content: --------------------------------------------------------------------------------
  
                  UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                               Washington, D.C. 20549
  
                                      FORM 10-Q
  
                [X] Quarterly Report Pursuant to Section 13 or 15(d)
                       of the Securities Exchange Act of 1934
  
                    For the Quarterly Period Ended June 30, 2003
  
                             Commission File No. 0-14710
  
                                      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) 204-7200
                (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 by check mark whether the registrant is an accelerated filer (as
  defined in Rule 12b-2 of the Securities Exchange Act of 1934).
  
                                   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                72,629,047
  Class                                           Outstanding at August 11, 2003
  
  --------------------------------------------------------------------------------
  
  
  <PAGE>
  
  
                                      XOMA Ltd.
                                      FORM 10-Q
                                  TABLE OF CONTENTS
  
  
  
  <TABLE>
  <CAPTION>
                                                                                                                 Page
  PART I        FINANCIAL INFORMATION
  
  <S>      <C>         <C>                                                                                        <C>
           Item 1.     Condensed Consolidated Financial Statements (Unaudited)
  
                       Condensed Consolidated Balance Sheets as of June 30, 2003 and December 31, 2002..............1
  
                       Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30,
                          2003 and 2002.............................................................................2
  
                       Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2003
                          and 2002..................................................................................3
  
                       Notes to Condensed Consolidated Financial Statements.........................................4
  
           Item 2.     Management's Discussion and Analysis of Financial Condition and Results of Operations.......11
  
           Item 3.     Quantitative and Qualitative Disclosures About Market Risk..................................26
  
           Item 4.     Controls and Procedures.....................................................................26
  </TABLE>
  
  <TABLE>
  <CAPTION>
  
  PART II       OTHER INFORMATION
  
  <S>      <C>         <C>                                                                                         <C>
           Item 1.     Legal Proceedings...........................................................................28
  
           Item 2.     Changes in Securities and Use of Proceeds...................................................28
  
           Item 3.     Defaults upon Senior Securities.............................................................28
  
           Item 4.     Submission of Matters to a Vote of Security Holders.........................................28
  
           Item 5.     Other Information...........................................................................29
  
           Item 6.     Exhibits and Reports on Form 8-K............................................................29
  
           Signatures..............................................................................................30
  
  </TABLE>
  
  
  <PAGE>
  
  
  
  
                           PART I - FINANCIAL INFORMATION
  
  ITEM 1.  CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
  
                                      XOMA Ltd.
                        CONDENSED CONSOLIDATED BALANCE SHEETS
                                   (In thousands)
  
  <TABLE>
  <CAPTION>
  
                                                                        June 30,       December 31,
                                                                          2003             2002
                                                                    ----------------- ----------------
  ASSETS                                                              (Unaudited)        (Note 1)
  Current assets:
  <S>                                                                      <C>              <C>
       Cash and cash equivalents                                            $ 26,946         $ 36,262
       Short-term investments                                                  2,592              391
       Restricted cash                                                             -            1,500
       Receivables                                                               484            8,656
       Related party receivables - current                                       100              206
       Inventory                                                               1,306            1,306
       Prepaid expenses and other                                              1,044              449
                                                                    ----------------- ----------------
           Total current assets                                               32,472           48,770
  Property and equipment, net                                                 22,699           22,650
  Related party receivables - long-term                                          108              190
  Deposits and other                                                             159              172
                                                                    ----------------- ----------------
           Total assets                                                     $ 55,438         $ 71,782
                                                                    ================= ================
  </TABLE>
  
  <TABLE>
  <CAPTION>
  
  LIABILITIES AND SHAREHOLDERS' EQUITY (Net Capital Deficiency)
  
  <S>                                                                     <C>               <C>
  Current liabilities:
       Accounts payable                                                      $ 2,961           $ 3,201
       Accrued liabilities                                                     5,379             7,096
       Short-term loan                                                             -               763
       Capital lease obligations - current                                       542               667
       Deferred revenue - current                                              1,650             1,729
       Convertible subordinated note - current                                 5,214             5,146
                                                                    ----------------- -----------------
           Total current liabilities                                          15,746            18,602
  
  Capital lease obligations - long-term                                          497               729
  Deferred revenue - long-term                                                    30               800
  Note payable long-term                                                       5,260                 -
  Convertible subordinated note - long-term                                   69,617            63,016
                                                                    ----------------- -----------------
           Total liabilities                                                  91,150            83,147
  
  Shareholders' equity (Net capital deficiency):
       Common shares                                                              36                36
       Additional paid-in capital                                            534,054           529,354
       Accumulated comprehensive income                                          228               121
       Accumulated deficit                                                  (570,030)         (540,876)
                                                                    ----------------- -----------------
           Total shareholders' equity (Net capital deficiency)               (35,712)          (11,365)
                                                                    ----------------- -----------------
           Total liabilities and shareholders' equity                        $55,438          $ 71,782
                                                                    ================= =================
  </TABLE>
  
  Note 1 - Amounts derived from the Company's audited financial statements
  appearing in the Annual Report on Form 10-K for the year ended December 31, 2002
  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 amounts)
  
  <TABLE>
  <CAPTION>
  
                                                                  Three months ended         Six months ended
                                                                       June 30,                  June 30,
                                                              -----------------------------------------------------
                                                                     2003         2002        2003          2002
                                                              -------------- ------------- ------------ -----------
  
  Revenues:
  <S>                                                             <C>          <C>           <C>         <C>
     License and collaborative fees                                   $ 920      $ 1,340       $ 2,075     $ 7,653
     Contract and other revenue                                       1,441        3,384         3,450       6,293
                                                              -------------- ------------- ------------- ----------
  
           Total revenues                                             2,361        4,724         5,525      13,946
                                                              -------------- ------------- ------------- ----------
  
  Operating costs and expenses:
     Research and development                                        13,502       10,759        25,484      20,694
     Marketing, general and administrative                            4,698        3,849         8,603       8,698
                                                              -------------- ------------- ------------- ----------
           Total operating costs and expenses                        18,200       14,608        34,087      29,392
                                                              -------------- ------------- ------------- ----------
  
           Loss from operations                                     (15,839)      (9,884)      (28,562)    (15,446)
  
  Other income (expense):
     Investment and other income                                        268          232           383         504
     Interest expense                                                  (489)        (493)         (975)     (1,142)
                                                              -------------- ------------- ------------- ----------
           Net loss                                               $ (16,060)   $ (10,145)    $ (29,154)  $ (16,084)
                                                              ============== ============= ============= ==========
  
  Basic and diluted net loss per common share                       $ (0.22)     $ (0.14)      $ (0.41)    $ (0.23)
                                                              ============== ============= ============= ==========
  
  Shares used in computing basic and diluted net loss
  per common share                                                   72,023       70,309        71,937      70,269
                                                              ============== ============= ============= ==========
  
  </TABLE>
  
  
       See accompanying notes to condensed consolidated financial statement.
  
                                        -2-
  <PAGE>
  
  
                                      XOMA Ltd.
                   CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                              (Unaudited, in thousands)
  
  <TABLE>
  <CAPTION>
  
                                                                                                  Six months ended
                                                                                                      June 30,
                                                                                              --------------------------
                                                                                                  2003         2002
                                                                                              --------------- ----------
  
  Cash flows from operating activities:
  <S>                                                                                            <C>          <C>
        Net loss                                                                                 $ (29,154)   $ (16,084)
           Adjustments to reconcile net loss to net cash used in operating activities:
           Depreciation and amortization                                                             1,878          823
           Common shares contribution to 401(k) and management incentive plans                         685          541
           Increase (decrease) in notes to (from) a collaborative partner
               for cost allocations                                                                    270        1,250
           Accrued interest on convertible notes                                                       872          834
           (Gain) loss on disposal/retirement of property and equipment and investments               (193)           1
        Changes in assets and liabilities:
           Receivables and related party and other receivables                                       8,360       (5,169)
           Inventory                                                                                     -           (7)
           Prepaid expenses and other                                                                 (595)        (460)
           Deposits and other                                                                           13          (12)
           Accounts payable                                                                           (240)       2,346
           Accrued liabilities                                                                      (1,717)       1,164
           Deferred revenue                                                                           (849)      (2,593)
                                                                                              --------------- ----------
  
                Net cash used in operating activities                                              (20,670)     (17,366)
                                                                                              --------------- ----------
  
  Cash flows from investing activities:
        Issuance of short-term investments                                                          (4,000)           -
        Transfer from restricted cash                                                                1,500            -
        Purchase of property and equipment, net of sale proceeds                                    (1,927)      (5,851)
        Proceeds from sale of short-term investments                                                 2,099            -
                                                                                              --------------- ----------
  
                Net cash used in investing activities                                               (2,328)      (5,851)
                                                                                              --------------- ----------
  
  Cash flows from financing activities:
        Proceeds from short-term loan                                                                    -        1,000
        Principal payments - short-term loan                                                          (763)           -
        Principal payments under capital lease obligations                                            (357)        (374)
        Proceeds from issuance of convertible notes                                                 10,787        4,020
        Proceeds from issuance of common shares, net of closing costs                                4,015          399
                                                                                              --------------- ----------
  
                Net cash provided by financing activities                                           13,682        5,045
                                                                                              --------------- ----------
  
  Net increase (decrease) in cash and cash equivalents                                              (9,316)     (18,172)
  Cash and cash equivalents at the beginning of the period                                          36,262       67,320
                                                                                              --------------- ----------
  
  Cash and cash equivalents at the end of the period                                               $26,946     $ 49,148
                                                                                              =============== ==========
  </TABLE>
  
       See accompanying notes to condensed consolidated financial statements.
  
