

Assumed public offering price per share......................................... $17.40
Net tangible book value per share as of December 31, 2001.................... $1.65
Increase in net tangible book value per share attributable to this offering.. 3.88
-----
Pro forma net tangible book value per share as of December 31, 2001 after giving
effect to this offering....................................................... 5.53
------
Dilution per share to new investors in this offering............................ $11.87
======

This table:

. assumes no exercise of an outstanding warrant to purchase 16,667 shares of
common stock at an exercise price of $3.00 per share;

. assumes no exercise of options to purchase 2,165,466 shares of common stock
at a weighted average exercise price of $8.41 per share outstanding as of
December 31, 2001.

To the extent that these options and warrants are exercised there will be
further dilution to new investors.

- --------------------------------------------------------------------------------

Selected consolidated financial data

This section presents our selected consolidated financial data. You should
carefully read the financial statements included in this prospectus, including
the notes to these financial statements. The selected data in this section is
not intended to replace the financial statements.

We derived the statement of operations data for the years ended December 31,
1997, 1998, 1999, 2000 and 2001 and balance sheet data as of December 31, 1997,
1998, 1999, 2000 and 2001 from audited financial statements. Historical results
are not necessarily indicative of results that we may expect in the future.

Year Ended December 31,
--------------------------------------------------
Consolidated Statements of Operations: 1997 1998 1999 2000 2001

- ------------------------------------------------------------------------------------------------------
(U.S. dollars, in thousands, except per share data)
Revenues:
Product revenue................................... $ 245 $ 559 $ 491 $ 6,307 $ 14,129
Revenues from collaborative agreements............ 1,821 1,000 2,602 8,235 8,221
-------- -------- -------- -------- --------
Total revenues................................. 2,066 1,559 3,093 14,542 22,350
Expenses:
Cost of products sold............................. 827 926 878 2,287 3,495
License fees and costs related to collaborative
agreements....................................... 461 78 297 4,173 5,583
Research and development.......................... 3,516 5,967 4,787 3,844 6,629
Selling, general and administrative............... 2,430 2,569 1,932 7,412 24,688
-------- -------- -------- -------- --------
Total expenses................................. 7,234 9,540 7,894 17,716 40,395
-------- -------- -------- -------- --------
Loss from operations.............................. (5,168) (7,981) (4,801) (3,174) (18,045)
Interest, other income (expense), net............. 378 572 190 208 547
Income taxes...................................... -- -- -- (9) --
-------- -------- -------- -------- --------
Net loss.......................................... $ (4,790) $ (7,409) $ (4,611) $ (2,975) $(17,498)
======== ======== ======== ======== ========
Net loss per share, basic and diluted/(1)/........ $ (0.63) $ (0.73) $ (0.45) $ (0.26) $ (1.13)
======== ======== ======== ======== ========
Shares used in computing net loss per
share/(1)/....................................... 7,613 10,208 10,209 11,356 15,456
======== ======== ======== ======== ========
At December 31,
--------------------------------------------------
Consolidated Balance Sheet Data: 1997 1998 1999 2000 2001
- ------------------------------------------------------------------------------------------------------
Cash and cash equivalents............................. $ 15,173 $ 2,763 $ 2,402 $ 13,244 $ 27,868
Short-term investments................................ -- 4,500 -- -- --
Working capital....................................... 13,884 6,553 2,013 12,408 26,308
Total assets.......................................... 15,878 8,256 3,659 25,761 38,590
Accumulated deficit................................... (13,391) (20,800) (25,411) (28,386) (45,884)
Stockholders' equity.................................. 14,129 6,826 2,215 12,742 27,594

- --------
(1) See Note 2 of Notes to Consolidated Financial Statements for an explanation
of shares used in computing net loss per share.

- --------------------------------------------------------------------------------

Management's discussion and analysis of financial condition and results of
operations

Overview

We are a specialty pharmaceutical company dedicated to acquiring, developing
and commercializing prescription drugs used in the treatment of a variety of
gastrointestinal diseases, which are those affecting the digestive tract. Our
strategy is to identify and acquire rights to products that we believe have
potential for near-term regulatory approval or are already approved; apply our
regulatory, product development, and sales and marketing expertise to
commercialize these products; and use our 60-person sales force focused on
high-prescribing U.S. gastroenterologists to sell our products. We rely on
distribution relationships with third parties to sell our products outside the
United States.

We in-licensed rights to balsalazide disodium from Biorex Laboratories Limited
in 1992. In 1993, we granted Astra AB an exclusive license to balsalazide
disodium throughout the world, excluding Japan, Taiwan, Korea, Italy, Spain,
Portugal and Greece. In 1999, Astra merged with Zeneca PLC, a British
pharmaceutical company, to create AstraZeneca PLC. In December 1999, we signed
an agreement with AstraZeneca under which the marketing and distribution rights
for balsalazide disodium previously licensed by us to Astra would return to us.
AstraZeneca returned all rights, intellectual property and information relating
to balsalazide to us and future milestone payments from AstraZeneca were
terminated.

In May 2000, we signed an agreement with Shire Pharmaceuticals Group plc under
which Shire purchased from us the exclusive rights to balsalazide disodium for
Austria, Belgium, Denmark, Finland, France, Germany, Iceland, Republic of
Ireland, Luxembourg, Norway, The Netherlands, Switzerland, Sweden and the
United Kingdom. Under the agreement, Shire agreed to pay us up to a total of
approximately $24 million in cash and Shire stock, including approximately
$12.1 million in up-front fees and up to $12 million upon the achievement of
milestones. In accordance with our license agreement with Biorex, we shared and
will continue to share a portion of the cash payments with Biorex. In addition,
we delivered all of the Shire stock we received to Biorex. In May 2000, Shire
paid us $9.6 million of cash and $2.5 million by way of the issuance of 160,546
Shire shares. In August 2000, Shire paid us $4.4 million in connection with the
transfer to Shire of the United Kingdom product license for balsalazide.

In July 2000, the FDA approved Colazal for marketing in the United States for
the treatment of mildly to moderately active ulcerative colitis. In December
2000, we established our own 30-member, direct sales force to market Colazal in
the United States. This sales force has been increased to over 60 members as of
December 31, 2001. Although the creation of an independent sales organization
involved substantial costs, we believe that the financial returns from
balsalazide and rifaximin and other future products, if acquired and approved,
will be more favorable to us than those from the indirect sale of product
through marketing partners.

In 1996, we in-licensed rights to our second drug, rifaximin, in the United
States and Canada from Alfa Wassermann. In December 2001, we submitted an NDA
to the FDA for rifaximin, which we intend to market in the United States under
the trade name Lumenax, as a treatment for travelers' diarrhea. We believe
there are opportunities to develop Lumenax for other indications, including
bacterial overgrowth in the small intestine, antibiotic-associated and other
forms of colitis, pouchitis, Crohn's disease, diverticular disease and hepatic
encephalopathy, and we intend to pursue these opportunities as we

- --------------------------------------------------------------------------------

Management's discussion and analysis of financial conditions and results of
operations
- --------------------------------------------------------------------------------

deem appropriate. If FDA approval is obtained, we intend to market Lumenax in
the United States through our own direct sales force.

In November 2000, we raised approximately $13.1 million, net of offering
expenses, through a private placement of 2.26 million shares of common stock.
Also in November 2000, we listed and initiated trading of our securities on the
Nasdaq SmallCap Market and subsequently ceased trading our securities on the
Toronto Stock Exchange. In February 2001, we began trading our common stock on
the Nasdaq National Market. In May 2001, we raised approximately $28.1 million,
net of offering expenses, through a private placement of 1.96 million shares of
common stock.

On December 31, 2001, we changed our place of incorporation from the British
Virgin Islands to the state of Delaware.

Revenue Recognition

Product sales are recorded upon shipment of order and transfer of title. In
December 2000, we made our first U.S. sales of Colazal to wholesalers. Product
sales in 1999 were limited to sales made to one of our licensees.

In December 1999, the SEC issued Staff Accounting Bulletin No. 101, "Revenue
Recognition in Financial Statements," that, among other guidance, clarifies
certain conditions to be met in order to recognize revenue. SAB 101 requires
companies to recognize up-front non-refundable fees over the term of the
related agreement unless the fee is in exchange for products delivered or
services performed that represent the culmination of a separate earnings
process. In fourth quarter 2000, we implemented SAB 101, which had no impact on
prior years but did affect 2000. Accordingly, there was no cumulative effect of
the adoption of SAB 101 as of January 1, 2000. However, as a result of the
adoption of SAB 101, $8.7 million of the $11.7 million initial payment received
from Shire and previously recognized as revenue during the second quarter of
2000 was deferred and was recognized as revenue ratably through the end of
2001. The other $3.0 million received from Shire was initially deferred and
will continue to be recognized according to contract terms, for any future
clinical studies for balsalazide conducted in order to gain approval in France,
The Netherlands and Germany.

Due to the uniqueness of each of our licensing arrangements, we analyze each
element of each contract, including milestone payments, to determine the
appropriate revenue recognition. In accordance with SAB 101, we recognize
revenue upon achievement of contractual milestones only when and to the extent
we conclude that a separate earnings process has been culminated or the
milestone is representative of the level of effort and progress toward
completion of a long-term contract.

