content: UNITED STATES
                         SECURITIES AND EXCHANGE COMMISSION
                               Washington, D.C. 20549
  
                                      FORM 10-Q
                                     (mark one)
  
                [X] Quarterly Report Pursuant to Section 13 or 15(d)
                       of the Securities Exchange Act of 1934
                      For Quarterly Period Ended March 31, 2001
  
                                         or
  
                [ ] Transition Report Pursuant to Section 13 or 15(d)
                       of the Securities Exchange Act of 1934
                 For Transition Period from __________ to __________
  
                            Commission File No. 000-26169
  
                                      XOMA Ltd.
  
               (Exact Name of Registrant as specified in its charter)
  
              Bermuda                                      52-2154066
  (State or other jurisdiction of             (I.R.S. Employer Identification No.)
  incorporation or organization)
  
                       2910 Seventh Street, Berkeley, CA 94710
                 (Address of principal executive offices) (Zip Code)
  
                                   (510) 644-1170
                (Registrant's telephone number, including area code)
  
                                   Not Applicable
                (Former name, former address and former fiscal year,
                           if changed since last report)
  
  Indicate by check mark whether the registrant (1) has filed all reports required
  to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
  the preceding 12 months (or for such shorter period that the registrant was
  required to file such reports), and (2) has been subject to such filing
  requirements for the past 90 days.
  
                                      Yes X No
  
  Indicate the number of shares outstanding of each of the issuer's classes of
  common stock, as of the latest practicable date.
  
  Common shares US$.0005 par value       66,195,223
  Class                                  Outstanding at March 31, 2001
  
  
  
  <PAGE>
  
  
  
                                      XOMA Ltd.
  
                                  TABLE OF CONTENTS
  
  
  <TABLE>
  <CAPTION>
                                                                                                           Page
  
  <S>          <C>          <C>                                                                             <C>
  PART I        FINANCIAL INFORMATION
  
                Item 1       Consolidated Financial Statements
  
                             Condensed Consolidated Balance Sheets as of March 31, 2001 and December 31,
                             2000 .............................................................................1
  
                             Condensed Consolidated Statements of Operations for the Three Months
                             Ended March 31, 2001 and 2000.....................................................2
  
                             Condensed Consolidated Statements of Cash Flows for the Three Months
                             Ended March 31, 2001 and 2000.....................................................3
  
                             Notes to Condensed Consolidated Financial Statements .............................4
  
                Item 2       Management's Discussion and Analysis of Financial Condition and Results of
                             Operations .......................................................................7
  
                PART II      OTHER INFORMATION
  
                             Items      1 through 5 are either inapplicable or
                                        nonexistent and therefore are omitted from
                                        this report
  
                             Item 6     Exhibits and Reports on Form 8-K .....................................10
  
  Signatures                 .................................................................................11
  
  </TABLE>
  
  <PAGE>
  
                                      XOMA Ltd.
  
                        CONDENSED CONSOLIDATED BALANCE SHEETS
                                   (In thousands)
  
  <TABLE>
  <CAPTION>
  
                                                                      March 31,          December 31,
                                                                        2001                2000
                                                                     (Unaudited)          (Note 1)
                                                                       -------             -------
  <S>                                                                  <C>                 <C>
  Assets:
       Cash and cash equivalents                                       $32,169             $35,043
       Short-term investments                                              115                 172
       Related party receivable                                            237                 237
       Receivables                                                       1,587               1,008
       Prepaid expenses and other                                          141                 162
                                                                       -------             -------
           Total current assets                                         34,249              36,622
       Property and equipment, net                                       9,465               8,421
       Deposits and other                                                  169                 169
                                                                       -------             -------
                                                                       $43,883             $45,212
                                                                       =======             =======
  Liabilities and Shareholders' Equity (Net Capital Deficiency):
       Accounts payable                                                $ 3,848             $ 2,515
       Accrued liabilities                                               3,501               4,311
       Capital lease obligations - current                                 247                 185
       Deferred revenue - current                                        3,733               3,333
                                                                       -------             -------
           Total current liabilities                                    11,329              10,344
       Capital lease obligations - long term                               631                 361
       Deferred revenue - long term                                      4,929               3,609
       Convertible subordinated notes                                   42,408              39,488
                                                                       -------             -------
           Total liabilities                                            59,297              53,802
  Shareholders' equity (net capital deficiency)                        (15,414)             (8,590)
                                                                       -------             -------
                                                                       $43,883             $45,212
                                                                       =======             =======
  
  </TABLE>
  
  
  Note 1 - Amounts derived from the Company's Annual Report on Form 10-K as filed
  with the Securities and Exchange Commission.
  
       See accompanying notes to condensed consolidated financial statements.
  
  
  
  
  <PAGE>
  
  
                                      XOMA Ltd.
  