  
                                        -3-
  <PAGE>
  
                                      XOMA Ltd.
                NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                     (Unaudited)
  
  
  1.       OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
  
  Business
  
       XOMA Ltd. ("XOMA" or the "Company"), a Bermuda company, is a
  biopharmaceutical company that develops and manufactures products to treat
  cancer, immunologic and inflammatory disorders, and infectious diseases. The
  Company's products are presently in various stages of development and all are
  subject to regulatory approval before the Company or its collaborators can
  commercially introduce any products. There can be no assurance that any of the
  products under development by the Company will be developed successfully, obtain
  the requisite regulatory approval or be successfully manufactured or marketed.
  
  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 or future periods. The
  condensed consolidated balance sheet as of December 31, 2002 has been derived
  from the audited consolidated financial statements included in the Company's
  2002 Annual Report on Form 10-K. The unaudited consolidated condensed financial
  statements should be read in conjunction with the Company's audited consolidated
  financial statements for the year ended December 31, 2002 included in its Annual
  Report on Form 10-K.
  
  Critical Accounting Policies
  
       We believe there have been no significant changes in our critical
  accounting policies during the six months ended June 30, 2003 as compared to
  those previously disclosed in our Annual Report on Form 10-K for the year ended
  December 31, 2002 filed with the SEC on March 28, 2003.
  
  Consolidation
  
       The consolidated financial statements include the accounts of the Company
  and its wholly owned subsidiaries. All significant intercompany accounts and
  transactions have been eliminated in consolidation.
  
  Estimates
  
       The preparation of financial statements in conformity with accounting
  principles generally accepted in the United States 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.
  
  Concentration of Risk
  
       Cash, cash equivalents, short-term investments and accounts receivable are
  financial instruments, which potentially subject the Company to concentrations
  of credit risk. The Company maintains and invests excess cash in money market
  funds and short-term investments, which bear minimal risk. The Company has not
  experienced any significant credit losses and does not generally require
  collateral on receivables. For the six months ended June 30, 2003, four
  customers represented 43%, 28%, 18% and 10% of total revenues and as of June 30,
  2003 there were no billed or unbilled receivables outstanding from these
  customers. For the six months ended June 30, 2002, three customers represented
  40%, 36% and 22% of total revenues.
  
  
                                        -4-
  <PAGE>
  
  
  
                                      XOMA Ltd.
          NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
                                     (Unaudited)
  
  
  Share-Based Compensation
  
       In accordance with the provisions of the Statement of Financial Accounting
  Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 123), the
  Company has elected to continue to follow Accounting Principles Board Opinion
  No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related
  interpretations, and to adopt the "disclosure only" alternative described in
  SFAS 123. Under APB 25, if the exercise price of the Company's employee share
  options equals or exceeds the fair market value on the date of the grant or the
  fair value of the underlying shares on the date of the grant as determined by
  the Company's Board of Directors, no compensation expense is recognized.
  Accordingly, the financial statements reflect amortization of compensation
  resulting from options granted at exercise prices which were below market price
  at the grant date. Had compensation cost for the Company's shares-based
  compensation plans been based on the fair value method at the grant dates for
  awards under these plans consistent with the provisions of SFAS 123, the
  Company's net loss and net loss per share would have been increased to the pro
  forma amounts indicated below for the three and six months ended June 30, 2003
  and 2002 (in thousands, except per share amounts):
  
  <TABLE>
  <CAPTION>
  
                                                          Three months ended                 Six months ended
                                                               June 30,                          June 30,
                                                    --------------------------------  --------------------------------
                                                         2003             2002             2003             2002
                                                    ---------------  ---------------  ---------------  ---------------
  
  <S>                                                 <C>              <C>              <C>              <C>
  Net loss - as reported                                $ (16,060)       $ (10,145)       $ (29,154)       $ (16,084)
  Deduct:
  
     Total share-based employee compensation
        expense determined under fair value
        method                                               (948)          (1,053)          (1,602)          (1,846)
                                                    ---------------  ---------------  ---------------  ---------------
  Pro forma net loss                                    $ (17,008)       $ (11,198)       $ (30,756)       $ (17,930)
                                                    ===============  ===============  ===============  ===============
  
  Loss per share:
     Basic and diluted - as reported                      $ (0.22)         $ (0.14)         $ (0.41)         $ (0.23)
     Basic and diluted - pro forma                        $ (0.24)         $ (0.16)         $ (0.43)         $ (0.26)
  
  </TABLE>
  
  The fair value of each option grant under these plans is estimated on the date
  of grant using the Black-Scholes option-pricing model with the following
  weighted-average assumptions used for grants during the periods indicated below:
  
                                                 Three and six months ended
                                                          June 30,
                                                 ---------------------------
                                                    2003               2002
                                                 -------------     ------------
  Dividend yield                                            0%               0%
  Expected volatility                                      96%              99%
  Risk-free interest rate                                1.17%            1.50%
  Expected life                                      4.9 years        6.2 years
  
  
  Revenue Recognition
  
       Revenue is recognized when the related costs are incurred and the four
  basic criteria of revenue recognition are met: (1) persuasive evidence of an
  arrangement exists; (2) delivery has occurred or services rendered; (3) the fee
  is fixed and determinable; and (4) collectibility is reasonably assured.
  Determination of criteria (3) and (4) are based on management's judgments
  regarding the nature of the fee charged for products or services delivered and
  the collectibility of those fees.
  
                                        -5-
  <PAGE>
  
                                      XOMA Ltd.
          NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
                                     (Unaudited)
  
  
  License and Collaborative Fees
  
       Revenue from non-refundable, license or technology access payments under
  license and collaborative agreements where the Company has a continuing
  obligation to perform is recognized as revenue over the period of the continuing
  performance obligation.
  
       Milestone payments under collaborative arrangements are recognized as
  revenue upon achievement of the milestone events, which represent the
  culmination of the earnings process because the Company has no future
  performance obligations related to the payment. Milestone payments that require
  a continuing performance obligation on the part of the Company are recognized
  over the period of the continuing performance obligation. Amounts received in
  advance are recorded as deferred revenue until the related milestone is
  completed.
  
  Contract Revenue
  
       Contract revenue for research and development involves the Company
  providing research, development, or manufacturing services to collaborative
  partners. The Company recognizes revenue under these arrangements as the related
  research and development costs are incurred and collectibility is reasonably
  assured.
  
  Product Sales
  
       The Company recognizes product revenue upon shipment when there is
  persuasive evidence that an arrangement exists, delivery has occurred, the price
  is fixed and determinable, and collectibility is reasonably assured. Allowances
  are established for estimated uncollectible amounts, product returns, and
  discounts, if any.
  
  Research and Development Expenses
  
       Research and development expenses consist of direct and research-related
  allocated overhead costs such as facilities costs, salaries and related
  personnel costs, and material and supply costs. In addition, research and
  development expenses include costs related to clinical trials to validate the
  Company's testing processes and procedures and related overhead expenses. From
  time to time, research and development expenses may include upfront fees and
  milestones paid to collaborative partners for the purchase of rights to
  in-process research and development. Such amounts are expensed as incurred. The
  timing of upfront fees and milestone payments in the future may cause
  variability in the Company's future research and development expenses.
  
  Comprehensive Income (Loss)
  
       Unrealized gains or losses on the Company's available-for-sale securities
  are included in other comprehensive income (loss). Comprehensive income (loss)
  and its components for the three and six months ended June 30, 2003 and 2002 are
  as follows (in thousands):
  <TABLE>
  <CAPTION>
  
                                                               Three months ended          Six months ended
                                                                    June 30,                   June 30,
                                                            -------------------------- --------------------------
                                                                2003         2002         2003         2002
                                                            ------------- ------------ ------------- ------------
  
  <S>                                                         <C>          <C>          <C>           <C>
  Net loss                                                     $ (16,060)   $ (10,145)   $ (29,154)    $ (16,084)
  Unrealized gain (loss) on securities available-for-sale            141           --          228            --
                                                            ------------- ------------ ------------- ------------
  Comprehensive loss                                           $ (15,919)   $ (10,145)   $ (28,926)    $ (16,084)
                                                            ============= ============ ============= ============
  </TABLE>
  
                                        -6-
  <PAGE>
                                      XOMA Ltd.
          NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
                                     (Unaudited)
  
  Net Loss Per Share
  
       Basic and diluted net loss per share is based on the weighted average
  number of shares outstanding during the period in accordance with Financial
  Accounting Standard No. 128. The following potentially dilutive outstanding
  securities were not considered in the computation of diluted net loss per share
  because they would be antidilutive for the six months ended June 30, 2003 and
  2002 (in thousands):
  <TABLE>
  <CAPTION>
  
                                                                                 Six months ended
                                                                                     June 30,
                                                                            ---------------------------
                                                                                 2003          2002
                                                                            --------------- -----------
  
  <S>                                                                             <C>         <C>
  Options for shares                                                                 5,719       4,655
  Warrants for shares                                                                  700         700
  Convertible notes, debentures and related interest, as if converted*              13,021      16,834
  </TABLE>
  
  *    The number of shares, as if converted represents a conversion price equal
       to the prevailing market prices of $5.32 and $3.99 at the close of business
       on June 30, 2003 and June 28, 2002, respectively.
  
  Recent Accounting Pronouncements
  
       In November of 2002, the Financial Accounting Standards Board (or FASB)
  issued Interpretation No. 45 (or FIN 45), "Guarantor's Accounting and Disclosure
  Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
  Others." FIN 45 elaborates on the existing disclosure requirements for most
  guarantees, including residual value guarantees issued in conjunction with
  operating lease agreements. It also clarifies that at the time a company issues
  a guarantee, the company must recognize an initial liability for the fair value
  of the obligation it assumes under that guarantee and must disclose that
  information in its interim and annual financial statements. The initial
  recognition and measurement provisions apply on a prospective basis to
  guarantees issued or modified after December 31, 2002. The Company's adoption of
  the recognition requirements in January of 2003 of FIN 45 did not have a
  material impact on the Company's results of operations and financial position.
  