Valuation and Qualifying Accounts

Allowance for Uncollectible Accounts

To date, we have not experienced any material accounts receivable collection
issues. However, based on a review of specific customer balances, industry
experience and the current economic environment, we currently reserve 1% of our
outstanding accounts receivable balance as an allowance for uncollectable
accounts.

Allowance for Rebates and Coupons

Based on current contracts that allow for rebates and our estimate of revenue
associated with those contracts, we currently reserve 4% of gross product
revenues as an allowance for rebate charges, which at December 31, 2001 was
$0.7 million. Based on the number of available coupons, the estimate of

- --------------------------------------------------------------------------------

Management's discussion and analysis of financial conditions and results of
operations
- --------------------------------------------------------------------------------

redemption of available coupons and industry experience, we currently have
reserved approximately $0.5 million as an allowance for coupon redemption.

RESULTS OF OPERATIONS

Years Ended December 31, 2001, 2000 and 1999

Revenues totaled $22.4 million, $14.5 million and $3.1 million for 2001, 2000
and 1999, respectively. Revenues for the year ended December 31, 2001 included
product revenues of $14.1 million and revenues from collaborative agreements of
$8.3 million, of which $5.5 million related to the agreement with Shire.

Revenues for the year ended December 31, 2000 included product revenues of $6.3
million and revenues from collaborative agreements of $8.2 million, of which
$7.6 million related to the agreement with Shire.

Revenues for the year ended December 31, 1999 included product revenues of $0.5
million and revenues from collaborative agreements with Astra of $2.6 million,
of which $2.0 million related to the completion of a clinical trial and the
termination of our collaborative agreements with Astra and $0.5 million related
to the launch of balsalazide in Sweden.

Product revenues during 2001 were higher than in 2000 due to the U.S. launch of
Colazal in January 2001. Product revenues during 2000 were higher than in 1999
due to our initial U.S. sales of Colazal to distributors in December 2000 in
advance of the launch of Colazal in January 2001. Product revenues in 1999 and
2000 were recorded net of credits to AstraZeneca for past research and
development funding equal to 20% of invoiced sales.

Total costs and expenses were $40.4 million, $17.7 million and $7.9 million for
2001, 2000 and 1999, respectively. The substantial increase in 2001 was the
result of the U.S. launch of Colazal in January 2001 and increased expenditures
associated with expanding our commercialization infrastructure. The increase in
total costs and expenses in 2000 from 1999 was primarily a result of higher
licensing fees payable to Biorex as a result of our agreement with Shire and
costs associated with the building of our sales and marketing infrastructure
for the launch of Colazal in the United States.

We recognized cost of products sold of $3.5 million, $2.3 million and $0.9
million for 2001, 2000 and 1999, respectively. The increase in cost of products
sold in 2001 was due to the U.S. launch of Colazal in January 2001. The
significant increase in cost of products sold in 2000 relates to our
preparation, beginning in December 2000, to launch Colazal in the United
States. License fees and costs related to collaborative agreements of $5.6
million, $4.2 million and $0.3 million in 2001, 2000 and 1999, respectively,
related primarily to payments made to Biorex and Alfa Wassermann under the
terms of the respective license agreements. The increase in license fees and
costs related to collaborative agreements in 2001 from 2000 was due to payments
to Biorex, the licensor of balsalazide disodium, as a result of the Shire
agreement and expenses related to supplying balsalazide to Menarini and Shire.
The increase in license fees in 2000 from 1999 was due to payments to Biorex,
as a result of the Shire agreement.

Research and development expense was $6.6 million, $3.8 million and $4.8
million for 2001, 2000 and 1999, respectively. The increase in research and
development expenses in 2001 from 2000 was primarily due to costs associated
with the preparation of the NDA for rifaximin as a treatment for travelers'
diarrhea and the ongoing multi-center study for rifaximin as a treatment for
hepatic encephalopathy. The decrease in research and development expenses in
2000 from 1999 was due primarily to reduced expenditures for balsalazide and
the completion of the rifaximin clinical trial for infectious diarrhea.

- --------------------------------------------------------------------------------

Management's discussion and analysis of financial conditions and results of
operations
- --------------------------------------------------------------------------------

We expect research and development costs to increase as we pursue additional
indications for balsalazide and rifaximin and if and when we acquire new
products.

Selling, general and administrative expenses were $24.7 million, $7.4 million
and $1.9 million, for 2001, 2000 and 1999, respectively. The substantial
increase in 2001 compared to 2000 was the result of the U.S. launch of Colazal
in January 2001 and increased expenditures associated with expanding our
commercialization infrastructure. The increase in 2000 compared to 1999 was
primarily the result of expenditures associated with the building of our sales
and marketing infrastructure for the U.S. launch of Colazal in January 2001.

Interest and other income (expenses), net was $0.5 million in 2001, $0.2
million in 2000 and $0.2 million in 1999. Interest income was significantly
higher in 2001 than 2000 due to higher average cash balances resulting from the
completion of private placements in November 2000 and May 2001.

We experienced net losses of $17.5 million in 2001, $3.0 million in 2000 and
$4.6 million in 1999.

At December 31, 2001, we had a U.S. federal net operating loss carryforward of
approximately $36.0 million related to our subsidiary, Salix Pharmaceuticals,
Inc. This carryforward will expire on various dates beginning in 2004 through
2020 if not utilized. Utilization of the federal net operating loss and credit
carryforwards might be subject to a substantial annual limitation due to the
"change in ownership" provisions of the Internal Revenue Code. The annual
limitation may result in the expiration of net operating losses and credits
before utilization.

See Note 9 to our financial statements included in this prospectus for a
presentation of our quarterly results of operations for the years ended
December 31, 2001 and 2000.

LIQUIDITY AND CAPITAL RESOURCES

Since inception, we have financed product development, operations and capital
expenditures primarily from funding arrangements with collaborative partners
and from public and private sales of equity securities. Cash used in our
operations was $16.4 million in 2001, $2.5 million in 2000 and $4.8 million in
1999. Negative operating cash flows during 2001, 2000 and 1999 were caused
primarily by operating losses. Our capital expenditures were $1.3 million in
2001, $0.2 million in 2000 and $17,000 in 1999, with the expenditures primarily
attributable to the purchase of office furniture and equipment. The increase in
2001 from 2000 was primarily the result of the relocation of our corporate
headquarters in April 2001, where we occupy approximately 26,000 square feet of
office space under a lease extending to August 31, 2011.

As of December 31, 2001, we had approximately $27.9 million in cash and cash
equivalents. As of December 31, 2000, we had approximately $13.2 million in
cash and cash equivalents. The increase of $14.7 million was due to the
completion of a private placement of 1.96 million shares of our common stock in
May 2001 with net proceeds of approximately $28.1 million, the issuance of
common stock upon the exercise of stock options and warrants in 2001 with net
proceeds of approximately $4.2 million, offset by operating losses.

During the first quarter of 2001, we entered into a $7.0 million revolving
working capital line of credit, with borrowing capacity of up to 85% of our
eligible accounts receivable under 90 days old from the date of invoice. We had
no outstanding balance under this line as of December 31, 2001. As of December
31, 2001, we had no long-term debt outstanding.

- --------------------------------------------------------------------------------

As of December 31, 2001, we had non-cancelable purchase order commitments for
inventory purchases of approximately $7.0 million. We anticipate significant
expenditures in 2002 related to our continued sales, marketing, product launch
and development efforts associated with Colazal and Lumenax. To the extent we
acquire rights to additional products, we will incur additional expenditures.

We have sustained continuing operating losses and had an accumulated deficit of
$45.9 million as of December 31, 2001. We expect to incur operating losses
until product revenues reach a sufficient level to support ongoing operations.
In addition, in the year ended December 31, 2001, we had negative cash flows
from operations of approximately $16.4 million. We believe our cash and cash
equivalent balances at December 31, 2001, plus the proceeds of this offering,
should be sufficient to satisfy our cash requirements for the foreseeable
future. However, our actual cash needs might vary materially from those now
planned because of a number of factors, including our success selling products,
the results of research and development activities, FDA and foreign regulatory
processes, establishment of and change in relationships with strategic
partners, technological advances by us and other pharmaceutical companies, the
terms of our collaborative arrangements with strategic corporate partners, the
status of competitive products and whether we acquire rights to additional
products. We might seek additional debt or equity financing or both to fund our
operations. If we increased our debt levels, we might be restricted in our
ability to raise additional capital and might be subject to financial and
restrictive covenants. If we issued additional equity, our stockholders could
suffer dilution. We might also enter into additional collaborative arrangements
with corporate partners that could provide us with additional funding in the
form of equity, debt, licensing, milestone and/or royalty payments. We might
not be able to enter into such arrangements or raise any additional funds on
terms favorable to us or at all.