                   CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                   (Unaudited, in thousands except per share data)
  
  <TABLE>
  <CAPTION>
  
                                                                         Three Months Ended
                                                                              March 31,
                                                                      -------------------------
                                                                       2001              2000
                                                                      --------          -------
  Revenues:
  <S>                                                                  <C>              <C>
      License fees and contract revenue                                $ 2,856          $ 2,572
                                                                       -------          -------
  Operating Costs and Expenses:
      Research and development                                           8,470            7,194
      General and administrative                                         1,610            1,526
                                                                       -------          -------
                                                                        10,080            8,720
                                                                       -------          -------
  Loss from operations                                                  (7,224)          (6,148)
  Other Income (Expense):
      Investment and other income                                          459              490
      Interest and other expense                                          (810)            (626)
                                                                       -------          -------
  Net loss                                                             $(7,575)         $(6,284)
                                                                       =======          =======
  Basic and diluted net loss per share                                 $(0.11)          $(0.10)
                                                                       =======          =======
  Shares used in computing basic and diluted net loss per share         66,134           61,629
                                                                       -------          -------
  
  </TABLE>
  
       See accompanying notes to condensed consolidated financial statements.
  
  
  
  
  <PAGE>
  
  
                                      XOMA Ltd.
  
                   CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                              (Unaudited, in thousands)
  <TABLE>
  <CAPTION>
  
  
                                                                       Three Months Ended
                                                                            March 31,
                                                                  ------------------------
                                                                    2001            2000
                                                                  --------         -------
  Cash Flows From Operating Activities:
  <S>                                                             <C>              <C>
       Net cash provided by (used in) operating activities        $ (4,788)        $   310
                                                                   -------         -------
  Cash Flows From Investing Activities:
       Proceeds from sale of short-term investments                     96              --
       Capital expenditures                                           (963)           (174)
                                                                   -------         -------
           Net cash provided by (used in) investing activities        (867)           (174)
                                                                   -------         -------
  Cash Flows From Financing Activities:
       Proceeds from issuance of common shares, net                    618          32,980
       Proceeds from issuance of convertible notes                   2,203              --
       Payments on convertible notes                                    --          (1,300)
       Payments under capital leases                                   (40)             --
                                                                   -------         -------
           Net cash provided by (used in) financing activities       2,781          31,680
                                                                   -------         -------
  Net increase (decrease) in cash and cash equivalents              (2,874)         31,816
  Cash and cash equivalents at beginning of period                  35,043          18,539
                                                                   -------         -------
  Cash and cash equivalents at end of period                       $32,169         $50,355
                                                                   =======         =======
  
  </TABLE>
  
       See accompanying notes to condensed consolidated financial statements.
  
  
  
  <PAGE>
  
  
                                      XOMA Ltd.
  
                NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
                                     (Unaudited)
  
  
       1. Basis of Presentation
  
       The interim information contained in this report is unaudited but, in
  management's opinion, includes all normal recurring adjustments necessary for a
  fair presentation of results for the periods presented. Interim results may not
  be indicative of results to be expected for the full year. The consolidated
  financial statements should be read in conjunction with the Company's audited
  consolidated financial statements for the year ended December 31, 2000 included
  in its Annual Report on Form 10-K. The preparation of financial statements in
  conformity with generally accepted accounting principles requires management to
  make estimates and assumptions that affect the reported amounts of assets and
  liabilities and disclosure of contingent assets and liabilities, if any, at the
  date of the financial statements and the reported amounts of revenues and
  expenses during the reporting period. Actual results could differ materially
  from those estimates.
  
       2. Recent Accounting Pronouncement
  
       In June of 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
  Instruments and Hedging Activities" (SFAS 133). XOMA adopted SFAS 133 on January
  1, 2001. Because the Company currently holds no derivative financial instruments
  and does not currently engage in hedging activities, adoption of SFAS 133 had no
  impact on the Company's financial position or results of operations.
  
       3. Accrued Liabilities
  
            Accrued liabilities consist of the following (in thousands):
  
                                           March 31,            December 31,
                                              2001                  2000
                                           ---------            ----------
          Accrued payroll costs               $1,485                $2,255
          Accrued clinical trial costs         1,185                 1,151
          Other                                  831                   905
                                           ---------              --------
                                              $3,501                $4,311
                                           =========              ========
  
  
                                        -4-
  <PAGE>
  
       4. Revenue Recognition
  
       Research payments under collaborative arrangements and grants are
  recognized as revenue based on research expenses incurred as provided for under
  the terms of the arrangements.
  
       The Company previously recognized non-refundable license fees as revenue
  when received and when all significant contractual obligations of the Company
  relating to the fees had been met. Effective January 1, 2000, the Company
  changed its method of accounting for non-refundable initial fees to recognize
  such fees over the period of continuing involvement by the Company such as the
  research and development period or the manufacturing period of the agreement, as
  applicable. The Company believes this accounting policy is appropriate based on
  guidance provided in SEC Staff Accounting Bulletin No. 101 - Revenue Recognition
  in Financial Statements (SAB 101). As of January 1, 2000, there was no
  cumulative effect of an accounting change as a result of the adoption of SAB 101
  and there was no pro forma effect of the adoption of SAB 101 in any year
  presented. In connection with the license and supply and development agreements
  with Baxter Healthcare Corporation ("Baxter") on January 25, 2000, the Company
  received $10.0 million as an initial, non-refundable fee. This initial fee was
  deferred and is being amortized over the period of continuing involvement, which
  period is estimated to be 36 months.
  