       In November of 2002, the Financial Accounting Standards Board issued
  Emerging Issues Task Force (referred to as EITF) Issue No. 00-21, "Revenue
  Arrangements with Multiple Deliverables." EITF Issue No. 00-21 addresses certain
  aspects of the accounting by a company for arrangements under which it will
  perform multiple revenue-generating activities. EITF Issue No. 00-21 addresses
  when and how an arrangement involving multiple deliverables should be divided
  into separate units of accounting. EITF Issue No. 00-21 provides guidance with
  respect to the effect of certain customer rights due to company nonperformance
  on the recognition of revenue allocated to delivered units of accounting. EITF
  Issue No. 00-21 also addresses the impact on the measurement and/or allocation
  of arrangement consideration of customer cancellation provisions and
  consideration that varies as a result of future actions of the customer or the
  company. Finally, EITF Issue No. 00-21 provides guidance with respect to the
  recognition of the cost of certain deliverables that are excluded from the
  revenue accounting for an arrangement. The provisions of EITF Issue No. 00-21
  will apply to revenue arrangements entered into in fiscal periods beginning
  after June 15, 2003. The Company's adoption of the recognition requirements in
  June of 2003 of EITF Issue No. 00-21 did not have a material impact on its
  consolidated financial position or results of operations.
  
       In December of 2002, the FASB issued Statement No. 148 (or FAS 148),
  "Accounting for Stock-Based Compensation - Transition and Disclosure." FAS 148
  amends SFAS 123 "Accounting for Stock-Based Compensation" to provide alternative
  methods of transition for a voluntary change to the fair based method of
  accounting for stock-based employee compensation. In addition, FAS 148 amends
  the disclosure requirements of SFAS 123 to require more prominent disclosures in
  both annual and interim financial statements about the method of accounting for
  stock-based employee compensation and the effect of the method used on reported
  results. The additional disclosure requirements of FAS 148 are effective for
  fiscal years ending after December 15, 2002. The Company elected to continue to
  follow the intrinsic value method of accounting as prescribed by Accounting
  Principles Board
  
  
                                        -7-
  <PAGE>
  
                                      XOMA Ltd.
          NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
                                     (Unaudited)
  
  
  Opinion No. 25 (or APB 25), "Accounting for Stock Issued to
  Employees," to account for employee stock options. See above in the "Significant
  Accounting Policies" note for the disclosure required by FAS 148.
  
       In January of 2003, the FASB issued Interpretation No. 46 (or FIN 46),
  "Consolidation of Variable Interest Entities." FIN 46 requires a variable
  interest entity to be consolidated by a company if that company is subject to a
  majority of the risk of loss from the variable interest entity's activities or
  entitled to receive a majority of the entity's residual returns or both. A
  variable interest entity is a corporation, partnership, trust, or any other
  legal structure used for business purposes that either (a) does not have equity
  investors with voting rights or (b) has equity investors that do not provide
  sufficient financial resources for the entity to support its activities. A
  variable interest entity often holds financial assets, including loans or
  receivables, real estate or other property. A variable interest entity may be
  essentially passive or it may engage in research and development or other
  activities on behalf of another company. The consolidation requirements of FIN
  46 apply immediately to variable interest entities created after January 31,
  2003. The consolidation requirements apply to older entities in the first fiscal
  year or interim period beginning after June 15, 2003. Certain of the disclosure
  requirements apply to all financial statements issued after January 31, 2003,
  regardless of when the variable interest entity was established. The Company's
  adoption of the disclosure requirements in January of 2003 did not have an
  impact on the Company's financial position and results of operations. The
  adoption of the recognition requirements of FIN 46 in July of 2003 is not
  expected to have a material impact on the Company's financial position or result
  of operations.
  
       In May 2003, the FASB issued Statements of Financial Accounting Standards
  No. 150, "Accounting for Certain Financial Instruments with Characteristics of
  both Liabilities and Equity" (FAS 150). FAS 150 establishes standards for the
  classification and measurement of financial instruments with characteristics of
  both liabilities and equity. FAS 150 will become effective for financial
  instruments entered into or modified after May 31, 2003. The adoption of FAS 150
  did not have a material effect on the Company's financial position or results of
  operations.
  
  2.       BALANCE SHEET COMPONENTS
  
  Inventories
  
       Inventories are stated at the lower of standard cost (which approximates
  first-in, first-out cost) or market. Inventories, which relate principally to
  the Company's agreement with Baxter Healthcare Corporation, consist of the
  following (in thousands):
  
                                             June 30,       December 31,
                                               2003             2002
                                          ---------------- ---------------
  
  Raw materials                                     $ 202           $ 202
  Finished goods                                    1,104           1,104
                                          ---------------- ---------------
  Total                                           $ 1,306         $ 1,306
                                          ================ ===============
  
  
  
  
                                        -8-
  <PAGE>
  
  
                                      XOMA Ltd.
          NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
                                     (Unaudited)
  
  
  Accrued Liabilities
  
  Accrued liabilities consist of the following (in thousands):
  
                                             June 30,       December 31,
                                               2003             2002
                                          ---------------- ---------------
  
  Accrued payroll expenses                        $ 3,054         $ 3,198
  Accrued clinical trial expenses                     356             559
  Accrued legal and other professional
       fees                                         1,100           2,425
  Other                                               869             914
                                          ---------------- ---------------
  Total                                           $ 5,379         $ 7,096
                                          ================ ===============
  
  3.       LICENSE AGREEMENTS AND RELATED CONTINGENCIES
  
       In February of 2002, XOMA and MorphoSys AG announced cross-licensing
  agreements for antibody-related technologies. The term of the XOMA license to
  MorphoSys commenced in February of 2002 and remains in effect until the
  expiration of the last patent within the XOMA patent rights provided under the
  terms of the agreement. Because there are no continuing performance obligations
  on the part of the Company under the MorphoSys agreement, the license fee
  provided for in that agreement was recognized as revenue in the first quarter of
  2002. Under the terms of the agreement, the $5.0 million license fee was to be
  paid in two installments. The first $1.0 million installment was due and paid in
  the first quarter of 2002, and the second portion in the amount of $4.0 million
  was due in the fourth quarter of 2002. The second installment could be paid in
  either cash or with MorphoSys shares valued at the time of MorphoSys' election
  to pay the second installment in shares.
  
  During the fourth quarter of 2002, we were notified by MorphoSys of its
  intention to exercise its option to pay the second installment totaling $4.0
  million owed to XOMA under the license agreement with 363,466 of its ordinary
  shares, which number of shares was determined with reference to the market price
  of MorphoSys shares at the time of such notice (October 23, 2002). XOMA applied
  for, and on January 31, 2003 was granted, an exemption from German withholding
  tax on the full license fee from MorphoSys. The administrative process in
  Germany for the issuance of the shares was delayed pending resolution of the
  withholding tax matter. Upon receipt of the tax exemption, MorphoSys
  re-initiated the process, and on May 6, 2003, the shares were issued to XOMA.
  The balance of these shares, totaling $2.1 million, are held as available-for-
  sale and are classified as short-term investments in the financial statements.
  During the second quarter of 2003, 171,581 shares were sold for net proceeds of
  $2.1 million and the gain on the sale of investment of $0.2 million was
  recognized as investment and other income.
  
       In June of 2003, Onyx Pharmaceuticals, Inc. announced that it was
  discontinuing its therapeutic virus program to focus its resources on its BAY
  43-9006 anticancer compound. Onyx subsequently notified XOMA on June 23, 2003 of
  its intention to terminate the Company's related process development and
  manufacturing agreement effective 120 days from the date of notification. Under
  the terms of the agreement, Onyx is obligated to pay $0.5 million as a facility
  fee plus $1.0 million as a termination fee by the end of the 120-day
  notification period. In accordance with our revenue recognition policy, these
  amounts will be recognized in future periods as the Company's service
  commitments are completed. Additionally, the Company plans to accelerate the
  amortization of $1.0 million remaining in deferred revenue over the 120-day
  notification period.
  
  4.       GENENTECH AGREEMENT MODIFICATION
  
       In the first quarter of 2003, the Company's financing arrangement with
  Genentech, Inc. related to development and commercialization of RaptivaTM was
  modified to provide the following terms:
  
                                        -9-
  <PAGE>
  
                                      XOMA Ltd.
          NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
                                     (Unaudited)
  
  
       The credit limit under the convertible subordinated debt agreement to
  finance XOMA's share of development costs was increased to $80.0 million. The
  convertible subordinated note is due upon the earlier of (a) April of 2005,
  except for advances made after April 2003 in which case payment will be due on
  the second anniversary date(s) of such advances or (b) within 90 days after
  first product approval (which could be before the end of 2003). At XOMA's
  election, the convertible subordinated note may be repaid in cash or with shares
  with the conversion price to be calculated at the time of payment based on the
  fair market value at the time of election. If repayment is triggered by product
  approval, XOMA may elect to defer payment of up to $40.0 million as an offset
  against the Company's proceeds from its 25% share of U.S. operating profits on
  the product. At June 30, 2003, the outstanding balance under this note totaled
  $69.6 million.
  
       A new $15.0 million debt facility was established to finance XOMA's share
  of U.S. commercialization costs. The note payable is due upon the earlier of (a)
  April of 2005, except for advances made after April 2003 in which case payment
  will be due on the second anniversary date(s) of such advances or (b) within 90
  days after first product approval by the FDA (which could be before the end of
  2003). The commercial note payable must be repaid in cash. At June 30, 2003 the
  outstanding balance under this note totaled $5.3 million.
  
       XOMA granted Genentech a security interest in the Company's profit share on
  RaptivaTM as collateral against any unpaid past due amounts of the loans.
  