- --------------------------------------------------------------------------------

Management

The following table sets forth certain information concerning our directors and
executive officers as of January 31, 2002:

Name Age Position
--------------------------------------------------------------------

Robert P. Ruscher............ 41 President, Chief Executive Officer
and Director
Adam C. Derbyshire........... 36 Vice President, Finance and
Administration and Chief
Financial Officer
Randy W. Hamilton............ 47 Executive Chairman of the Board
Lorin K. Johnson, Ph.D....... 48 Senior Vice President and Chief
Scientific Officer
Carolyn J. Logan............. 52 Senior Vice President, Sales and
Marketing
Allen W. Mangel, M.D., Ph.D.. 49 Vice President, Research &
Development
R. Scott Sykes, M.D.......... 44 Vice President, Medical Affairs
and Chief Medical Officer
Joseph E. Tyler.............. 51 Vice President, Operations
John F. Chappell /(1)/....... 65 Director
Thomas W. D'Alonzo /(1)/..... 58 Director
Richard A. Franco, R.Ph./(1)/ 60 Director

- --------
(1) Member of Audit Committee and Compensation Committee.

Robert P. Ruscher joined Salix in April 1995 and has served as the President
and Chief Executive Officer and as a member of the Board of Directors since
November 1999. Prior to assuming his current position, Mr. Ruscher held various
positions of increasing responsibilities within Salix, including Executive Vice
President, Vice President of Business Development, Chief Financial Officer and
Corporate Secretary. Before joining Salix, Mr. Ruscher practiced law, advising
emerging growth pharmaceutical companies in licensing, corporate partnering,
financing and general corporate matters with Wyrick Robbins Yates & Ponton from
May 1994 to April 1995; with Venture Law Group, which he co-founded, from March
1993 to April 1994; and with Wilson Sonsini Goodrich & Rosati from June 1988 to
February 1993. From July 1983 to July 1986, Mr. Ruscher was a Senior Accountant
with Price Waterhouse in San Francisco, California, working with emerging
growth technology companies. Mr. Ruscher is a Certified Public Accountant and
received his J.D. with distinction from the Stanford University School of Law
and his B.S. in Commerce (Business Administration) with distinction from the
University of Virginia.

Adam C. Derbyshire has served as Chief Financial Officer and Vice President,
Finance and Administration since June 2000. Prior to joining Salix, Mr.
Derbyshire was Vice President, Corporate Controller and Secretary of Medco
Research, Inc. from June 1999 to June 2000, Corporate Controller and Secretary
of Medco from September 1995 to June 1999 and Assistant Controller of Medco
from October 1993 to September 1995.

Randy W. Hamilton is one of the co-founders of Salix and has been its Chairman
of the Board since inception. From inception through November 1999 he was also
President and Chief Executive Officer. In 1998, Mr. Hamilton was named "Man of
the Year" by the Crohn's and Colitis Foundation of America,

- --------------------------------------------------------------------------------

Management
- --------------------------------------------------------------------------------

Bay Area chapter. Prior to founding Salix, Mr. Hamilton was Business
Development Manager for California Biotechnology, Inc., now Scios, Inc.,
responsible for licensing products to the Japanese pharmaceutical industry and
for the commercial aspects of several of the company's development projects,
including human lung surfactant, nasal drug delivery systems, genetic market
diagnosis, and growth factors. Before joining California Biotechnology, Inc.,
Mr. Hamilton was Director of Strategic Planning and Business Development for
SmithKline Diagnostics, then a division of SmithKline Beecham, where he also
held positions in market research and marketing information services. Mr.
Hamilton received his B.A. in Sociology from California State University, Long
Beach.

Lorin K. Johnson, Ph.D. is one of the co-founders of Salix and has served as
Chief Science Officer since 1993. Prior to co-founding Salix, Dr. Johnson
served as Director of Scientific Operations at California Biotechnology, Inc.,
now Scios, Inc. Prior to joining California Biotechnology, Dr. Johnson was
assistant Professor of Pathology at Stanford University Medical Center.

Carolyn J. Logan has served as Senior Vice President, Sales and Marketing since
June 2000. Prior to joining Salix, Ms. Logan served as Vice President, Sales
and Marketing of the Oclassen Dermatologics division of Watson Pharmaceuticals,
Inc. from May 1997 to June 2000, and as Vice President, Sales from February
1997 to May 1997. Prior to that date, she served as Director, Sales of Oclassen
Pharmaceuticals, Inc. from January 1993 to February 1997. Prior to joining
Oclassen, Ms. Logan held various sales and marketing positions with Galderma
Laboratories, Ulmer Pharmacal and Westwood Pharmaceuticals.

Allen W. Mangel, M.D., Ph.D. joined Salix in November 2001 with responsibility
for the planning and execution of our product development efforts, including
the evaluation of new product opportunities and the clinical development and
regulatory approval of product candidates. Prior to joining Salix, Dr. Mangel
was Worldwide Head of Gastroenterology Clinical Development for
GlaxoSmithKline. He also held an Assistant Professor in Medicine position at
Duke University Medical Center. Dr. Mangel holds an M.D. from the Georgetown
University School of Medicine and a Ph.D. in physiology from the University of
Illinois.

R. Scott Sykes, M.D. joined Salix in October 2001 with 18 years of industry
experience. He is responsible for all medical affairs, including drug
information services, product safety, and post-marketing surveillance. Dr.
Sykes was previously employed by GlaxoSmithKline, where he served most recently
as Vice President, North American Product Surveillance. Dr. Sykes holds an M.D.
from the University of North Carolina School of Medicine.

Joseph E. Tyler joined Salix in April 2001 with over 25 years of manufacturing,
process development and product development experience. Prior to joining Salix,
Mr. Tyler was Vice President of Manufacturing for GelTex Pharmaceuticals. He
also served as Director of Operations and European Operations with Stryker
Biotech and in other roles with Abbott Biotech (formerly Damon Biotech) and
Lederle Laboratories. Mr. Tyler received a B.S. in Chemical Engineering from
Carnegie-Mellon University and a M.S. in Biochemical Engineering from Cornell
University.

John F. Chappell has served as a member of the Board of Directors of Salix
since December 1993 and as a member of its Audit and Compensation Committees
since December 1994. From 1990 to 2000, he served as founder and Chairman of
Plexus Ventures, which specializes in business development and strategic
transactions for clients in the biotechnology, pharmaceutical and drug delivery
industries. Prior to founding Plexus Ventures, Mr. Chappell served as Chairman,
Worldwide Pharmaceuticals for SmithKline Beecham plc, where he was responsible
for the multi-billion dollar ethical pharmaceutical business with 30,000
employees worldwide. During his 28 years at SmithKline Beecham, Mr. Chappell
also headed the International Consumer Products (OTC) operations and the
Corporate Development Center. He has served as a Director of SmithKline
Beecham, the Pharmaceutical Manufacturers

- --------------------------------------------------------------------------------

Management
- --------------------------------------------------------------------------------

Association, now PhRMA, and the Industrial Biotechnology Association, now BIO.
Additionally, Mr. Chappell has served as a director of a number of
biotechnology companies including Aronex Pharmaceuticals, Neurex Corporation
(now part of Elan) and Ribi ImmunoChem Research. Mr. Chappell holds a B.A. from
Harvard University and attended the Wharton School of the University of
Pennsylvania.

Thomas W. D'Alonzo joined the Board of Directors of Salix in May 2000 with over
17 years of pharmaceutical executive experience. From 1996 to 1999, Mr.
D'Alonzo served as President and Chief Operating Officer of Pharmaceutical
Product Development, Inc. ("PPD"), a publicly traded provider of research,
development and consulting services in life and discovery sciences with over
3,000 employees worldwide. Before joining PPD, he served as President and Chief
Executive Officer of GENVEC, Inc., a gene therapy biotechnology company, from
1993 to 1996. From 1983 to 1993, Mr. D'Alonzo held positions of increasing
responsibility within Glaxo Inc., including President of Glaxo, Inc. Mr.
D'Alonzo has served as a director of Goodmark Foods, PPD and Amarillo
Biosciences, Inc., all publicly traded companies. Mr. D'Alonzo received his
B.S. in Business Administration from the University of Delaware, and his law
degree from the University of Denver College of Law.

Richard A. Franco, R.Ph. joined the Board of Directors of Salix in May 2000
with over 32 years of pharmaceutical executive and sales and marketing
experience. Mr. Franco has served as Chairman, Chief Executive Officer and a
founder of LipoMed, Inc., a provider of spectroscopic analysis for clinical
diagnostics, since November 1997. From April 1996 to October 1997, he was
President of the Richards Group, Ltd., a healthcare consulting firm. From April
1994 to April 1996, Mr. Franco served as President and Chief Executive Officer
of Trimeris, Inc., a publicly traded biopharmaceutical company. Previously, Mr.
Franco served as a corporate officer of Glaxo, Inc., first as Vice President
and General Manager of Glaxo Dermatology and then as Vice President and General
Manager of the Cerenex Division. Mr. Franco's other positions with Glaxo
included Vice President of Commercial Development and Vice President of
Marketing. Prior to joining Glaxo, Mr. Franco was with Eli Lilly and Company
for 16 years. Mr. Franco is a director of Amarillo Biosciences. He received his
pharmacy degree from St. John's University and attended Long Island University
for his graduate work in pharmaceutical marketing and management.