       In January of 2001, the Company entered into a strategic process
  development and manufacturing agreement with Onyx Pharmaceuticals, Inc. ("Onyx")
  which calls for the Company to scale-up production to commercial volume and
  manufacture Onyx's CI-1042 product. The initial term of the agreement is five
  years, with options to extend for additional periods. Terms of the agreement
  include an initial payment of $2.0 million, payments for development work and
  material produced, and payments upon achieving key milestones. XOMA's objectives
  are to increase the fermentation volume to commercial scale, to improve the
  purification process, to seek FDA licensure of its manufacturing facility for
  CI-1042, and to produce material for use in clinical testing and for commercial
  sale upon approval. The initial payment was deferred and is being amortized over
  five years.
  
       Milestone payments under collaborative arrangements are recognized as
  revenue upon achievement of the incentive milestone events, which represent the
  culmination of the earnings process because the Company has no future
  performance obligations related to the milestone payment. Milestone payments are
  triggered either by the results of our research efforts or by events external to
  the Company, such as regulatory approval to market a product. Amounts received
  in advance are recorded as deferred revenue until the related revenue is
  recognized.
  
  
                                        -5-
  <PAGE>
  
       5. Comprehensive Loss
  
       Available-for-sale securities are stated at fair value, with unrealized
  gains and losses, net of tax, if any, reported in other comprehensive income
  (loss). Realized gains and losses and declines in value judged to be
  other-than-temporary on available-for-sale securities are included in interest
  and other expense and totaled $60,000 in the quarter ended March 31, 2001. The
  cost of investments sold is based on the specific identification method.
  Interest and dividends on securities classified as available-for-sale are also
  included in investment and other income.
  
       Comprehensive loss includes certain changes in equity that are excluded
  from net loss. Specifically, unrealized holding gains and losses in available
  for sale investments, which were reported separately in shareholders' equity,
  are included in accumulated other comprehensive income (loss). Comprehensive
  loss and its components for the quarters ended March 31, 2001 and 2000 are as
  follows (in thousands):
  
  <TABLE>
  <CAPTION>
  
                                                                                  Three Months Ended
                                                                                      March 31,
                                                                                ------------------------
                                                                                   2001            2000
                                                                                --------        --------
         <S>                                                                    <C>             <C>
          Net Loss                                                              $(7,575)        $(6,284)
          Unrealized gain on securities available-for-sale                           --             887
                                                                                --------        ---------
          Comprehensive loss                                                    $(7,575)        $(5,397)
                                                                                =========       =========
  </TABLE>
  
       6. Net Loss Per Common Share
  
       Basic and diluted net loss per common share is based on the weighted
  average number of common shares outstanding during the period in accordance with
  Financial Accounting Standard No. 128. Common share equivalents were not
  included because they are antidilutive.
  
  
  
                                        -6-
  <PAGE>
  
  
  
                       MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                    FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  
  
  Results of Operations:
  
       Revenues in the first quarter of 2001 increased to $2.9 million, from $2.6
  million in the first quarter of 2000. Licensing revenue, primarily reflecting
  the amortization into revenue of certain license fees and other payments
  received from Baxter Healthcare Corporation and Onyx Pharmaceuticals, Inc.,
  increased to $1.0 million in the first three months of 2001, compared to $0.6
  million in the comparable prior year period. Contract revenue decreased to $1.8
  million in the 2001 period from $2.0 million in the first quarter of 2000.
  
       Operating expenses increased to $10.1 million in the first quarter of 2001
  from $8.7 million in the first quarter of 2000. Research and development
  expenses increased to $8.5 million from $7.2 million in the prior year period,
  reflecting increased development costs associated with ING-1, GENIMUNE(TM),
  BPI-derived peptide products and Onyx's CI-1042 product. This was partially
  offset by reduced spending on NEUPREX(R). General and administrative expenses
  increased from $1.5 million in the first quarter of 2000 compared with $1.6
  million in 2001.
  
       Interest expense was higher in the first three months of 2001 compared to
  2000 due to higher interest rates and the higher average note balance of the
  convertible subordinated notes due Genentech, Inc.
  
  Liquidity and Capital Resources:
  
       XOMA ended the quarter with $32.3 million in cash, cash equivalents and
  short-term investments, compared with $35.2 million at December 31, 2000. Net
  cash used in operations in the first quarter of 2001 was $4.8 million, compared
  with net cash provided by operations of $0.3 million in the first quarter of
  2000. The first quarter 2000 included payments of $10.0 million from Baxter
  related to the licensing of NEUPREX(R). This payment is being recognized as
  revenue over 36 months. See footnote 4, "Revenue Recognition," to the
  Consolidated Financial Statements.
  