  5.       MILLENNIUM INVESTMENT AGREEMENT MODIFICATION
  
       In the second quarter of 2003, the Company announced the amendment of
  certain terms of the investment agreement with Millennium Pharmaceuticals, Inc.
  The key elements of the revised investment agreement include an extension of the
  maturity date of the $5.0 million outstanding convertible debt from May of 2003
  to February of 2004 and a re-scheduling of the Company's decision points
  regarding whether to sell the remaining common shares from three option dates
  through May of 2004 to six option dates through February of 2005. In June of
  2003, the Company exercised an option to sell 608,766 shares to Millennium for
  gross proceeds of $4.0 million or $6.57 per share, leaving a balance of $33.5
  million available under this arrangement, excluding the convertible debt.
  
  6.       SUBSEQUENT EVENTS
  
       On July 3, 2003, the Company and Baxter Healthcare Corporation terminated
  the license and supply agreements for the NEUPREX(R) product. Baxter has agreed
  to make a one-time termination payment of $10.0 million to the Company no later
  than January of 2004. Until such payment is made, Baxter is committed to
  reimburse the Company for a portion of certain development expenses which may be
  incurred. The Company expects to recognize the $10.0 million termination payment
  as revenue in the third quarter of 2003 and to establish an inventory reserve of
  $1.3 million for NEUPREX(R) products that were included in inventory as of June
  30, 2003.
  
       In July of 2003, a complaint was filed in the General Court of Justice,
  Superior Court Division, Orange County, North Carolina, in a lawsuit captioned
  Hamlet v. Genentech, Inc., et al., No. 03 CVS 1161, and was subsequently
  amended, by a participant in one of the Phase III clinical trials of
  Raptiva(TM). The complaint asserts claims for alleged negligence, breach of
  fiduciary duty, fraud, misrepresentation and medical negligence against the
  plaintiff's treating physician, the physician's medical practice, Genentech,
  XOMA, the institutional review board responsible for the trial and the contract
  research organization retained to conduct the trial. The complaint seeks
  unspecified compensatory damages alleged to be in excess of $10,000.00. As set
  forth in the complaint, the plaintiff was initially in the placebo group of this
  trial; he did not receive Raptiva(TM) during this time, and his claims are based
  on his failure to receive his indicated treatment, not his receipt of
  Raptiva(TM). Although this case is at an early stage, XOMA believes the claims
  against it to be without merit and intends to vigorously defend against them.
  
                                        -10-
  
  <PAGE>
  
  
  
  ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                    AND RESULTS OF OPERATIONS
  
  Results of Operations
  
           Revenues for the three months ended June 30, 2003 were $2.4 million
  compared with $4.7 million for the three months ended June 30, 2002, a 49%
  decrease. This decrease was primarily due to lower recognition of deferred
  revenue from license fees and milestone payments related to the NEUPREX(R)
  license agreement with Baxter Healthcare Corporation ("Baxter") as a result of
  achieving full amortization in the first quarter of 2003 and the fourth quarter
  of 2002, respectively, and to lower development service revenues from Onyx
  Pharmaceuticals, Inc. ("Onyx"). Revenues for the six months ended June 30, 2003
  were $5.5 million compared with $13.9 million for the same period of 2002. This
  decrease was primarily due to lower license fees due from the amortization of
  deferred revenue mentioned earlier, to lower development service revenues from
  Onyx, and to a non-recurring $5.0 million license fee from MorphoSys AG
  recognized in the first quarter of 2002. License fee revenue is expected to be
  higher in the second half of 2003 including the $11.0 million termination fees
  associated with Baxter and Onyx. Contract revenue is expected to be lower in the
  second half of 2003 due to reduced development services for Baxter and Onyx.
  
       Research and development expenses for the three and six months ended June
  30, 2003 were $13.5 million and $25.5 million, respectively, compared with $10.8
  million and $20.7 million, respectively, for the same periods of 2002, or
  increases of 25% and 23%, respectively. These increases reflected increased
  development costs associated with RaptivaTM, MLN2201 (formerly known as MLN01),
  CAB-2, and the Company's XMP.629 compound being developed for acne. These
  increases were partially offset by decreased spending on Onyx-015, NEUPREX(R),
  and ING-1. In July 2003, the Company's licensing arrangement with Baxter for
  NEUPREX(R) was terminated, and future development plans are under review. In the
  third quarter, the Company expects to establish an inventory reserve of $1.3
  million for NEUPREX(R) products.
  
           Our research and development activities can be divided into earlier
  stage programs, which include molecular biology, process development,
  pilot-scale production and preclinical testing, and later stage programs, which
  include clinical testing, regulatory affairs and manufacturing clinical
  supplies. The cost associated with these programs approximate the following (in
  thousands):
  
                               Three months ended           Six months ended
                                    June 30,                    June 30,
                              ------------------------    ------------------------
                                 2003          2002          2003          2002
                              ----------     ---------    ----------   -----------
  Earlier stage programs         $ 9,492       $ 6,252      $ 16,691      $ 10,916
  Later stage programs             4,010         4,507         8,793         9,778
                              ----------     ---------    ----------   -----------
  Total                         $ 13,502      $ 10,759      $ 25,484      $ 20,694
                              ==========     =========    ==========    ==========
  
  
       Our research and development activities also can be divided into those
  related to our internal projects and those related to collaborative
  arrangements. The cost related to internal projects versus collaborative
  arrangements approximate the following (in thousands):
  
                               Three months ended           Six months ended
                                    June 30,                    June 30,
                              ------------------------    ------------------------
                                 2003          2002          2003          2002
                              ----------     ---------    ----------    ----------
  Internal projects              $ 5,077       $ 4,653       $ 9,499       $ 9,613
  Collaborative arrangements       8,425         6,106        15,985        11,081
                              ----------     ---------    ----------   -----------
  Total                         $ 13,502      $ 10,759      $ 25,484      $ 20,694
                              ==========     =========    ==========    ==========
  
  
       For the three and six months ended June 30, 2003, one project accounted for
  approximately 20% of our total research and development costs. No other single
  project was greater than 20% of our total research and development costs during
  the three and six months ended June 30, 2003 and 2002.
  
  
                                        -11-
  <PAGE>
  
       Marketing, general and administrative expenses for the three months ended
  June 30, 2003 increased to $4.7 million, or 24%, from $3.8 million for the three
  months ended June 30, 2002. The most significant component of this increase was
  pre-launch activities for RaptivaTM offset by lower legal expenses. Marketing,
  general and administrative expenses for the six months ended June 30, 2003 were
  $8.6 million compared with $ 8.7 million for the same period of 2002. The net
  decrease of $0.1 million represents primarily an increase in pre-launch
  activities for RaptivaTM and business development expenses, which were offset by
  lower legal expenses. Pre-launch marketing expenses for RaptivaTM are expected
  to continue at similar or higher levels until the product launch date.
  
       Investment income for the three months ended June 30, 2003 increased to
  $0.3 million, or 50%, compared to $0.2 million for the three months ended June
  30, 2002 primarily due to gains recognized on the sale of MorphoSys AG shares
  issued to XOMA on May 6, 2003. The gains were partially offset by lower interest
  income due to lower interest rates and lower average cash balances. Investment
  income for the six months ended June 30, 2003 decreased to $0.4 million, or 20%,
  compared to $0.5 million for the same period of 2002. This decrease reflected
  lower interest rates on lower average cash balance. Interest expense for the
  three and six months ended June 30, 2003 were to $0.5 million and $1.0 million,
  respectively, compared to $0.5 million and $1.1 million, respectively, for the
  three and six months ended June 30, 2002. This reflected lower interest rates on
  a higher average outstanding balance of the convertible notes due to Genentech,
  Inc. ("Genentech") and Millennium Pharmaceuticals, Inc. ("Millennium"). Interest
  expense for the remainder of 2003 is expected to increase due to anticipated
  higher development and commercial loan balances due to Genentech.
  
  Liquidity and Capital Resources
  
       Cash, cash equivalents, short-term investments and restricted cash
  decreased during the six months ended June 30, 2003 by $8.7 million to $29.5
  million at June 30, 2003, compared with $38.2 million at December 31, 2002. The
  Company's cash, cash equivalents and short-term investments are expected to
  decrease through 2003, except to the extent that the Company may utilize debt
  funding by Genentech for XOMA's share of RaptivaTM development and marketing
  costs, obtain additional funding under the terms of our investment agreement
  with Millennium, or secure additional sources of funding.
  
       Net cash used in operating activities was $20.7 million for the six months
  ended June 30, 2003, compared with $17.4 million for the six months ended June
  30, 2002. The increase in the first half of 2003 when compared with the first
  half of 2002 primarily reflected a higher net loss and reductions in accrued
  expenses related primarily to legal expenses, partially offset by reductions in
  accounts receivable in the first half of 2003 compared to increases in the first
  half of 2002.
  
       Net cash used in investing activities was $2.3 million for the six months
  ended June 30, 2003, compared to cash used in investing activities of $5.9
  million for the six months ended June 30, 2002. The decrease in the first half
  of 2003 when compared to the first half of 2002 was primarily due to the release
  of $1.5 million of restricted cash, which was securing a short-term loan that
  was paid off during the first quarter of 2003, to proceeds received on the sale
  of MorphoSys shares in the second quarter of 2003, and to reduced purchases of
  property and equipment in 2003. Capital programs in 2002 included renovating and
  expanding our manufacturing and warehouse facilities and other infrastructure
  investments. Capital spending is expected to continue at this lower level for
  the remainder of 2003.
  
       Net cash provided by financing activities was $13.7 million for the six
  months ended June 30, 2003, compared with $5.0 million for the six months ended
  June 30, 2002. Financing activities in the first half of 2003 included $10.8
  million net funding from Genentech under our development and commercial loan
  agreements and $4.0 million proceeds from common share sold under our investment
  agreement with Millennium. This was partially offset by principal payments of
  $1.1 million to retire a short-term loan obligation and for principal payments
  on capital lease obligations.
  