- --------------------------------------------------------------------------------

Underwriting

We and the underwriters for this offering named below have entered into an
underwriting agreement concerning the shares being offered. Subject to
conditions, each underwriter has severally agreed to purchase the number of
shares indicated in the following table. UBS Warburg LLC, Wachovia Securities,
Thomas Weisel Partners LLC, Leerink Swann & Company and SunTrust Capital
Markets, Inc. are the representatives of the underwriters. UBS Warburg LLC and
Wachovia Securities are joint book-running managers of this offering.

Number
Underwriters of shares
----------------------------------------

UBS Warburg LLC...............
First Union Securities, Inc...
Thomas Weisel Partners LLC....
Leerink Swann & Company.......
SunTrust Capital Markets, Inc.
---------
Total............... 4,000,000
=========

If the underwriters sell more shares than the total number set forth in the
table above, the underwriters have a 30-day option to buy up to 600,000 shares
from us at the public offering price less the underwriting discounts and
commissions to cover these sales. If any shares are purchased under this
option, the underwriters will severally purchase shares in approximately the
same proportion as set forth in the table above.

The following table provides information regarding the amount of the discount
to be paid to the underwriters by us. These amounts are shown assuming both no
exercise and full exercise of the underwriters' option to purchase up to an
additional 600,000 shares.

No Exercise of Full Exercise of
Over Allotment Over Allotment
Option Option
-----------------------------------------

Per share $ $
Total... $ $

We estimate that the total expenses of this offering payable by us, excluding
underwriting discounts and commissions, will be about $450,000.

Shares sold by the underwriters to the public will initially be offered at the
public offering price set forth on the cover of this prospectus. Any shares
sold by the underwriters to securities dealers may be sold at a discount of up
to $ per share from the public offering price. Any of these securities
dealers may resell any shares purchased from the underwriters to other brokers
or dealers at a discount of up to $ per share from the public offering
price. If all the shares are not sold at the public offering price, the
representatives may change the offering price and the other selling terms.

We and each of our directors and executive officers have agreed with the
underwriters not to offer, sell, contract to sell, hedge or otherwise dispose
of, directly or indirectly, any of our common stock or securities convertible
into or exercisable or exchangeable for shares of common stock during the period

- --------------------------------------------------------------------------------

Underwriting
- --------------------------------------------------------------------------------

from the date of this prospectus continuing through the date 90 days after the
date of this prospectus, subject to certain permitted exceptions, without the
prior written consent of UBS Warburg LLC.

In connection with this offering, the underwriters may purchase and sell shares
of our common stock in the open market. These transactions might include
stabilizing transactions, short sales and purchases to cover positions created
by short sales. Stabilizing transactions consist of bids or purchases made for
the purpose of preventing or retarding a decline in the market price of our
common stock while this offering is in progress. Short sales involve the sale
by the underwriters of a greater number of shares than they are required to
purchase in this offering. Short sales can be either "covered short sales" or
"naked short sales." Covered short sales are sales made in an amount not
greater than the underwriters' over-allotment option to purchase additional
shares in this offering. The underwriters may close out any covered short
position by either exercising their over-allotment option or purchasing shares
in the open market. In determining the source of shares to close out the
covered short position, the underwriters will consider, among other things, the
price of shares available for purchase in the open market as compared to the
price at which they can purchase shares through the over-allotment option.
Naked short sales are sales in excess of the over-allotment option. The
underwriters must close out any naked short position by purchasing shares in
the open market. A naked short position is more likely to be created if the
underwriters are concerned there might be downward pressure on the price of
shares in the open market after pricing that could adversely affect investors
who purchase in this offering.

The underwriters also may impose a penalty bid. This occurs when a particular
underwriter repays to the underwriters a portion of the underwriting discount
received by it because the representatives have repurchased shares sold by or
for the account of that underwriter in stabilizing or short covering
transactions.

These activities by the underwriters might stabilize, maintain or otherwise
affect the market price of our common stock. As a result, the price of our
common stock might be higher than the price that otherwise might exist in the
open market. If these activities are commenced, they may be discontinued by the
underwriters at any time. These transactions may be effected on the Nasdaq
National Market or otherwise.

In addition, in connection with this offering certain of the underwriters and
selling group members may engage in passive market making transactions in the
common stock on the Nasdaq National Market prior to the pricing and completion
of the offering. Passive market making consists of displaying bids on the
Nasdaq National Market no higher than the bid prices of independent market
makers and making purchases at prices no higher than these independent bids and
effected in response to order flow. Net purchases by a passive market maker on
each day are limited to a specified percentage of the passive market maker's
average daily trading volume in the common stock during a specified period and
must be discontinued when such limit is reached. Passive market making might
cause the price of the common stock to be higher than the price that otherwise
would exist in the open market in the absence of such transactions. If passive
market making is commenced, it may be discontinued at any time.

We have agreed to indemnify the several underwriters against some liabilities,
including liabilities under the Securities Act of 1933, and to contribute to
payments that the underwriters are required to make in respect thereof.

Leerink Swann & Company has in the past engaged in investment banking
transactions with us, for which we have paid them customary compensation. Prior
to this offering, we have not engaged in any transactions with the other
underwriters. In the ordinary course of their respective businesses, the

- --------------------------------------------------------------------------------

Underwriting
- --------------------------------------------------------------------------------

underwriters and certain of their affiliates may in the future engage in
investment and commercial banking or other transactions with us, including the
provision of certain advisory services and making loans to us.

First Union Securities, Inc., acting under the trade name of Wachovia
Securities, is an indirect, wholly-owned subsidiary of Wachovia Corporation.
Wachovia Corporation conducts its investment banking, institutional, and
capital markets businesses through its various bank, broker-dealer and nonbank
subsidiaries, including First Union Securities, Inc., under the trade name of
Wachovia Securities. Any references to Wachovia Securities in this prospectus,
however, do not include Wachovia Securities, Inc., member NASD/SIPC and a
separate broker-dealer subsidiary of Wachovia Corporation and an affiliate of
First Union Securities, Inc., which may or may not be participating as a seller
dealer in the distribution of the securities offered by this prospectus.

- --------------------------------------------------------------------------------

Where you can find more information

We file annual, quarterly and current reports, proxy statements, and other
information with the SEC. You may read and copy this information at the SEC's
public reference rooms in Washington, D.C., New York, New York and Chicago,
Illinois. You may obtain information on the operation of the Public Reference
Rooms by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site
that contains reports, proxy and information statements, and other information
about issuers that file electronically with the SEC. The address of that site
is http://www.sec.gov. You can also inspect reports, proxy and information
statements, and other information about us at the offices of the National
Association of Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C.
20006.

We filed a registration statement with the SEC under the Securities Act of 1933
relating to this offering. The registration statement contains additional
information about the offering, us and the common stock. The SEC allows us to
omit certain information included in the registration statement from this
prospectus. The registration statement may be inspected and copied at the SEC's
public reference facilities described above. For further information about us
and the common stock we propose to sell in this offering, we refer you to the
registration statement. Statements contained in this prospectus as to the
contents of any contract, agreement or other document referred to are not
necessarily complete, and in each instance reference is made to the copy of the
contract, agreement or other document filed as an exhibit to the registration
statement or any incorporated document, each statement being qualified by this
reference.

Incorporation of certain documents by reference

The SEC allows us to "incorporate by reference" the information we file with
them, which means that we can disclose important information to you by
referring you to those documents. The information incorporated by reference is
considered to be part of this prospectus, and information that we file later
with the SEC will automatically update and supersede this information. We
incorporate by reference the documents listed below (other than portions
thereof not deemed "filed") and any future filings we make with the SEC under
Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934 prior
to termination of this offering:

1. Annual Report on Form 10-K for the year ended December 31, 2000;

2. Quarterly Reports on Form 10-Q for the quarters ended March 31, June 30,
and September 30, 2001;

3. Current Reports on Form 8-K filed on February 27, April 9, May 2, May
16, May 24, May 30, June 15, June 27, July 31, August 1, August 30,
October 25, October 30, November 1, December 27, 2001, and January 2,
January 30, February 5 and February 12, 2002;

4. definitive proxy solicitation materials dated April 30, 2001; and

5. the description of our stock contained in our registration statements
filed pursuant to Section 12 of the Exchange Act, as amended from time
to time.

We will provide without charge to each person, including any beneficial
owner, to whom a prospectus is delivered, upon written or oral request of that
person, a copy of any and all information that has been

- --------------------------------------------------------------------------------

incorporated by reference in this prospectus (excluding exhibits unless
specifically incorporated by reference in those documents). Please direct
inquiries to us at the following address:

Salix Pharmaceuticals, Ltd.
Investor Relations
8540 Colonnade Center Drive
Suite 501
Raleigh, North Carolina 27615
(919) 862-1000

This prospectus is part of a registration statement we filed with the SEC. You
should rely only on the information or representations provided in this
prospectus. We have authorized no one to provide you with different
information. We are not making an offer of these securities in any state where
the offer is not permitted. You should not assume that the information in this
prospectus is accurate as of any date other than the date on the front of the
document.