       Capital expenditures increased from $0.2 million in the first quarter of
  2000 to $1.0 million in the current year quarter. Current year spending included
  expenses related to the transfer of XOMA's technical development operations from
  Santa Monica to Berkeley, as well as investments related to our collaborative
  arrangement with Onyx.
  
  
                                        -7-
  <PAGE>
  
       For the full year 2001, the Company currently expects its loss to be
  somewhat lower than in 2000, with increased expense levels being more than
  offset by higher revenues.
  
       The Company has been able to control its operating cash consumption by
  carefully monitoring its costs. As a result, based on current spending levels
  and taking into account the Onyx transaction, the Company believes its cash
  position and resulting investment income are sufficient to finance the Company's
  currently anticipated levels of spending through approximately the end of 2002.
  Strategic arrangements with Onyx, Baxter and Genentech have reduced Company
  spending levels by paying certain product development costs. The Company
  continues to evaluate a variety of arrangements that would further strengthen
  its competitive position and provide additional funding, but cannot predict
  whether or when any such arrangement or additional funding will be consummated
  or whether additional funding will be available. Without additional funding, the
  Company will have to decrease or eliminate the development of some of its
  products.
  
  Quantitative and Qualitative Disclosures About Market Risk:
  
       Interest Rate Risk. The Company's exposure to market rate risk due to
  changes in interest rates relates primarily to the Company's investment
  portfolio. The Company does not use derivative financial instruments in its
  investment portfolio. By policy, the Company places its investments with high
  quality debt security issuers, limits the amount of credit exposure to any one
  issuer, limits duration by restricting the term and holds investments to
  maturity except under rare circumstances. The Company classifies its cash
  equivalents as fixed rate if the rate of return on an instrument remains fixed
  over its term. As of March 31, 2001, all the Company's cash equivalents are
  classified as fixed rate.
  
       The Company also has a long-term convertible note due to Genentech in 2005.
  Interest on this note of LIBOR plus 1% is reset at the end of June and December
  each year and is therefore variable.
  
       The table below presents the amounts and related weighted interest rates of
  the Company's cash equivalents and long-term convertible note at March 31, 2001:
  
  <TABLE>
  <CAPTION>
  
                                                                 Fair Value            Average
                                              Maturity        ($ in millions)       Interest Rate
                                              --------        ---------------      --------------
  <S>                                           <C>                <C>                   <C>
  Cash equivalents, fixed rate                  daily              $ 32.2                5.5%
  Long-term convertible note, variable rate      2005                42.4                7.1%
  </TABLE>
  
  
       Other Market Risk. At March 31, 2000 the Company had a long-term
  convertible note outstanding which is convertible into common shares based on
  the market price
  
  
                                        -8-
  <PAGE>
  
  of the Company's common shares at the time of conversion. A 10% decrease in the
  market price of the Company's common shares would increase the number of shares
  issuable upon conversion of either security by approximately 11%. An increase in
  the market price of Company common shares of 10% would decrease the shares
  issuable by approximately 9%.
  
  Forward Looking Statements:
  
       Statements made herein related to the estimated size of the Company's loss
  for 2001, the estimated levels of its expenses and revenues for the balance of
  2001, the sufficiency of its cash resources, present or future collaborative
  arrangements and current plans for product development, or that otherwise relate
  to future periods, are forward-looking statements within the meaning of Section
  27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
  of 1934. These statements are based on assumptions that may not prove accurate.
  Actual results could differ materially from those anticipated due to certain
  risks inherent in the biotechnology industry and for companies engaged in the
  development of new products in a regulated market. These risks, including those
  related to size and timing of expenditures, unanticipated expenditures,
  availability of funds, changes in the status of the existing collaborative
  relationships, availability of additional collaboration opportunities, the time
  or results of pending and future clinical trials, the ability of collaborators
  and other partners to meet their obligations, market demand for products,
  actions by the Food and Drug Administration of the U.S. Patent and Trademark
  Office, and uncertainties regarding the status of biotechnology patents, are
  discussed in the Company's most recent annual report on Form 10-K and in other
  SEC filings.
  
  
  
                        Condensed Financial Statements Follow
  
  
  
                                        -9-
  <PAGE>
  
  
  
                             PART II - OTHER INFORMATION
  
  
       Item 1 Legal Proceedings. None.
  
       Item 2 Changes in Securities. None.
  
       Item 3 Defaults Upon Senior Securities. None.
  
       Item 4 Submission of Matters to a Vote of Security Holders. None
  
       Item 5 Other Information. None. Item 6 Exhibits and Reports on Form 8-K.
  
       Current Report on Form 8-K dated and filed on January 30, 2001, as amended
            by Amendment No. 1 on Form 8-K/A dated and filed on February 13, 2001
            (File No. 000-26169), Item 5 (Other Events) and 7 (Exhibits).
  
  
  
  
                                        -10-
  <PAGE>
  
  
  
                                      XOMA Ltd.
  