       In the first quarter of 2003, the Company's financing arrangement with
  Genentech related to development and commercialization of RaptivaTM was modified
  to provide the following terms:
  
  
                                        -12-
  <PAGE>
  
       The credit limit under the convertible subordinated debt agreement to
  finance XOMA's share of development costs was increased to $80.0 million. The
  convertible subordinated debt is due upon the earlier of (a) April of 2005,
  except for advances made after April 2003 in which case payment will be due on
  the second anniversary date(s) of such advances or (b) within 90 days after
  first product approval (which could be before the end of 2003). At XOMA's
  election, the convertible subordinated debt may be repaid in cash or with shares
  with the conversion price to be calculated at the time of payment based on the
  fair market value at the time of election. If repayment is triggered by product
  approval, XOMA may elect to defer payment of up to $40.0 million as an offset
  against the Company's proceeds from its 25% share of U.S. operating profits on
  the product. At June 30, 2003, the outstanding balance under this note totaled
  $69.6 million.
  
       A new $15.0 million debt facility was established to finance XOMA's share
  of U.S. commercialization costs. The note payable is due upon the earlier of (a)
  April of 2005, except for advances made after April 2003 in which case payment
  will be due on the second anniversary date(s) of such advances or (b) within 90
  days after first product approval by the FDA (which could be before the end of
  2003). The commercial note must be repaid in cash. At June 30, 2003 the
  outstanding balance under this note totaled $5.3 million.
  
       XOMA granted Genentech a security interest in the Company's profit share on
  RaptivaTM as collateral against any unpaid past due amounts of the loans.
  
       In the second quarter of 2003, the Company announced the amendment of
  certain terms of the investment agreement with Millennium. The key elements of
  the revised investment agreement include an extension of the maturity date of
  the $5.0 million outstanding convertible debt from May of 2003 to February of
  2004 and a re-scheduling of the Company's decision points regarding whether to
  sell the remaining common shares from three option dates through May of 2004 to
  six option dates through February of 2005. In June of 2003, the Company
  exercised an option to sell 608,766 shares to Millennium for gross proceeds of
  $4.0 million or $6.57 per share, leaving a balance of $33.5 million available
  under this arrangement, excluding the convertible debt.
  
       The present outlook is for higher losses in 2003 than recorded in 2002,
  primarily due to increased expenses on RaptivaTM and on the Millennium
  collaboration. The Company's strategy is to attempt to continue broadening its
  product pipeline through additional development collaborations such as its
  arrangements with Genentech and Millennium. To support these activities, the
  Company expanded its manufacturing capacity and other development capabilities
  during 2001 and 2002. For example, the Company relocated its technical
  development and pilot plant facilities from Santa Monica to Berkeley in 2001 to
  improve efficiencies. XOMA also installed a third 2750-liter fermentation line
  in its Berkeley production facility, which became operational in the second half
  of 2002.
  
       Based on current spending levels, anticipated revenues, debt financing
  provided by Genentech for XOMA's share of RaptivaTM development and marketing
  costs, and financing commitments from Millennium under the collaborative
  agreement between the companies, the Company estimates it has sufficient cash
  resources to meet its operating needs through at least the end of 2004. Any
  significant revenue shortfalls, or increases in planned spending on development
  programs could shorten this period. Any change in spending on RaptivaTM prior to
  approval should have no material impact on liquidity due to the Company's
  financing arrangement with Genentech. Approval of RaptivaTM during this period
  would be expected to improve operating cash flow to the extent of XOMA's share
  of operating profits from sales of RaptivaTM in the U.S., but require repayment
  of amounts owed to Genentech under the financial arrangements discussed above.
  Additional licensing arrangements or collaborations or otherwise entering into
  new equity or other financing arrangements could potentially extend this period.
  In December of 2002, Genentech submitted a Biologics License Application (or
  BLA) to the U.S. Food and Drug Administration for marketing approval of
  RaptivaTM for the treatment of moderate-to-severe plaque psoriasis. The
  timeliness of review of the BLA by the FDA may have a material impact on the
  Company's cash flow, and its ability to raise new funding on acceptable terms.
  Progress or setbacks by the Company in its other development programs or by
  potentially competing companies' products may also affect XOMA's ability to
  raise new funding on acceptable terms. The Company continues to evaluate
  alternative financing arrangements to strengthen its overall financial position
  and mitigate risks. For a further discussion of the risks related to our
  business and their effects on our cash flow and ability to raise new funding on
  acceptable terms, see "Forward-Looking Statements and Cautionary Factors that
  May Affect Future Results," included in this Item 2 below.
  
  
  
                                        -13-
  <PAGE>
  
       As of June 30, 2003, future contractual obligations are as follows (in
  thousands):
  <TABLE>
  <CAPTION>
  
                                                     Note         Capital      Operating     Convertible
                                                   Payable*       Leases         Leases         Notes**        Total
                                                 -----------    ----------     -----------   ------------    ---------
  <S>                                              <C>             <C>          <C>            <C>           <C>
  Remainder of 2003                                     $  -         $ 246        $ 1,515           $   -      $ 1,761
  2004                                                     -           572          2,894           5,214        8,680
  2005                                                 5,260           221          2,890          69,617       77,988
  2006                                                     -             -          2,900               -        2,900
  2007                                                     -             -          2,730               -        2,730
  Thereafter                                               -             -            708               -          708
                                                 -----------    ----------     -----------   ------------    ---------
  Total                                              $ 5,260       $ 1,039       $ 13,637        $ 74,831     $ 94,767
                                                 ===========    ==========     ===========   ============    =========
  </TABLE>
  
  
  *    The amount due in 2005 relates to XOMA's commercial loan agreement with
       Genenetech. This amount is due at the earlier of (a) April of 2005, except
       for advances made after April 2003 in which case payment will be due on the
       second anniversary date(s) of such advances or (b) within 90 days after
       first product approval (which could be before the end of 2003).
  
  **   The amount due in 2005 relates to XOMA's convertible subordinated debt
       agreement with Genentech. This amount is due at the earlier of (a) April of
       2005, except for advances made after April 2003 in which case payment will
       be due on the second anniversary date(s) of such advances or (b) within 90
       days after the first product approval (which could be before the end of
       2003). The amount due in 2004 represents the amount due to Millennium in
       February of 2004.
  
       Under an effective shelf registration statement filed on November 17, 2000,
  we registered 10,000,000 common shares, of which 7,000,000 common shares have
  not been issued and remain available to be sold from time to time by us. We also
  intend to file a registration statement with the SEC to increase the common
  shares available to be issued under this shelf registration by an additional
  13,000,000 shares. Once this registration statement becomes effective, we will
  be able to issue these shares from time to time in response to market conditions
  or other circumstances. This Form 10-Q does not itself constitute an offer to
  sell or the solicitation of offers to purchase any securities.
  
       In addition, pursuant to our agreements with Millennium, we have an
  effective registration statement filed on December 12, 2002 and amended on May
  23, 2003 covering the resale by Millennium of up to 6,000,000 common shares we
  have issued or may issue to Millennium, and we have issued a total of 2,052,184
  shares to Millennium which may be resold under that registration statement.
  Pursuant to our arrangement with Genentech, we have an effective registration
  statement filed on August 5, 1999 covering the resale by Genentech of up to
  2,000,000 common shares we may issue to Genentech, of which 482,000 have been
  issued and resold.
  
  Critical Accounting Policies
  
       The preparation of our financial statements in conformity with accounting
  principles generally accepted in the United States 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. The following critical accounting policies are important
  to our financial condition and results of operations presented in the financial
  statements and require management to make judgments, assumptions and estimates
  that are inherently uncertain:
  
       We believe there have been no significant changes in our critical
  accounting policies during the six months ended June 30, 2003 as compared to
  those previously disclosed in our Annual Report on Form 10-K for the year ended
  December 31, 2002 filed with the SEC on March 28, 2003.
  
  
  
                                        -14-
  <PAGE>
  
  Revenue Recognition
  
       Revenue is recognized when the related costs are incurred and the four
  basic criteria of revenue recognition are met: (1) persuasive evidence of an
  arrangement exists; (2) delivery has occurred or services rendered; (3) the fee
  is fixed and determinable; and (4) collectibility is reasonably assured.
  Determination of criteria (3) and (4) are based on management's judgments
  regarding the nature of the fee charged for products or services delivered and
  the collectibility of those fees.
  
  License and Collaborative Fees
  
       Revenue from non-refundable license or technology access payments under
  license and collaborative agreements where the Company has a continuing
  obligation to perform is recognized as revenue over the period of the continuing
  performance obligation.
  
       Milestone payments under collaborative arrangements are recognized as
  revenue upon completion of the milestone events, which represent the culmination
  of the earnings process because the Company has no future performance
  obligations related to the payment. Milestone payments that require a continuing
  performance obligation on the part of the Company are recognized over the period
  of the continuing performance obligation. Amounts received in advance are
  recorded as deferred revenue until the related milestone is completed.
  
  Contract Revenue
  
       Contract revenue for research and development involves the Company
  providing research, development or manufacturing services to collaborative
  partners. The Company recognizes revenue under these arrangements as the related
  research and development costs are incurred and collectibility is reasonably
  assured.
  
  Product Sales
  
       The Company recognizes product revenue upon shipment when there is
  persuasive evidence that an arrangement exists, delivery has occurred, the price
  is fixed and determinable and collectibility is reasonably assured. Allowances
  are established for estimated uncollectible amounts, product returns, and
  discounts, if any.
  