Any statement contained in a document incorporated or deemed to be incorporated
by reference in this prospectus shall be deemed modified, superceded or
replaced for purposes of this prospectus to the extent that a statement
contained in this prospectus, or in any subsequently filed document that also
is deemed to be incorporated by reference in this prospectus, modifies,
supercedes or replaces such statement. Any statement so modified, superceded or
replaced shall not be deemed, except as so modified, superceded or replaced, to
constitute a part of this prospectus. Subject to the foregoing, all information
appearing in this prospectus is qualified in its entirety by the information
appearing in the documents incorporated by reference.

Legal matters

The legality of the shares of common stock to be issued in this offering will
be passed upon for Salix by Wyrick Robbins Yates & Ponton LLP, Raleigh, North
Carolina. Donald R. Reynolds, a partner at Wyrick Robbins, is married to an
employee of ours who holds options to purchase 21,500 shares of Salix common
stock. Dewey Ballantine LLP, New York, New York, is counsel for the
underwriters in connection with this offering.

Experts

Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements and schedule included in our Annual Report on Form 10-K
for the year ended December 31, 2000 as set forth in their report, which is
incorporated by reference in this registration statement, and have also audited
our consolidated financial statements and schedule for the year ended December
31, 2001, as set forth in their report, which is included in this prospectus.
Our consolidated financial statements and schedules are incorporated by
reference and included in this prospectus in reliance upon Ernst & Young LLP's
reports, given on their authority as experts in accounting and auditing.

- --------------------------------------------------------------------------------

SALIX PHARMACEUTICALS, LTD. AND SUBSIDIARIES
- --------------------------------------------------------------------------------

Index to consolidated financial statements and schedule

PAGE
-----------------------------------------------------

AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Auditors.................. F-2
Consolidated Balance Sheets..................... F-3
Consolidated Statements of Operations........... F-4
Consolidated Statements of Stockholders' Equity. F-5
Consolidated Statements of Cash Flows........... F-6
Notes to Consolidated Financial Statements...... F-7
CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
Schedule II--Valuation and Qualifying Accounts.. F-17

- --------------------------------------------------------------------------------

F-1

SALIX PHARMACEUTICALS, LTD. AND SUBSIDIARIES
- --------------------------------------------------------------------------------

REPORT OF INDEPENDENT AUDITORS

The Board of Directors
Salix Pharmaceuticals, Ltd.

We have audited the accompanying consolidated balance sheets of Salix
Pharmaceuticals, Ltd. and subsidiaries as of December 31, 2001 and 2000, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 2001.
Our audits also included the financial statement schedule, Schedule II -
Valuation and Qualifying Accounts. These financial statements and schedule are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Salix
Pharmaceuticals, Ltd. and subsidiaries at December 31, 2001 and 2000, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2001, in conformity with
accounting principles generally accepted in the United States. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
/s/ Ernst & Young LLP

Raleigh, North Carolina
February 5, 2002

- --------------------------------------------------------------------------------

F-2

SALIX PHARMACEUTICALS, LTD. AND SUBSIDIARIES
- --------------------------------------------------------------------------------

CONSOLIDATED BALANCE SHEETS

December 31,
--------------------------
2001 2000
- --------------------------------------------------------------------------------------------------------------
(U.S. Dollars in Thousands
Except Share Amounts)

ASSETS
Current assets:
Cash and cash equivalents....................................................... $ 27,868 $ 13,244
Accounts receivable............................................................. 2,378 6,156
Inventory....................................................................... 6,274 2,819
Prepaid and other current assets................................................ 784 3,208
-------- --------
Total current assets........................................................ 37,304 25,427
Property and equipment, net........................................................ 1,067 208
Other assets....................................................................... 219 126
-------- --------
Total assets....................................................................... $ 38,590 $ 25,761
======== ========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities........................................ $ 8,094 $ 4,532
Deferred revenue................................................................ 2,902 8,487
-------- --------
Total current liabilities................................................... 10,996 13,019
Commitments........................................................................ -- --
Stockholders' equity:..............................................................
Preferred stock, no par value; 5,000,000 shares authorized, issuable in series,
none outstanding.............................................................. -- --
Common stock, $0.001 par value; 40,000,000 shares authorized; 16,708,681
and 13,562,771 shares issued and outstanding at December 31, 2001 and
2000, respectively............................................................ 17 14
Additional paid-in-capital...................................................... 73,461 41,114
Accumulated deficit............................................................. (45,884) (28,386)
-------- --------
Total stockholders' equity.................................................. 27,594 12,742
-------- --------
Total liabilities and stockholders' equity......................................... $ 38,590 $ 25,761
======== ========

The accompanying notes are an integral part of these consolidated financial
statements.

- --------------------------------------------------------------------------------

F-3

SALIX PHARMACEUTICALS, LTD. AND SUBSIDIARIES
- --------------------------------------------------------------------------------

CONSOLIDATED STATEMENTS OF OPERATIONS

Year Ended December 31,
--------------------------
2001 2000 1999
- ------------------------------------------------------------------------------------------
(U.S. Dollars in Thousands,
Except Per Share Data)

Revenues:
Product revenue............................................ $ 14,129 $ 6,307 $ 491
Revenue from collaborative agreements...................... 8,221 8,235 2,602
-------- ------- -------
Total revenues......................................... 22,350 14,542 3,093
Costs and expenses:...........................................
Cost of products sold...................................... 3,495 2,287 878
License fees and costs related to collaborative agreements. 5,583 4,173 297
Research and development................................... 6,629 3,844 4,787
Selling, general and administrative........................ 24,688 7,412 1,932
-------- ------- -------
Total costs and expenses............................... 40,395 17,716 7,894
-------- ------- -------
Loss from operations.......................................... (18,045) (3,174) (4,801)
Interest, and other income (expense), net..................... 547 208 190
Income taxes.................................................. -- (9) --
-------- ------- -------
Net loss............................................... $(17,498) $(2,975) $(4,611)
======== ======= =======
Net loss per share, basic and diluted......................... $ (1.13) $ (0.26) $ (0.45)
======== ======= =======
Shares used in computing net loss per share, basic and diluted 15,456 11,356 10,209
======== ======= =======

The accompanying notes are an integral part of these consolidated financial
statements.

- --------------------------------------------------------------------------------

F-4

SALIX PHARMACEUTICALS, LTD. AND SUBSIDIARIES
- --------------------------------------------------------------------------------

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

Common Stock
-------------------- Additional Accumulated Stockholders'
Shares Amount Paid-in-capital Deficit Equity
---------- --------- --------------- ----------- -------------
- -----------------------------------------------------
(U.S. Dollars in Thousands, Except Share Amounts)

Balance at December 31, 1998........................ 10,208,838 $ 10 $ 27,616 $(20,800) $ 6,826
Net loss............................................ -- -- -- (4,611) (4,611)
---------- --------- --------- -------- --------
Balance at December 31, 1999........................ 10,208,838 10 27,616 (25,411) 2,215
Issuance of common stock upon exercise of stock
options......................................... 593,933 1 290 -- 291
Issuance of common stock in connection with the
Company's private placement, net of issuance
costs of $1,014................................. 2,760,000 3 13,208 -- 13,211
Net loss............................................ -- -- -- (2,975) (2,975)
---------- --------- --------- -------- --------
Balance at December 31, 2000........................ 13,562,771 14 41,114 (28,386) 12,742
Issuance of common stock upon exercise of stock
options and warrants............................ 1,185,910 1 4,229 -- 4,230
Issuance of common stock in connection with the
Company's private placement, net of issuance
costs of $1,281................................. 1,960,000 2 28,118 -- 28,120
Net loss............................................ -- -- -- (17,498) (17,498)
---------- --------- --------- -------- --------
Balance at December 31, 2001........................ 16,708,681 $ 17 $ 73,461 $(45,884) $ 27,594
========== ========= ========= ======== ========

The accompanying notes are an integral part of these consolidated financial
statements.

- --------------------------------------------------------------------------------

F-5

SALIX PHARMACEUTICALS, LTD. AND SUBSIDIARIES
- --------------------------------------------------------------------------------

CONSOLIDATED STATEMENTS OF CASH FLOWS

Year Ended December 31,
----------------------------
2001 2000 1999
- ---------------------------------------------------------------------------------------------
(U.S. Dollars in Thousands)

Cash Flows from Operating Activities
Net loss...................................................... $(17,498) $(2,975) $(4,611)
Adjustments to reconcile net loss to cash used in operating
activities:
Depreciation and amortization............................. 223 120 88
Loss on disposal of fixed asset........................... 21 13 --
Changes in assets and liabilities:
Accounts receivable....................................... 3,778 (5,869) (287)
Inventory and other assets................................ (905) (5,334) (48)
Accounts payable and accrued liabilities.................. 3,562 3,088 14
Deferred revenue.......................................... (5,585) 8,487 --
-------- -------- --------
Net cash used in operating activities.......................... (16,404) (2,470) (4,844)
Cash Flows from Investing Activities
Sale and maturity of short-term investments................. -- -- 4,500
Purchases of property and equipment......................... (1,107) (190) (17)
Proceeds from the disposal of property and equipment........ 4 -- --
Purchase of other assets.................................... (219) -- --
-------- -------- --------
Net cash (used in) provided by investing activities............ (1,322) (190) 4,483
Cash Flows from Financing Activities
Proceeds from issuance of common stock...................... 32,350 13,502 --
-------- -------- --------
Net cash provided by financing activities...................... 32,350 13,502 --
-------- -------- --------
Net increase (decrease) in cash and cash equivalents........... 14,624 10,842 (361)
Cash and cash equivalents at beginning of year................. 13,244 2,402 2,763
-------- -------- --------
Cash and cash equivalents at end of year....................... $ 27,868 $13,244 $ 2,402
======== ======== ========

The accompanying notes are an integral part of these consolidated financial
statements.