                                     SIGNATURES
  
  
       Pursuant to the requirements of the Securities Exchange Act of 1934, the
  registrant has duly caused this report to be signed on its behalf by the
  undersigned, thereunto duly authorized.
  
                              XOMA LTD.
  
  
  Date:    May 4, 2001        By:    /s/ JOHN L. CASTELLO
                                     ---------------------------------------------
                                     John L. Castello
                                     Chairman of the Board, President and
                                     Chief Executive Officer
  
  
  Date:    May 4, 2001        By:    /s/ PETER B. DAVIS
                                     ---------------------------------------------
                                     Peter B. Davis
                                     Vice President, Finance and
                                     Chief Financial Officer
  
                                        -11-
  <PAGE>
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text: UNITED STATES
                         SECURITIES AND EXCHANGE COMMISSION
                               Washington, D.C. 20549
  
                                      FORM 10-Q
                                     (mark one)
  
                [X] Quarterly Report Pursuant to Section 13 or 15(d)
                       of the Securities Exchange Act of 1934
                      For Quarterly Period Ended March 31, 2001
  
                                         or
  
                [ ] Transition Report Pursuant to Section 13 or 15(d)
                       of the Securities Exchange Act of 1934
                 For Transition Period from __________ to __________
  
                            Commission File No. 000-26169
  
                                      XOMA Ltd.
  
               (Exact Name of Registrant as specified in its charter)
  
              Bermuda                                      52-2154066
  (State or other jurisdiction of             (I.R.S. Employer Identification No.)
  incorporation or organization)
  
                       2910 Seventh Street, Berkeley, CA 94710
                 (Address of principal executive offices) (Zip Code)
  
                                   (510) 644-1170
                (Registrant's telephone number, including area code)
  
                                   Not Applicable
                (Former name, former address and former fiscal year,
                           if changed since last report)
  
  Indicate by check mark whether the registrant (1) has filed all reports required
  to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
  the preceding 12 months (or for such shorter period that the registrant was
  required to file such reports), and (2) has been subject to such filing
  requirements for the past 90 days.
  
                                      Yes X No
  
  Indicate the number of shares outstanding of each of the issuer's classes of
  common stock, as of the latest practicable date.
  
  Common shares US$.0005 par value       66,195,223
  Class                                  Outstanding at March 31, 2001
  XOMA Ltd.
  
                                  TABLE OF CONTENTS
  Page
  PART I        FINANCIAL INFORMATION
  
                Item 1       Consolidated Financial Statements
  
                             Condensed Consolidated Balance Sheets as of March 31, 2001 and December 31,
                             2000 .............................................................................1
  
                             Condensed Consolidated Statements of Operations for the Three Months
                             Ended March 31, 2001 and 2000.....................................................2
  
                             Condensed Consolidated Statements of Cash Flows for the Three Months
                             Ended March 31, 2001 and 2000.....................................................3
  
                             Notes to Condensed Consolidated Financial Statements .............................4
  
                Item 2       Management's Discussion and Analysis of Financial Condition and Results of
                             Operations .......................................................................7
  
                PART II      OTHER INFORMATION
  
                             Items      1 through 5 are either inapplicable or
                                        nonexistent and therefore are omitted from
                                        this report
  
                             Item 6     Exhibits and Reports on Form 8-K .....................................10
  
  Signatures                 .................................................................................11
  XOMA Ltd.
  
                        CONDENSED CONSOLIDATED BALANCE SHEETS
                                   (In thousands)
  March 31,          December 31,
                                                                        2001                2000
                                                                     (Unaudited)          (Note 1)
                                                                       -------             -------
  Assets:
       Cash and cash equivalents                                       $32,169             $35,043
       Short-term investments                                              115                 172
       Related party receivable                                            237                 237
       Receivables                                                       1,587               1,008
       Prepaid expenses and other                                          141                 162
                                                                       -------             -------
           Total current assets                                         34,249              36,622
       Property and equipment, net                                       9,465               8,421
       Deposits and other                                                  169                 169
                                                                       -------             -------
                                                                       $43,883             $45,212
                                                                       =======             =======
  Liabilities and Shareholders' Equity (Net Capital Deficiency):
       Accounts payable                                                $ 3,848             $ 2,515
       Accrued liabilities                                               3,501               4,311
       Capital lease obligations - current                                 247                 185
       Deferred revenue - current                                        3,733               3,333
                                                                       -------             -------
           Total current liabilities                                    11,329              10,344
       Capital lease obligations - long term                               631                 361
       Deferred revenue - long term                                      4,929               3,609
       Convertible subordinated notes                                   42,408              39,488
                                                                       -------             -------
           Total liabilities                                            59,297              53,802
  Shareholders' equity (net capital deficiency)                        (15,414)             (8,590)
                                                                       -------             -------
                                                                       $43,883             $45,212
                                                                       =======             =======
  Note 1 - Amounts derived from the Company's Annual Report on Form 10-K as filed
  with the Securities and Exchange Commission.
  