  Research and Development Expenses
  
       Research and development expenses consist of direct and research-related
  allocated overhead costs such as facilities costs, salaries and related
  personnel costs and material and supply costs. In addition, research and
  development expenses include costs related to clinical trials to validate our
  testing processes and procedures and related overhead expenses. From time to
  time, research and development expenses may include upfront fees and milestones
  paid to collaborative partners for the purchase of rights to in-process research
  and development. Such amounts are expensed as incurred. The timing of upfront
  fees and milestone payments in the future may cause variability in our future
  research and development expenses.
  
  Forward-Looking Statements And Cautionary Factors That May Affect Future Results
  
       Certain statements contained herein related to the relative size of the
  Company's loss for 2003, the estimated levels of its expenses and revenues for
  the balance of 2003, the sufficiency of its cash resources, the FDA advisory
  committee review and the BLA review timeframe, as well as other statements
  related to current plans for product development (including the progress of
  clinical trials, the regulatory process and the timing of clinical trials and
  regulatory filings and approvals) and existing and potential collaborative and
  licensing relationships, 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. Among other things, the actual loss for 2003
  could be higher depending on revenues from licensees and collaborators, the size
  and timing of expenditures, and whether there are unanticipated expenses. The
  suf-
  
                                        -15-
  <PAGE>
  
  
  ficiency of cash resources could be shortened if expenditures are made
  earlier or in larger amounts than anticipated or are unanticipated or if funds
  are not available on acceptable terms; and regulatory approvals could be delayed
  or denied as a result of safety or efficacy issues regarding the products being
  tested, action, inaction or delay by the FDA, European or other regulators or
  their advisory bodies, or issues relating to analysis or interpretation by, or
  submission to, these entities or others of scientific data. These and other
  risks, including those related to the results of pre-clinical testing, the
  design and progress of clinical trials, changes in the status of existing
  collaborative relationships, availability of additional licensing or
  collaboration opportunities, the timing 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 U.S. Food and Drug
  Administration, the U.S. Patent and Trademark Office or the U.S. Securities and
  Exchange Commission, scale-up and marketing capabilities, competition,
  international operations, share price volatility, the Company's financing needs
  and opportunities, uncertainties regarding the status of biotechnology patents,
  uncertainties as to the costs of protecting intellectual property, and risks
  associated with our status as a Bermuda company are described in more detail in
  the remainder of this section.
  
  None Of Our Therapeutic Products Have Received Regulatory Approval. If Our
  Products Do Not Receive Regulatory Approval, Neither Our Third Party
  Collaborators Nor We Will Be Able To Manufacture And Market Them.
  
       Even our most advanced therapeutic product has not received regulatory
  approval. Our products cannot be manufactured and marketed in the United States
  and other countries without required regulatory approvals. The United States
  government and governments of other countries extensively regulate many aspects
  of our products, including:
  
       o    testing,
  
       o    manufacturing,
  
       o    promotion and marketing, and
  
       o    exporting.
  
       In the United States, the FDA regulates pharmaceutical products under the
  Federal Food, Drug, and Cosmetic Act and other laws, including, in the case of
  biologics, the Public Health Service Act. At the present time, we believe that
  our products will be regulated by the FDA as biologics. The FDA has announced
  that it is consolidating its responsibility for reviewing new pharmaceutical
  products into its Center for Drug Evaluation and Research, the body that
  currently reviews drug products, combining that operation with part of its
  biologics review operation, the Center for Biologics Evaluation and Research.
  Because implementation of this plan may not be complete, we do not know when or
  how this change will affect us. State regulations may also affect our proposed
  products.
  
       The FDA has substantial discretion in both the product approval process and
  manufacturing facility approval process and, as a result of this discretion and
  uncertainties about outcomes of testing, we cannot predict at what point, or
  whether, the FDA will be satisfied with our or our collaborators' submissions or
  whether the FDA will raise questions which may be material and delay or preclude
  product approval or manufacturing facility approval. As we accumulate additional
  clinical data, we will submit it to the FDA, which may have a material impact on
  the FDA product approval process.
  
       Our potential products will require significant additional research and
  development, extensive preclinical studies and clinical trials and regulatory
  approval prior to any commercial sales. This process is lengthy, often taking a
  number of years, and expensive. As clinical results are frequently susceptible
  to varying interpretations that may delay, limit or prevent regulatory
  approvals, the length of time necessary to complete clinical trials and to
  submit an application for marketing approval for a final decision by a
  regulatory authority varies significantly. As a result, it is uncertain whether:
  
       o    our future filings will be delayed,
  
  
                                        -16-
  <PAGE>
  
       o    our studies will be successful,
  
       o    we will be able to provide necessary additional data,
  
       o    our future results will justify further development, or
  
       o    we will ultimately achieve regulatory approval for any of these
            products.
  
  For example,
  
            o    in 1996, we and Genentech began testing RaptivaTM (Efalizumab) in
                 patients with moderate-to-severe psoriasis. In April of 2002, we
                 and Genentech announced that a pharmacokinetic study conducted on
                 RaptivaTM comparing XOMA-produced material and Genentech-produced
                 material did not achieve the pre-defined statistical definition
                 of comparability, and the FDA requested that another Phase III
                 study be completed before the filing of a Biologics License
                 Application for RaptivaTM, delaying the filing of a Biologics
                 Licensing Application with the FDA for RaptivaTM beyond the
                 previously-planned time frame of summer 2002. In September of
                 2002, we and Genentech announced the results of the additional
                 Phase III study which achieved its primary efficacy endpoint. In
                 December of 2002, Genentech submitted a Biologics License
                 Application for RaptivaTM for the treatment of moderate-to-severe
                 plaque psoriasis, which was accepted by the FDA in February of
                 2003. Genentech has projected a single cycle (approximately
                 10-month) regulatory review period, which could potentially lead
                 to FDA action in late 2003. A FDA advisory committee is scheduled
                 to review the Biologics License Application for RaptivaTM on
                 September 9, 2003. However, we do not yet know what issues the
                 FDA or its advisory committee may raise with respect to efficacy
                 or safety of the drug or other elements of the application. In
                 March 2003, we announced completion of enrollment in a Phase II
                 study of RaptivaTM in patients suffering from rheumatoid
                 arthritis. In May of 2003, we and Genentech announced our
                 decision to terminate Phase II testing of RaptivaTM in patients
                 suffering from rheumatoid arthritis based on an evaluation by an
                 independent Data Safety Monitoring Board that suggested no
                 overall net clinical benefit in patients receiving the study
                 drug. We have also announced the initiation of enrollment in a
                 Phase II study of RaptivaTM as a possible treatment for patients
                 with psoriatic arthritis. We do not know whether or when any such
                 testing will demonstrate product safety and efficacy in this
                 patient population or result in regulatory approval.
  
            o    in December of 1992, we began human testing of our
                 NEUPREX(R)product, a genetically engineered fragment of a
                 particular human protein, and licensed certain worldwide rights
                 to Baxter. In April of 2000, members of the FDA and
                 representatives of XOMA and Baxter discussed results from the
                 Phase III trial that tested NEUPREX(R)in pediatric patients with
                 a potentially deadly bacterial infection called meningococcemia,
                 and senior representatives of the FDA indicated that the data
                 presented were not sufficient to support the filing of an
                 application for marketing approval at that time. In November of
                 2002, Baxter completed enrollment in a Phase II pilot study with
                 NEUPREX(R) in Crohn's disease patients. In July of 2003, XOMA
                 announced the termination of its license and supply agreements
                 with Baxter for XOMA's NEUPREX(R)product, and the rights returned
                 to XOMA.
  
       Given that regulatory review is an interactive and continuous process, we
  maintain a policy of limiting announcements and comments upon the specific
  details of the ongoing regulatory review of our products, subject to our
  obligations under the securities laws, until definitive action is taken.
  
  Because All Of Our Products Are Still In Development, We Will Require
  Substantial Funds To Continue; We Cannot Be Certain That Funds Will Be Available
  And, If Not Available, We May Have To Take Actions Which Could Adversely Affect
  Your Investment.
  
                                        -17-
  <PAGE>
  
       If adequate funds are not available, we may have to dilute or otherwise
  adversely affect the rights of existing shareholders, curtail or cease
  operations or, in extreme circumstances, file for bankruptcy protection. We have
  spent, and we expect to continue to spend, substantial funds in connection with:
  
       o    research and development relating to our products and production
            technologies
  
       o    expansion of our production capabilities
  
       o    extensive human clinical trials and
  
       o    protection of our intellectual property.
  
       Based on current spending levels, anticipated revenues, debt financing
  provided by Genentech for our share of RaptivaTM development and marketing
  costs, and financing commitments from Millennium under the collaborative
  agreement between the companies, we estimate we have sufficient cash resources
  to meet our operating needs through at least the end of 2004. However, to the
  extent we experience changes in the timing or size of expenditures or
  unanticipated expenditures, or if our collaborators do not meet their
  obligations to us or anticipated revenues otherwise do not materialize, these
  funds may not be adequate for this period. As a result, we do not know whether:
  
       o    operations will generate meaningful funds
  
       o    additional agreements for product development funding can be reached
  
       o    strategic alliances can be negotiated or
  
       o    adequate additional financing will be available for us to finance our
            own development on acceptable terms, if at all.
  
       Cash balances and operating cash flow are influenced primarily by the
  timing and level of payments by our licensees and development partners, as well
  as by our operating costs.
  
       Specifically, although changes in spending on RaptivaTM should not impact
  liquidity due to our financing arrangements with Genentech and FDA approval of
  RaptivaTM would generally be expected to improve operating cash flow to the
  extent of XOMA's share of operating profits from sales of RaptivaTM in the U.S.,
  such approval will also require repayment in cash, shares or deferred repayment
  of up to $40.0 million of amounts owed to Genentech (approximately $74.9 million
  under both loan agreements as of June 30, 2003). In addition, any delays in the
  review by the FDA of the Biologics License Application for RaptivaTM may have a
  material impact on our cash flow and on our ability to raise new funding on
  acceptable terms.
  