- --------------------------------------------------------------------------------

F-6

SALIX PHARMACEUTICALS, LTD. AND SUBSIDIARIES
- --------------------------------------------------------------------------------

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) ORGANIZATION AND BASIS OF PRESENTATION

Salix Pharmaceuticals, Ltd., formerly Salix Holdings, Ltd. ("Salix" or the
"Company"), became a Delaware corporation on December 31, 2001 pursuant to a
reorganization and continuation of the Company as a domestic entity (the
"Reorganization"). The Company was originally incorporated in the British
Virgin Islands in December 1993 for the purpose of acquiring all of the
outstanding capital stock of Salix Pharmaceuticals, Inc., a California
corporation ("Salix Inc."), and Glycyx Pharmaceuticals, Ltd., a Bermuda
corporation ("Glycyx"). Salix Inc. was incorporated in California in 1989 and
Glycyx was incorporated in Bermuda in 1992. Salix and Glycyx had identical
stockholder ownership interests in the period from the inception of Glycyx
through March 1994. In March 1994, Salix Pharmaceuticals, Ltd. entered into an
agreement with the stockholders of Salix Inc. and Glycyx, whereby it issued
shares in exchange for the stockholders' interests in Salix Inc. and Glycyx. As
a result of the exchange, Salix Inc. and Glycyx became wholly owned
subsidiaries of the Company. Glycyx was reorganized and continued as a Delaware
corporation effective December 19, 2001 in connection with the Reorganization.

These statements are stated in United States dollars and are prepared under
accounting principles generally accepted in the United States. The accompanying
consolidated financial statements include the accounts of the Company and its
subsidiaries. All significant intercompany balances and transactions have been
eliminated.

The Company has sustained continuing operating losses and had an accumulated
deficit of $45.9 million as of December 31, 2001. The Company expects to incur
operating losses until product revenues reach a sufficient level to support
ongoing operations. In addition, in the year ended December 31, 2001, the
Company had negative cash flows from operations of approximately $16.4 million
and its remaining cash balances were approximately $27.9 million. The Company
believes that its cash and cash equivalent balances at December 31, 2001, plus
the proceeds of its proposed public offering announced in the first quarter of
2002, should be sufficient to satisfy the cash requirements for the foreseeable
future. However, the Company's actual cash requirements might vary materially
from those now planned because of a number of factors, including its success
selling products, the results of research and development activities, FDA and
foreign regulatory processes, establishment of and change in relationships with
strategic partners, technological advances by the Company and other
pharmaceutical companies, the terms of the Company's collaborative arrangements
with strategic partners, the status of competitive products, and whether it
acquires rights to additional products. The Company might seek additional debt
or equity financing or both to fund it operations. The Company might also enter
into additional collaborative arrangements with corporate partners that could
provide the Company with additional funding in the form of equity, debt,
licensing, milestone and/or royalty payments. The Company might not be able to
enter into such arrangements or raise any additional funds on terms favorable
to the Company.

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts reported
in the consolidated financial statements and accompanying notes. Actual results
could differ from those estimates.

Revenue Recognition
Product sales are recorded upon shipment of order and transfer of title. In
December 2000, the Company made its first U.S. sales of Colazal(TM) to
wholesalers.

F-7

SALIX PHARMACEUTICALS, LTD. AND SUBSIDIARIES
- --------------------------------------------------------------------------------

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements,"
which among other guidance clarifies certain conditions to be met in order to
recognize revenue. SAB 101 requires companies to recognize certain up-front
non-refundable fees over the term of the related agreement unless the fee is in
exchange for products delivered or services performed that represent the
culmination of a separate earnings process. In the fourth quarter of 2000,
Salix implemented SAB 101. As a result of the adoption of SAB 101, $8.7 million
of the $11.7 million initial payment received and recognized in full during the
second quarter of 2000 from Shire Pharmaceuticals Group plc was deferred and
recognized as revenue ratably through the end of 2001. The adoption of SAB 101
had no effect on revenues recognized in prior years and, therefore, there is no
cumulative effect adjustment as of the beginning of 2000.

Due to the uniqueness of each of its licensing arrangements, Salix analyzes
each element of each contract, including milestone payments, to determine the
appropriate revenue recognition. In accordance with SAB 101, Salix recognizes
revenue upon achievement of contractual milestones only when and to the extent
Salix concludes that a separate earnings process has been culminated or the
milestone is representative of the level of effort and progress toward
completion of a long-term contract.

Research and Development
Research and development costs, both internal and externally contracted, are
expensed as incurred. These costs include direct expenditures for goods and
services, as well as indirect expenditures such as salaries, administrative
expenses and various allocated costs.

Cash and Cash Equivalents
The Company considers all highly liquid investments with maturities from date
of purchase of three months or less to be cash equivalents. The Company
maintains its cash and cash equivalents in several different instruments with
various banks and brokerage houses. This diversification of risk is consistent
with Company policy to maintain liquidity and ensure the safety of principal.

Property and Equipment
Property and equipment are stated at cost and depreciated over the estimated
useful lives of the assets, generally three to five years, using the
straight-line method. Property and equipment consisted of the following at
December 31 (in thousands):

2001 2000
-------------------------------------------

Cost:
Furniture and equipment... $ 925 $193
Computer equipment........ 720 377
Laboratory equipment...... 105 105
------ ----
1,750 675
Accumulated depreciation:
Furniture and equipment... 243 143
Computer equipment........ 335 219
Laboratory equipment...... 105 105
------ ----
683 467
------ ----
Net property and equipment..... $1,067 $208
====== ====

F-8

SALIX PHARMACEUTICALS, LTD. AND SUBSIDIARIES
- --------------------------------------------------------------------------------

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Inventories
Raw materials, work-in-process and finished goods inventories are stated at the
lower of cost (which approximates actual cost on a first-in, first-out cost
method) or market value. At December 31, 2001, inventories were comprised of
$3.6 million of raw material and $2.7 million of finished goods. At December
31, 2000, inventories were comprised of $2.8 million of raw material and $0.02
million of finished goods.

Asset Impairment
The Company periodically reviews the value of its long-lived assets to
determine if an impairment has occurred. In accordance with Financial
Accounting Standards Board Statement of Financial Standards No. 121,
"Accounting for Long-Lived Assets and Long-Lived Assets to be Disposed Of", if
this review indicates that the assets will not be recoverable, as determined
based on an analysis of undiscounted cash flows over the remaining amortization
period, the Company would reduce the carrying value of its long-lived assets
accordingly.

Advertising Costs
Advertising costs are charged to expense as incurred. Advertising expenses were
approximately $200,000 and $90,000 for 2001 and 2000, respectively. The Company
incurred no advertising costs in 1999.

Foreign Currency Translation
The functional currency for the Company is the United States dollar. All
balance sheet accounts have been translated using the exchange rates in effect
at the balance sheet date. The gains and losses resulting from the changes in
exchange rates from year to year have been immaterial. The effect on the
consolidated statements of operations of transaction gains and losses is
insignificant for all years presented.

Stock-Based Compensation
The Company accounts for stock-based awards to employees under the intrinsic
value method in accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and has adopted the disclosure-only
alternative of Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation". Under APB 25, the Company generally recognizes
no compensation expense with respect to such awards.

Net Loss Per Common Share
In accordance with Statement of Financial Accounting Standards No. 128,
"Earnings Per Share," basic and diluted net loss per common share have been
computed using the weighted-average number of common shares outstanding during
each year. Common equivalent shares related to outstanding options and warrants
are excluded from the computation as their effect is anti-dilutive in all
periods.

- --------------------------------------------------------------------------------

F-9

SALIX PHARMACEUTICALS, LTD. AND SUBSIDIARIES
- --------------------------------------------------------------------------------

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Derivative Instruments
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities", is effective for fiscal years beginning
after June 15, 2000. SFAS No. 133 establishes reporting standards for
derivative instruments, including derivative instruments embedded in other
contracts, and for hedging activities. SFAS No. 133 requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. The Company
adopted SFAS No. 133 for its fiscal year ended December 31, 2001. The adoption
of this pronouncement did not have a material impact on the Company's results
of operations or financial position.

Recently Issued Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 141 requires that all business combinations be accounted for
under the purchase method only and that certain acquired intangible assets in a
business combination be recognized as assets apart from goodwill. SFAS No. 142
requires that ratable amortization of goodwill be replaced with periodic tests
of the goodwill's impairment and that intangible assets other than goodwill be
amortized over their useful lives. SFAS No. 141 is effective for all business
combinations initiated after June 30, 2001 and for all business combinations
accounted for by the purchase method for which the date of acquisition is after
June 30, 2001. The provisions of SFAS No. 142 will be effective for fiscal
years beginning after December 15, 2001, and will thus be adopted by the
Company, as required, in fiscal year 2002. The Company does not expect the
adoption of SFAS No. 141 and SFAS No. 142 to have a material impact on the
Company's results of operations or financial position.