       See accompanying notes to condensed consolidated financial statements.
  XOMA Ltd.
  
                   CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                   (Unaudited, in thousands except per share data)
  Three Months Ended
                                                                              March 31,
                                                                      -------------------------
                                                                       2001              2000
                                                                      --------          -------
  Revenues:
  License fees and contract revenue                                $ 2,856          $ 2,572
                                                                       -------          -------
  Operating Costs and Expenses:
      Research and development                                           8,470            7,194
      General and administrative                                         1,610            1,526
                                                                       -------          -------
                                                                        10,080            8,720
                                                                       -------          -------
  Loss from operations                                                  (7,224)          (6,148)
  Other Income (Expense):
      Investment and other income                                          459              490
      Interest and other expense                                          (810)            (626)
                                                                       -------          -------
  Net loss                                                             $(7,575)         $(6,284)
                                                                       =======          =======
  Basic and diluted net loss per share                                 $(0.11)          $(0.10)
                                                                       =======          =======
  Shares used in computing basic and diluted net loss per share         66,134           61,629
                                                                       -------          -------
  See accompanying notes to condensed consolidated financial statements.
  XOMA Ltd.
  
                   CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                              (Unaudited, in thousands)
  Three Months Ended
                                                                            March 31,
                                                                  ------------------------
                                                                    2001            2000
                                                                  --------         -------
  Cash Flows From Operating Activities:
  Net cash provided by (used in) operating activities        $ (4,788)        $   310
                                                                   -------         -------
  Cash Flows From Investing Activities:
       Proceeds from sale of short-term investments                     96              --
       Capital expenditures                                           (963)           (174)
                                                                   -------         -------
           Net cash provided by (used in) investing activities        (867)           (174)
                                                                   -------         -------
  Cash Flows From Financing Activities:
       Proceeds from issuance of common shares, net                    618          32,980
       Proceeds from issuance of convertible notes                   2,203              --
       Payments on convertible notes                                    --          (1,300)
       Payments under capital leases                                   (40)             --
                                                                   -------         -------
           Net cash provided by (used in) financing activities       2,781          31,680
                                                                   -------         -------
  Net increase (decrease) in cash and cash equivalents              (2,874)         31,816
  Cash and cash equivalents at beginning of period                  35,043          18,539
                                                                   -------         -------
  Cash and cash equivalents at end of period                       $32,169         $50,355
                                                                   =======         =======
  See accompanying notes to condensed consolidated financial statements.
  XOMA Ltd.
  
                NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
                                     (Unaudited)
  
       1. Basis of Presentation
  
       The interim information contained in this report is unaudited but, in
  management's opinion, includes all normal recurring adjustments necessary for a
  fair presentation of results for the periods presented. Interim results may not
  be indicative of results to be expected for the full year. The consolidated
  financial statements should be read in conjunction with the Company's audited
  consolidated financial statements for the year ended December 31, 2000 included
  in its Annual Report on Form 10-K. The preparation of financial statements in
  conformity with generally accepted accounting principles requires management to
  make estimates and assumptions that affect the reported amounts of assets and
  liabilities and disclosure of contingent assets and liabilities, if any, at the
  date of the financial statements and the reported amounts of revenues and
  expenses during the reporting period. Actual results could differ materially
  from those estimates.
  
       2. Recent Accounting Pronouncement
  
       In June of 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
  Instruments and Hedging Activities" (SFAS 133). XOMA adopted SFAS 133 on January
  1, 2001. Because the Company currently holds no derivative financial instruments
  and does not currently engage in hedging activities, adoption of SFAS 133 had no
  impact on the Company's financial position or results of operations.
  
       3. Accrued Liabilities
  
            Accrued liabilities consist of the following (in thousands):
  
                                           March 31,            December 31,
                                              2001                  2000
                                           ---------            ----------
          Accrued payroll costs               $1,485                $2,255
          Accrued clinical trial costs         1,185                 1,151
          Other                                  831                   905
                                           ---------              --------
                                              $3,501                $4,311
                                           =========              ========
  
                                        -4-
  4. Revenue Recognition
  
       Research payments under collaborative arrangements and grants are
  recognized as revenue based on research expenses incurred as provided for under
  the terms of the arrangements.
  
       The Company previously recognized non-refundable license fees as revenue
  when received and when all significant contractual obligations of the Company
  relating to the fees had been met. Effective January 1, 2000, the Company
  changed its method of accounting for non-refundable initial fees to recognize
  such fees over the period of continuing involvement by the Company such as the
  research and development period or the manufacturing period of the agreement, as
  applicable. The Company believes this accounting policy is appropriate based on
  guidance provided in SEC Staff Accounting Bulletin No. 101 - Revenue Recognition
  in Financial Statements (SAB 101). As of January 1, 2000, there was no
  cumulative effect of an accounting change as a result of the adoption of SAB 101
  and there was no pro forma effect of the adoption of SAB 101 in any year
  presented. In connection with the license and supply and development agreements
  with Baxter Healthcare Corporation ("Baxter") on January 25, 2000, the Company
  received $10.0 million as an initial, non-refundable fee. This initial fee was
  deferred and is being amortized over the period of continuing involvement, which
  period is estimated to be 36 months.
  