  The Financial Terms Of Some Of Our Existing Collaborative Arrangements Could
  Result In Dilution Of Our Share Value.
  
       We have financed, and anticipate continuing to finance, our most
  significant development program, RaptivaTM, principally by borrowing from
  Genentech, and this debt is convertible at XOMA's option into our common shares
  with the conversion price to be calculated at the time of conversion. The
  outstanding amount of such convertible debt as of June 30, 2003 was
  approximately $69.6 million. This debt will come due at the earlier of April of
  2005 or within 90 days after first product approval (which could be before the
  end of 2003). Unless we secure substantial alternative financing, it is likely
  that some or all of this debt, as well as some or all of any convertible debt
  issued in the future as part of this financing arrangement, will be converted
  into equity when it comes due rather than be repaid in cash, resulting in the
  issuance of additional common shares.
  
       Our financing arrangement with Millennium includes a $5.0 million
  convertible note we issued to Millennium in November of 2001, which comes due in
  February of 2004 and may be converted into common shares at that time. In
  addition, we have the option to issue up to $33.5 million worth of common
  shares, excluding the converti-
  
  
                                        -18-
  <PAGE>
  
  
  ble debt, to Millennium through February of 2005. The total amount issuable in
  the remainder of 2003 could be $9.0 million. The number of shares to be issued
  will be based on a conversion price to be calculated at the time of conversion.
  
       These arrangements, as well as future arrangements we may enter into with
  similar effect, could result in dilution in the value of our shares.
  
  Because All Of Our Products Are Still In Development, We Have Sustained Losses
  In The Past And We Expect To Sustain Losses In The Future.
  
       We have experienced significant losses and, as of June 30, 2003, we had an
  accumulated deficit of $570.0 million.
  
       For the six months ended June 30, 2003, we had a net loss of approximately
  $29.2 million, or $0.41 per common share (basic and diluted). For the year ended
  December 31, 2002, we had a net loss of approximately $33.2 million, or $0.47
  per common share (basic and diluted). We expect to incur additional losses in
  the future, primarily due to increased expenses on RaptivaTM, on the Millennium
  collaboration and on our XMP.629 compound.
  
       Our ability to make profits is dependent in large part on obtaining
  regulatory approval for our products and entering into agreements for product
  development and commercialization, both of which are uncertain. Our ability to
  fund our ongoing operations is dependent on the foregoing factors and on our
  ability to secure additional funds. Because all of our products are still in
  development, we do not know whether we will ever make a profit or whether cash
  flow from future operations will be sufficient to meet our needs.
  
  If Third Party Collaborators Do Not Successfully Develop And Market Our
  Products, We May Not Be Able To Do So On Our Own.
  
       Our financial resources and our marketing experience and expertise are
  limited. Consequently, we depend to a large extent upon securing the financial
  resources and marketing capabilities of third parties with whom we collaborate.
  
       o    In April of 1996, we and Genentech entered into an agreement whereby
            we agreed to co-develop Genentech's humanized monoclonal antibody
            product RaptivaTM. In April of 1999, the companies extended and
            expanded the agreement. In March of 2003, the Company further expanded
            the agreement.
  
       o    In November of 2001, we entered into a collaboration with Millennium
            Pharmaceuticals, Inc. to develop two of Millennium's products for
            certain vascular inflammation indications.
  
       Because our collaborators are independent third parties, they may be
  subject to different risks than we are and have significant discretion in
  determining the efforts and resources they will apply. We do not know whether
  Genentech or Millennium will successfully develop or market any of the products
  we are collaborating on.
  
       Even when we have a collaborative relationship, other circumstances may
  prevent it from resulting in successful development of marketable products.
  
       o    In January of 2000, we licensed the worldwide rights to all
            pharmaceutical compositions containing a particular human protein for
            treatment of meningococcemia and additional potential future human
            clinical indications to Baxter. In July of 2003, this arrangement was
            terminated, and the rights returned to XOMA. Although we are
            evaluating future options for developing this product, we do not know
            whether any options we may pursue will succeed.
  
       o    In January of 2001, we entered into a strategic process development
            and manufacturing alliance with Onyx Pharmaceuticals, Inc. pursuant to
            which we are scaling up production to commercial volume to manufacture
            one of Onyx's cancer products. In June of 2003, Onyx notified XOMA
  
  
                                        -19-
  <PAGE>
  
  
            that it was discontinuing development of the product and terminating
            the agreement so that it could focus on its anticancer compound.
  
       Although we continue to evaluate additional strategic alliances and
  potential partnerships, we do not know whether or when any such alliances or
  partnerships will be entered into.
  
  Because We Have No History Of Profitability And Because The Biotechnology Sector
  Has Been Characterized By Highly Volatile Stock Prices, Announcements We Make
  And General Market Conditions For Biotechnology Stocks Could Result In A Sudden
  Change In The Value Of Our Common Shares.
  
       As a biopharmaceutical company, we have experienced significant volatility
  in our common shares. Fluctuations in our operating results and general market
  conditions for biotechnology stocks could have a significant impact on the
  volatility of our common share price. From December 31, 2001 through August 12,
  2003, our share price has ranged from a high of $12.19 to a low of $2.84. On
  August 11, 2003, the last reported sale price of the common shares as reported
  on the Nasdaq National Market was $8.40 per share. Factors contributing to such
  volatility include, but are not limited to:
  
       o    results of preclinical studies and clinical trials
  
       o    information relating to the safety or efficacy of our products
  
       o    developments regarding regulatory filings
  
       o    announcements of new collaborations
  
       o    failure to enter into collaborations
  
       o    developments in existing collaborations
  
       o    our funding requirements and the terms of our financing arrangements
  
       o    announcements of technological innovations or new indications for our
            therapeutic products
  
       o    government regulations
  
       o    developments in patent or other proprietary rights
  
       o    the number of shares outstanding
  
       o    the number of shares trading on an average trading day
  
       o    announcements regarding other participants in the biotechnology and
            pharmaceutical industries
  
       o    market speculation regarding any of the foregoing.
  
  Because Many Of The Companies We Do Business With Are Also In The Biotechnology
  Sector, The Volatility Of That Sector Can Affect Us Indirectly As Well As
  Directly.
  
       The same factors that affect us directly because we are a biotechnology
  company can also adversely impact us indirectly by affecting the ability of our
  collaborators, partners and others we do business with to meet their obligations
  to us or our ability to realize the value of the consideration provided to us by
  these other companies. For example, in connection with our licensing transaction
  with MorphoSys AG, MorphoSys has announced that it has exercised its option to
  pay a portion of the license fee owed to us in the form of equity securities of
  MorphoSys.
  
                                        -20-
  <PAGE>
  
  XOMA has only recently received these shares and the future value of
  these shares is subject both to market risks affecting our ability to realize
  the value of these shares and more generally to the business and other risks to
  which the issuer of these shares is subject. Since the date of MorphoSys'
  election on October 23, 2002, the per share closing price for MorphoSys shares
  has ranged from approximately $4.77 to $15.95, which demonstrates the volatility
  of these shares in the current market.
  
  If Any Of Our Products Receives Regulatory Approval, We May Not Be Able To
  Increase Existing Or Acquire New Manufacturing Capacity Sufficient To Meet
  Market Demand.
  
       Because we have never commercially introduced any pharmaceutical products
  and none of our products have received regulatory approval, we do not know
  whether the capacity of our existing manufacturing facilities can be increased
  to produce sufficient quantities of our products to meet market demand. Also, if
  we need additional manufacturing facilities to meet market demand, we cannot
  predict that we will successfully obtain those facilities because we do not know
  whether they will be available on acceptable terms. In addition, any
  manufacturing facilities acquired or used to meet market demand must meet the
  FDA's quality assurance guidelines.
  
  Because We Do Not And Cannot Currently Market Any Of Our Products For Commercial
  Sale, We Do Not Know Whether There Will Be A Viable Market For Our Products.
  
       Even if we receive regulatory approval for our products and we or our third
  party collaborators successfully manufacture them, our products may not be
  accepted in the marketplace. For example, physicians and/or patients may not
  accept a product for a particular indication because it has been biologically
  derived (and not discovered and developed by more traditional means) if no
  biologically derived products are currently in widespread use in that
  indication, as is currently the case with psoriasis. Consequently, we do not
  know if physicians or patients will adopt or use our products for their approved
  indications.
  
  If Our And Our Partners' Patent Protection For Our Principal Products And
  Processes Is Not Enforceable, We May Not Realize Our Profit Potential.
  
       Because of the length of time and the expense associated with bringing new
  products to the marketplace, we and our partners hold and are in the process of
  applying for a number of patents in the United States and abroad to protect our
  products and important processes and also have obtained or have the right to
  obtain exclusive licenses to certain patents and applications filed by others.
  However, the patent position of biotechnology companies generally is highly
  uncertain and involves complex legal and factual questions, and no consistent
  policy regarding the breadth of allowed claims has emerged from the actions of
  the U.S. Patent and Trademark Office with respect to biotechnology patents.
  Legal considerations surrounding the validity of biotechnology patents continue
  to be in transition, and historical legal standards surrounding questions of
  validity may not continue to be applied, and current defenses as to issued
  biotechnology patents may not in fact be considered substantial in the future.
  These factors have contributed to uncertainty as to:
  
       o    the degree and range of protection any patents will afford against
            competitors with similar technologies
  
       o    if and when patents will issue
  
       o    whether or not others will obtain patents claiming aspects similar to
            those covered by our patent applications or
  
       o    the extent to which we will be successful in avoiding infringement of
            any patents granted to others.
  
       The Patent Office has issued approximately 69 patents to us related to our
  products based on human bactericidal permeability-increasing protein, which we
  call BPI, including novel compositions, their manufacture, formulation, assay
  and use. In addition, we are the exclusive licensee of BPI-related patents and
  applications owned by
  
  
                                        -21-
  <PAGE>
  
  New York University and Incyte Pharmaceuticals Inc. The Patent Office has also
  issued nine patents to us related to our bacterial expression technology.
  