In August 2001, the Financial Accounting Standards Board issued SFAS No. 143,
"Accounting for Asset Retirement Obligations." SFAS No. 143 requires an entity
to record a liability for an obligation associated with the retirement of an
asset at the time that the liability is incurred by capitalizing the cost as
part of the carrying value of the related asset and depreciating it over the
remaining useful life of that asset. The standard is effective for the Company
beginning January 1, 2003. The Company does not expect the adoption of SFAS No.
143 to have a material impact on the Company's results of operations or
financial position.

In October 2001, the Financial Accounting Standards Board issued SFAS No. 144,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of." SFAS No. 144 addresses how and when to measure impairment
on long-lived assets and how to account for long-lived assets that an entity
plans to dispose of either through sale, abandonment, exchange or distribution
to owners. The new provisions supersede SFAS No. 121, which addressed asset
impairment and certain provisions of APB Opinion 30 related to reporting the
effects of the disposal of a business segment and requires expected future
operating losses from discontinued operations to be recorded in the period in
which the losses are incurred rather than the measurement date. Under SFAS No.
144, more dispositions may qualify for discontinued operations treatment in the
income statement. The provisions of SFAS No. 144 became effective for the
Company on January 1, 2002. The Company does not expect the adoption of SFAS
No. 144 to have a material impact on the Company's results of operations or
financial position.

- --------------------------------------------------------------------------------

F-10

SALIX PHARMACEUTICALS, LTD. AND SUBSIDIARIES
- --------------------------------------------------------------------------------

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(3) LICENSE REVENUE AND REVENUE FROM COLLABORATIVE AGREEMENTS

In May 2000, the Company signed an agreement with Shire Pharmaceuticals Group
under which Shire purchased from Salix the exclusive rights to balsalazide, for
use as a treatment for ulcerative colitis for Austria, Belgium, Denmark,
Finland, France, Germany, Iceland, Republic of Ireland, Luxembourg, Norway, The
Netherlands, Switzerland, Sweden and the United Kingdom. Under the agreement,
Shire agreed to pay Salix up to a total of approximately $24.0 million,
including approximately $12.1 million in up-front fees and up to $12.0 million
upon the achievement of certain milestones. In accordance with the Company's
license arrangement with Biorex Laboratories Limited, its licensor, Salix will
share a portion of these payments, including all of the new Shire ordinary
shares, with Biorex. In May 2000, Shire paid the Company $9.6 million of cash
and $2.5 million by way of the issue of 160,546 new Shire ordinary shares. In
August 2000 Shire paid the Company $4.4 million in connection with the transfer
to Shire of the United Kingdom product license for balsalazide.

During the years ended December 31, 2001 and 2000, the Company recognized $8.3
million and $8.2 million, respectively, of license fee income primarily related
to the agreement with Shire. The Company recognized license fee income from
Astra of $2.6 million in 1999 of which $2.1 million related to a balsalazide
clinical trial in the United States and the termination of the Company's
collaborative agreements with Astra, and $0.5 million related to the launch of
balsalazide in Sweden.

In December 1999, the Company and Astra signed an agreement whereby all rights
to balsalazide previously licensed to Astra under the aforementioned agreements
were returned to the Company. All future milestone payments that would have
been due from Astra were cancelled.

(4) COMMITMENTS

The Company leases certain office facilities under various non-cancelable
operating leases, the last of which expires on August 31, 2011. Rent expense
was approximately $800,000, $328,000, and $228,000 for the years ended December
31, 2001, 2000 and 1999, respectively. In addition to the office space, the
Company leases automobiles, for use by its direct sales force, under a
three-year operating lease.

Future payments for operating leases at December 31, 2001 are as follows (in
thousands):

OPERATING
Years ending December 31, LEASES
-----------------------------------------

2002........................... $1,352
2003........................... 1,305
2004........................... 814
2005........................... 617
2006........................... 631
Thereafter..................... 3,145
------
Total minimum payments required $7,864
======

At December 31, 2001, the Company had binding purchase order commitments for
inventory purchases aggregating approximately $7.0 million throughout 2002.

- --------------------------------------------------------------------------------

F-11

SALIX PHARMACEUTICALS, LTD. AND SUBSIDIARIES
- --------------------------------------------------------------------------------

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

In March 2001, the Company obtained a $7.0 million line of credit with a
two-year term, plus three optional one-year renewals. The line of credit has a
variable interest rate based on the 30-day dealer placed commercial paper rate
plus 4%. The Company may borrow up to 85% of all eligible accounts receivable
under 90 days old from the date of invoice. The line of credit requires the
Company to meet certain restrictive covenants related to working capital. At
December 31, 2001, the line of credit had no outstanding balance.

(5) STOCKHOLDERS' EQUITY

On December 12, 2001, the Board of Directors of the Company approved the
Reorganization of the Company as a Delaware corporation. As a result of the
Reorganization, each share of no par value common stock was converted into one
share of $0.001 par value common stock. All common stock amounts for all
periods presented in the accompanying consolidated financial statements have
been restated to reflect the establishment of the $0.001 par value.

Preferred Stock
A total of 5,000,000 shares of preferred stock are authorized and issuable in
series. No shares of preferred stock were issued or outstanding as of December
31, 2001 or 2000.

Common Shares
As of December 31, 2001 the Company was authorized to issue up to 40,000,000
shares of $0.001 par value common stock. As of December 31, 2001 and 2000,
there were 16,708,681 and 13,562,771 shares of common stock issued and
outstanding, respectively.

In January 2000, the Company completed a private placement under Section 4(2)
of the Securities Act of 1933 of 500,000 shares of common stock to the
President and Chief Executive Officer of the Company, for net proceeds of
approximately $100,000 in cash. No underwriters were involved in this
transaction.

In November 2000, the Company completed a private placement of its common stock
to a limited number of accredited and sophisticated investors. The Company
raised approximately $13.1 million, net of offering costs, through the issuance
of 2,260,000 shares of common stock, along with warrants to purchase 226,000
additional shares at an exercise price of $9.72 per share. The Company also
issued a similar warrant to purchase 158,200 shares to Leerink Swann & Company,
the placement agent. During 2001, all of these warrants were exercised.

In May 2001, the Company completed a private placement of its common stock to a
limited number of accredited and sophisticated investors. The Company raised
approximately $28.1 million, net of offering costs, through the issuance of
1,960,000 shares of common stock.

Warrants
At December 31, 2001, 16,667 shares of common stock were reserved for issuance
upon the exercise of warrants. These warrants were issued in connection with
the Company's initial public offering in May 1996, at an exercise price of
$3.00 per share and expire in 2003.

- --------------------------------------------------------------------------------

F-12

SALIX PHARMACEUTICALS, LTD. AND SUBSIDIARIES
- --------------------------------------------------------------------------------

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Stock Option Plans

The Company's 1994 Stock Plan (the "1994 Plan") was adopted by the board of
directors in March 1994 and approved by the stockholders in March 1995. The
Company's 1996 Stock Option Plan (the "1996 Plan") was adopted by the board of
directors and approved by the Company's stockholders in February 1996. The
options granted under the 1994 Plan and the 1996 Plan may be either incentive
stock options or non-statutory stock options. Options granted expire no later
than ten years from the date of grant.

For incentive stock options, the option price shall be at least 100% of the
fair market value on the date of grant, and no less than 85% of the fair market
value for nonqualified stock options. If, at the time the Company grants an
option, the optionee directly or by attribution owns stock possessing more than
10% of the total combined voting power of all classes of stock of the Company,
the option price shall be at least 110% of the fair market value and shall not
be exercisable more than five years after the date of grant. The options
generally become exercisable in increments of 1/48th per month over a period
of 48 months from the date of grant. Options may be granted with different
vesting terms as determined by the board of directors.

Aggregate option activity is as follows:

Outstanding Options
--------------------------------
Weighted-
Shares Average
Available Number Exercise
For Grant Of Shares Price
--------------------------------------------------------------------

Balance at December 31, 1998....... 514,365 993,680 $ 3.20
Options granted................ (593,000) 593,000 $ 0.34
Options exercised.............. -- -- --
Options canceled............... 371,750 (371,750) $ 3.81
---------- ---------
Balance at December 31, 1999....... 293,115 1,214,930 $ 1.62
Additional shares authorized... 927,207 -- --
Options granted................ (1,071,500) 1,071,500 $ 4.85
Options exercised.............. -- (593,933) $ 0.49
Options canceled............... 10,000 (10,000) $ 7.38
---------- ---------
Balance at December 31, 2000....... 158,822 1,682,497 $ 4.04
Additional shares authorized... 1,822,793 -- --
Options granted................ (1,083,500) 1,083,500 $12.15
Options exercised.............. -- (510,823) $ 2.99
Options canceled............... 89,708 (89,708) $ 4.03
---------- ---------
Balance at December 31, 2001....... 987,823 2,165,466 $ 8.41
========== =========

- --------------------------------------------------------------------------------

F-13

SALIX PHARMACEUTICALS, LTD. AND SUBSIDIARIES
- --------------------------------------------------------------------------------

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Exercise prices for options outstanding as of December 31, 2001 ranged from
$0.47 to $17.35 per share.