       In January of 2001, the Company entered into a strategic process
  development and manufacturing agreement with Onyx Pharmaceuticals, Inc. ("Onyx")
  which calls for the Company to scale-up production to commercial volume and
  manufacture Onyx's CI-1042 product. The initial term of the agreement is five
  years, with options to extend for additional periods. Terms of the agreement
  include an initial payment of $2.0 million, payments for development work and
  material produced, and payments upon achieving key milestones. XOMA's objectives
  are to increase the fermentation volume to commercial scale, to improve the
  purification process, to seek FDA licensure of its manufacturing facility for
  CI-1042, and to produce material for use in clinical testing and for commercial
  sale upon approval. The initial payment was deferred and is being amortized over
  five years.
  
       Milestone payments under collaborative arrangements are recognized as
  revenue upon achievement of the incentive milestone events, which represent the
  culmination of the earnings process because the Company has no future
  performance obligations related to the milestone payment. Milestone payments are
  triggered either by the results of our research efforts or by events external to
  the Company, such as regulatory approval to market a product. Amounts received
  in advance are recorded as deferred revenue until the related revenue is
  recognized.
  
                                        -5-
  5. Comprehensive Loss
  
       Available-for-sale securities are stated at fair value, with unrealized
  gains and losses, net of tax, if any, reported in other comprehensive income
  (loss). Realized gains and losses and declines in value judged to be
  other-than-temporary on available-for-sale securities are included in interest
  and other expense and totaled $60,000 in the quarter ended March 31, 2001. The
  cost of investments sold is based on the specific identification method.
  Interest and dividends on securities classified as available-for-sale are also
  included in investment and other income.
  
       Comprehensive loss includes certain changes in equity that are excluded
  from net loss. Specifically, unrealized holding gains and losses in available
  for sale investments, which were reported separately in shareholders' equity,
  are included in accumulated other comprehensive income (loss). Comprehensive
  loss and its components for the quarters ended March 31, 2001 and 2000 are as
  follows (in thousands):
  Three Months Ended
                                                                                      March 31,
                                                                                ------------------------
                                                                                   2001            2000
                                                                                --------        --------
  Net Loss                                                              $(7,575)        $(6,284)
          Unrealized gain on securities available-for-sale                           --             887
                                                                                --------        ---------
          Comprehensive loss                                                    $(7,575)        $(5,397)
                                                                                =========       =========
  6. Net Loss Per Common Share
  
       Basic and diluted net loss per common share is based on the weighted
  average number of common shares outstanding during the period in accordance with
  Financial Accounting Standard No. 128. Common share equivalents were not
  included because they are antidilutive.
  
                                        -6-
  MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                    FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  
  Results of Operations:
  
       Revenues in the first quarter of 2001 increased to $2.9 million, from $2.6
  million in the first quarter of 2000. Licensing revenue, primarily reflecting
  the amortization into revenue of certain license fees and other payments
  received from Baxter Healthcare Corporation and Onyx Pharmaceuticals, Inc.,
  increased to $1.0 million in the first three months of 2001, compared to $0.6
  million in the comparable prior year period. Contract revenue decreased to $1.8
  million in the 2001 period from $2.0 million in the first quarter of 2000.
  
       Operating expenses increased to $10.1 million in the first quarter of 2001
  from $8.7 million in the first quarter of 2000. Research and development
  expenses increased to $8.5 million from $7.2 million in the prior year period,
  reflecting increased development costs associated with ING-1, GENIMUNE(TM),
  BPI-derived peptide products and Onyx's CI-1042 product. This was partially
  offset by reduced spending on NEUPREX(R). General and administrative expenses
  increased from $1.5 million in the first quarter of 2000 compared with $1.6
  million in 2001.
  
       Interest expense was higher in the first three months of 2001 compared to
  2000 due to higher interest rates and the higher average note balance of the
  convertible subordinated notes due Genentech, Inc.
  
  Liquidity and Capital Resources:
  
       XOMA ended the quarter with $32.3 million in cash, cash equivalents and
  short-term investments, compared with $35.2 million at December 31, 2000. Net
  cash used in operations in the first quarter of 2001 was $4.8 million, compared
  with net cash provided by operations of $0.3 million in the first quarter of
  2000. The first quarter 2000 included payments of $10.0 million from Baxter
  related to the licensing of NEUPREX(R). This payment is being recognized as
  revenue over 36 months. See footnote 4, "Revenue Recognition," to the
  Consolidated Financial Statements.
  
       Capital expenditures increased from $0.2 million in the first quarter of
  2000 to $1.0 million in the current year quarter. Current year spending included
  expenses related to the transfer of XOMA's technical development operations from
  Santa Monica to Berkeley, as well as investments related to our collaborative
  arrangement with Onyx.
  
                                        -7-
  For the full year 2001, the Company currently expects its loss to be
  somewhat lower than in 2000, with increased expense levels being more than
  offset by higher revenues.
  
       The Company has been able to control its operating cash consumption by
  carefully monitoring its costs. As a result, based on current spending levels
  and taking into account the Onyx transaction, the Company believes its cash
  position and resulting investment income are sufficient to finance the Company's
  currently anticipated levels of spending through approximately the end of 2002.
  Strategic arrangements with Onyx, Baxter and Genentech have reduced Company
  spending levels by paying certain product development costs. The Company
  continues to evaluate a variety of arrangements that would further strengthen
  its competitive position and provide additional funding, but cannot predict
  whether or when any such arrangement or additional funding will be consummated
  or whether additional funding will be available. Without additional funding, the
  Company will have to decrease or eliminate the development of some of its
  products.
  
  Quantitative and Qualitative Disclosures About Market Risk:
  
       Interest Rate Risk. The Company's exposure to market rate risk due to
  changes in interest rates relates primarily to the Company's investment
  portfolio. The Company does not use derivative financial instruments in its
  investment portfolio. By policy, the Company places its investments with high
  quality debt security issuers, limits the amount of credit exposure to any one
  issuer, limits duration by restricting the term and holds investments to
  maturity except under rare circumstances. The Company classifies its cash
  equivalents as fixed rate if the rate of return on an instrument remains fixed
  over its term. As of March 31, 2001, all the Company's cash equivalents are
  classified as fixed rate.
  
       The Company also has a long-term convertible note due to Genentech in 2005.
  Interest on this note of LIBOR plus 1% is reset at the end of June and December
  each year and is therefore variable.
  
       The table below presents the amounts and related weighted interest rates of
  the Company's cash equivalents and long-term convertible note at March 31, 2001:
  Fair Value            Average
                                              Maturity        ($ in millions)       Interest Rate
                                              --------        ---------------      --------------
  Cash equivalents, fixed rate                  daily              $ 32.2                5.5%
  Long-term convertible note, variable rate      2005                42.4                7.1%
  Other Market Risk. At March 31, 2000 the Company had a long-term
  convertible note outstanding which is convertible into common shares based on
  the market price
  
                                        -8-
  of the Company's common shares at the time of conversion. A 10% decrease in the
  market price of the Company's common shares would increase the number of shares
  issuable upon conversion of either security by approximately 11%. An increase in
  the market price of Company common shares of 10% would decrease the shares
  issuable by approximately 9%.
  
  Forward Looking Statements:
  
       Statements made herein related to the estimated size of the Company's loss
  for 2001, the estimated levels of its expenses and revenues for the balance of
  2001, the sufficiency of its cash resources, present or future collaborative
  arrangements and current plans for product development, or that otherwise relate
  to future periods, are forward-looking statements within the meaning of Section
  27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
  of 1934. These statements are based on assumptions that may not prove accurate.
  Actual results could differ materially from those anticipated due to certain
  risks inherent in the biotechnology industry and for companies engaged in the
  development of new products in a regulated market. These risks, including those
  related to size and timing of expenditures, unanticipated expenditures,
  availability of funds, changes in the status of the existing collaborative
  relationships, availability of additional collaboration opportunities, the time
  or results of pending and future clinical trials, the ability of collaborators
  and other partners to meet their obligations, market demand for products,
  actions by the Food and Drug Administration of the U.S. Patent and Trademark
  Office, and uncertainties regarding the status of biotechnology patents, are
  discussed in the Company's most recent annual report on Form 10-K and in other
  SEC filings.
  
                        Condensed Financial Statements Follow
  
                                        -9-
  PART II - OTHER INFORMATION
  
       Item 1 Legal Proceedings. None.
  
       Item 2 Changes in Securities. None.
  
       Item 3 Defaults Upon Senior Securities. None.
  
       Item 4 Submission of Matters to a Vote of Security Holders. None
  
       Item 5 Other Information. None. Item 6 Exhibits and Reports on Form 8-K.
  
       Current Report on Form 8-K dated and filed on January 30, 2001, as amended
            by Amendment No. 1 on Form 8-K/A dated and filed on February 13, 2001
            (File No. 000-26169), Item 5 (Other Events) and 7 (Exhibits).
  
                                        -10-
  XOMA Ltd.
  
                                     SIGNATURES
  
       Pursuant to the requirements of the Securities Exchange Act of 1934, the
  registrant has duly caused this report to be signed on its behalf by the
  undersigned, thereunto duly authorized.
  
                              XOMA LTD.
  
  Date:    May 4, 2001        By:    /s/ JOHN L. CASTELLO
                                     ---------------------------------------------
                                     John L. Castello
                                     Chairman of the Board, President and
                                     Chief Executive Officer
  
  Date:    May 4, 2001        By:    /s/ PETER B. DAVIS
                                     ---------------------------------------------
                                     Peter B. Davis
                                     Vice President, Finance and
                                     Chief Financial Officer
  
                                        -11-