Options Currently
Options Outstanding Exercisable
------------------------------------------- --------------------------
Weighted
Average
Remaining Weighted Weighted
Number Contractual Life Average Number Average
Exercise Price Outstanding (Yrs) Exercise Price Exercisable Exercise Price
- -------------------------------------------------------------------------------------

$ 0.47 - 2.24 434,133 7.70 $1.72 190,716 $1.50
$ 4.98 - 7.38 657,833 8.35 6.74 257,323 6.25
$10.62 - 10.62 612,500 9.73 10.62 -- --
$12.80 - 17.35 461,000 9.44 14.17 32,292 14.19
----- -----
2,165,466 8.84 $8.41 480,331 $4.90
========= =======

The weighted-average fair value of options granted in 2001, 2000 and 1999 was
$12.15, $4.39 and $0.19, respectively.

Stock-Based Compensation

The fair value of the Company stock-based awards to employees was estimated
using a Black-Scholes option pricing model. The Black-Scholes option valuation
model was developed for use in estimating the fair value of traded options,
which have no vesting restrictions and are fully transferable. In addition, the
Black-Scholes model requires the input of highly subjective assumptions
including the expected stock price volatility. Because the Company's
stock-based awards to employees have characteristics significantly different
from those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its stock-based awards to employees. The fair
value of the Company's stock-based awards to employees was estimated assuming
no expected dividends and the following weighted-average assumptions:

2001 2000 1999
---- ---- ----
-----------------------------------------

Expected life (years) 5 5 5
Expected volatility 1.26 1.44 0.6
Risk-free interest rate 4.19% 6.00% 6.00%

Had compensation cost for the Company's stock-based compensation plan been
determined based on the fair value at the grant dates for awards under those
plans consistent with the method of SFAS No. 123, the Company's net loss and
loss per share would have been increased to the pro forma amounts indicated
below for the years ended December 31, 2001, 2000 and 1999, respectively.

2001 2000 1999
---------------------------------------------------------------

Pro forma net loss (in thousands) $(19,698) $(3,266) $(5,056)
Pro forma net loss per common share
-- basic and diluted $ (1.27) $ (0.29) $ (0.50)

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F-14

SALIX PHARMACEUTICALS, LTD. AND SUBSIDIARIES
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Future pro forma net income (loss) and earnings (loss) per share results may be
materially different from actual amounts reported.

At December 31, 2001, the Company had reserved a total of 2,182,133 shares of
common stock, 2,165,466 for issuance to eligible participants under the two
option plans and 16,667 for outstanding warrants.

(6) INCOME TAXES

As of December 31, 2001, the Company has a U.S. federal net operating loss
carryforward of approximately $36.0 million related to its U.S. subsidiary,
Salix Inc. This will expire on various dates beginning in 2004 through 2020, if
not utilized.

Significant components of the Company's deferred tax assets for federal and
state income taxes are as follows at December 31 (in thousands):

2001 2000
----------------------------------------------------------------

Net operating loss carryforwards............. $ 12,970 $ 6,250
Capitalized research and development expenses 700 700
Other........................................ 460 50
Research and development credits............. 950 --
-------- -------
Total deferred tax assets.................... 15,080 7,000
Valuation allowance.......................... (15,080) (7,000)
-------- -------
Net deferred taxes........................... $ -- $ --
======== =======

Because of the Company's lack of earnings history, the deferred tax asset has
been fully offset by a valuation allowance. The valuation allowance increased
by approximately $8.0 million and $1.3 million during the year ended December
31, 2001 and 2000, respectively.

Utilization of the federal net operating loss and credit carryforwards might be
subject to a substantial annual limitation due to the "change in ownership"
provisions of the Internal Revenue Code of 1986. The annual limitation may
result in the expiration of net operating losses and credits before utilization.

The Company effected its Reorganization from the British Virgin Islands (BVI)
to Delaware in 2001. To date the Company has not recognized any tax assets
related to the losses incurred in BVI. In the future, losses will generate U.S.
tax losses.

The Company's subsidiary, Glycyx, had a cumulative net operating loss of
approximately $3.1 million at December 31, 2001. Because Glycyx originally was
domiciled in Bermuda where the effective tax rate is zero, the Company expects
to receive no future tax benefit from these net operating losses.

(7) SIGNIFICANT CONCENTRATIONS

The Company operates in a single industry and is engaged in acquiring,
developing and commercializing prescription drugs used in the treatment of a
variety of gastrointestinal diseases, which are those affecting the digestive
tract. The Company's principal financial instruments subject to potential
concentration of credit risk are accounts receivable, which are unsecured.

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F-15

SALIX PHARMACEUTICALS, LTD. AND SUBSIDIARIES
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

During 2000, the Company made its first sales of Colazal to U.S. wholesalers.
This significantly diversified the Company's customer base and reduced the
risks associated with serving a limited number of significant customers. All
revenue is associated with the Company's single product, Colazal.

Net revenues from customers representing 10% or more of total net revenues for
the respective years, are summarized as follows:

Years ended December 31
-----------------------
2001 2000 1999
---- ---- ----

Customer 1 27% 24% --
Customer 2 27% 10% --
Customer 3 14% 15% --
Customer 4 10% 23% --
Customer 5 -- -- 100%

Additionally, 34% and 68% of the Company's accounts receivable balances were
due from these customers at December 31, 2001 and 2000, respectively.

Currently, the Company is using active pharmaceutical ingredient balsalazide
manufactured for the Company by Diosynth Limited, a subsidiary of Akzo Nobel,
in Scotland, and Omnichem, a subsidiary of Ajinomoto, in Belgium. The Company's
balsalazide is being encapsulated by Anabolic Laboratories, Inc. in Irvine,
California. In addition, the Company is in negotiations to secure additional
sources of commercial quantities of the active pharmaceutical ingredient
balsalazide and an additional encapsulator.

Under its supply agreement with the Company, Alfa Wassermann is obligated to
supply the Company with active pharmaceutical ingredient rifaximin. Currently,
Alfa Wassermann manufactures rifaximin for the Italian and other European
markets.

(8) 401(K) PLAN

In 1996, the Company adopted the Salix Pharmaceuticals, Inc. 401(k) Retirement
Plan. Eligible participants may elect to defer a percentage of their
compensation. The Company matches up to 50% of such participant deferrals,
provided that such deferrals do not exceed 6% of the participant's
compensation. The Company's total matching contributions for all participants
were approximately $150,000, $14,000 and $13,000 in 2001, 2000 and 1999,
respectively. Additional discretionary employer contributions may be made on an
annual basis.

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F-16

SALIX PHARMACEUTICALS, LTD. AND SUBSIDIARIES
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(9) QUARTERLY RESULTS OF OPERATIONS

The following is a summary of the unaudited quarterly results of operations for
the years ended December 31, 2001 and 2000.

Mar. 31 Jun. 30 Sep. 30 Dec. 31
----------------------------------------------------------------------------
(in thousands, except per share amounts) (unaudited)

2001
Product revenue....................... $ 3,290 $ 4,163 $ 2,834 $ 3,842
Other revenue......................... 1,375 1,824 2,589 2,433
Cost of products sold................. 786 1,080 676 953
Net income (loss)..................... $(3,897) $(3,309) $(5,055) (5,237)
Net income (loss) per common share:
Basic............................... $ (0.28) $ (0.22) $ (0.30) $ (0.31)
Diluted............................. $ (0.28) $ (0.22) $ (0.30) $ (0.31)
2000
Product revenue....................... $ 380 $ 173 $ 299 $ 5,455
Other revenue......................... 467 653 5,740 1,375
Cost of products sold................. 313 222 284 1,468
Net income (loss)..................... $ (682) $(1,374) $ 220 $(1,139)
Net income (loss) per common share:
Basic............................... $ (0.06) $ (0.12) $ 0.02 $ (0.09)
Diluted............................. $ (0.06) $ (0.12) $ 0.02 $ (0.09)

SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

Allowance for Rebates and Coupons

Additions Deductions
------------------- -----------
Rebates and
Coupons
Charged to Charged Honored
Beginning Costs and to Other During Ending
Year ended December 31, Balance Expenses Accounts Period Balance
-------------------------------------------------------------------------

(in thousands).........
2001 $ 310 $1,219 $ -- $ 342 $1,187
2000 $ -- $ 310 $ -- $ -- $ 310
1999 $ -- $ -- $ -- $ -- $ --

Allowance for Uncollectable Accounts

Additions Deductions
------------------- -----------
Accounts
Charged to Charged Written Off
Beginning Costs and to Other During Ending
Year ended December 31, Balance Expenses Accounts Period Balance
-------------------------------------------------------------------------

(in thousands).........
2001 $ -- $ 14 $ -- $ -- $ 14
2000 $ -- $ -- $ -- $ -- $ --
1999 $ -- $ -- $ -- $ -- $ --

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F-17

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[LOGO]
Salix
Pharmaceuticals, Ltd.

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