       If certain patents issued to others are upheld or if certain patent
  applications filed by others issue and are upheld, we may require licenses from
  others in order to develop and commercialize certain potential products
  incorporating our technology or we may become involved in litigation to
  determine the proprietary rights of others. These licenses, if required, may not
  be available on acceptable terms, and any such litigation may be costly and may
  have other adverse effects on our business, such as inhibiting our ability to
  compete in the marketplace and absorbing significant management time.
  
       Due to the uncertainties regarding biotechnology patents, we also have
  relied and will continue to rely upon trade secrets, know-how and continuing
  technological advancement to develop and maintain our competitive position. All
  of our employees have signed confidentiality agreements under which they have
  agreed not to use or disclose any of our proprietary information. Research and
  development contracts and relationships between us and our scientific
  consultants and potential customers provide access to aspects of our know-how
  that are protected generally under confidentiality agreements. These
  confidentiality agreements may not be honored or may not be enforced by a court.
  To the extent proprietary information is divulged to competitors or to the
  public generally, such disclosure may adversely affect our ability to develop or
  commercialize our products by giving others a competitive advantage or by
  undermining our patent position.
  
  Protecting Our Intellectual Property Can Be Costly And Expose Us To Risks Of
  Counterclaims Against Us.
  
       We may be required to engage in litigation or other proceedings to protect
  our intellectual property. The cost to us of this litigation, even if resolved
  in our favor, could be substantial. Such litigation could also divert
  management's attention and resources. In addition, if this litigation is
  resolved against us, our patents may be declared invalid, and we could be held
  liable for significant damages. In addition, if the litigation included a claim
  of infringement by us of another party's patent that was resolved against us, we
  or our collaborators may be enjoined from developing, manufacturing, selling or
  importing products, processes or services without a license from the other
  party.
  
  Other Companies May Render Some Or All Of Our Products Noncompetitive Or
  Obsolete.
  
       Developments by others may render our products or technologies obsolete or
  uncompetitive. Technologies developed and utilized by the biotechnology and
  pharmaceutical industries are continuously and substantially changing.
  Competition in the areas of genetically engineered DNA-based and antibody-based
  technologies is intense and expected to increase in the future as a number of
  established biotechnology firms and large chemical and pharmaceutical companies
  advance in these fields. Many of these competitors may be able to develop
  products and processes competitive with or superior to our own for many reasons,
  including that they may have:
  
       o    significantly greater financial resources
  
       o    larger research and development and marketing staffs
  
       o    larger production facilities
  
       o    entered into arrangements with, or acquired, biotechnology companies
            to enhance their capabilities or
  
       o    extensive experience in preclinical testing and human clinical trials.
  
       These factors may enable others to develop products and processes
  competitive with or superior to our own or those of our collaborators. In
  addition, a significant amount of research in biotechnology is being carried out
  in universities and other non-profit research organizations. These entities are
  becoming increasingly interested in the
  
  
  
                                        -22-
  <PAGE>
  
  commercial value of their work and may become more aggressive in seeking patent
  protection and licensing arrangements.
  
       Furthermore, positive or negative developments in connection with a
  potentially competing product may have an adverse impact on our ability to raise
  additional funding on acceptable terms. For example, if another product is
  perceived to have a competitive advantage, or another product's failure is
  perceived to increase the likelihood that our product will fail, then investors
  may choose not to invest in us on terms we would accept or at all.
  
       Without limiting the foregoing, we are aware that:
  
       o    Biogen Inc. has announced that the FDA has approved Amevive(R)to treat
            moderate-to-severe chronic plaque psoriasis in adult patients who are
            candidates for systematic therapy or phototherapy;
  
       o    Centocor Inc., a unit of Johnson & Johnson, has announced that it has
            tested its rheumatoid arthritis and Crohn's disease drug, Remicade(R),
            in psoriasis showing clinical benefits (and it has been announced that
            the drug has shown promising results in patients with psoriatic
            arthritis);
  
       o    it has been announced that Amgen Inc. tested its rheumatoid arthritis
            and psoriatic arthritis drug, Enbrel(R), in a Phase III clinical trial
            in patients with moderate-to-severe plaque psoriasis; meeting the
            primary endpoint and all secondary endpoints, that the primary and key
            secondary endpoints were met in a second Phase III trial, and that a
            filing for regulatory approval with the U.S. FDA for this medication
            was submitted in July of 2003;
  
       o    MedImmune, Inc. has completed enrollment in three Phase II trials to
            evaluate its anti-T cell monoclonal antibody in psoriasis;
  
       o    GenMab A/S has announced that its investigational new drug application
            for HuMax-CD4 for psoriasis has been cleared through the FDA to
            initiate a Phase II study;
  
       o    Abbott Laboratories has announced the commencement of a Phase II
            psoriasis trial and Phase III psoriatic arthritis trial of its
            rheumatoid arthritis drug HumiraTM; and
  
       o    other companies, including Medarex, Inc., are developing monoclonal
            antibody or other products for treatment of inflammatory skin
            disorders.
  
       A number of companies are developing monoclonal antibodies targeting
  cancers, which may prove more effective than the ING-1 antibody.
  
       It is possible that one or more other companies may be developing one or
  more products based on the same human protein as our NEUPREX(R) product, and
  these product(s) may prove to be more effective than NEUPREX(R) or receive
  regulatory approval prior to NEUPREX(R) or any BPI-derived ophthalmic product
  developed by XOMA.
  
  As We Do More Business Internationally, We Will Be Subject To Additional
  Political, Economic And Regulatory Uncertainties.
  
       We may not be able to successfully operate in any foreign market. We
  believe that, because the pharmaceutical industry is global in nature,
  international activities will be a significant part of our future business
  activities and that, when and if we are able to generate income, a substantial
  portion of that income will be derived from product sales and other activities
  outside the United States. Foreign regulatory agencies often establish standards
  different from those in the United States, and an inability to obtain foreign
  regulatory approvals on a timely basis could put us at a competitive
  disadvantage or make it uneconomical to proceed with a product's development.
  International operations may be limited or disrupted by:
  
  
  
                                        -23-
  <PAGE>
  
  
       o    imposition of government controls,
  
       o    export license requirements,
  
       o    political or economic instability,
  
       o    trade restrictions,
  
       o    changes in tariffs,
  
       o    restrictions on repatriating profits,
  
       o    exchange rate fluctuations,
  
       o    withholding and other taxation, and
  
       o    difficulties in staffing and managing international operations.
  
  Because We Are A Relatively Small Biopharmaceutical Company With Limited
  Resources, We May Not Be Able To Attract And Retain Qualified Personnel, And The
  Loss Of Key Personnel Could Delay Or Prevent Achieving Our Objectives.
  
       Our success in developing marketable products and achieving a competitive
  position will depend, in part, on our ability to attract and retain qualified
  scientific and management personnel, particularly in areas requiring specific
  technical, scientific or medical expertise. There is intense competition for
  such personnel. Our research, product development and business efforts would be
  adversely affected by the loss of one or more of key members of our scientific
  or management staff, particularly our executive officers: John L. Castello, our
  Chairman of the Board, President and Chief Executive Officer; Patrick J.
  Scannon, M.D., Ph.D., our Senior Vice President and Chief Scientific and Medical
  Officer; Clarence L. Dellio, our Senior Vice President and Chief Operating
  Officer; Peter B. Davis, our Vice President, Finance and Chief Financial
  Officer; and Christopher J. Margolin, our Vice President, General Counsel and
  Secretary. We have employment agreements with Mr. Castello, Dr. Scannon and Mr.
  Davis. We currently have no key person insurance on any of our employees.
  
  Even If We Bring Products To Market, We May Be Unable To Effectively Price Our
  Products Or Obtain Adequate Reimbursement For Sales Of Our Products, Which Would
  Prevent Our Products From Becoming Profitable.
  
       If we succeed in bringing our product candidates to the market, they may
  not be considered cost-effective, and reimbursement to the patient may not be
  available or may not be sufficient to allow us to sell our products on a
  competitive basis. In both the United States and elsewhere, sales of medical
  products and treatments are dependent, in part, on the availability of
  reimbursement to the patient from third-party payors, such as government and
  private insurance plans. Third-party payors are increasingly challenging the
  prices charged for pharmaceutical products and services. Our business is
  affected by the efforts of government and third-party payors to contain or
  reduce the cost of health care through various means. In the United States,
  there have been and will continue to be a number of federal and state proposals
  to implement government controls on pricing. In addition, the emphasis on
  managed care in the United States has increased and will continue to increase
  the pressure on the pricing of pharmaceutical products. We cannot predict
  whether any legislative or regulatory proposals will be adopted or the effect
  these proposals or managed care efforts may have on our business.
  
  Because We Engage In Human Testing, We Are Exposed To An Increased Risk Of
  Product Liability Claims.
  
       The testing and marketing of medical products entails an inherent risk of
  allegations of product liability. We believe that we currently have adequate
  levels of insurance for our clinical trials, however, in the event of one or
  
  
                                        -24-
  <PAGE>
  
  more large, unforeseen awards, such levels may not provide adequate coverage. We
  will seek to obtain additional insurance, if needed, if and when our products
  are commercialized; however, because we do not know when this will occur, we do
  not know whether adequate insurance coverage will be available or be available
  at acceptable costs. A significant product liability claim for which we were not
  covered by insurance would have to be paid from cash or other assets. To the
  extent we have sufficient insurance coverage, such a claim would result in
  higher subsequent insurance rates.
  
  We May Be Subject To Increased Risks Because We Are A Bermuda Company.
  
       Alleged abuses by certain companies that have changed their legal domicile
  from jurisdictions within the United States to Bermuda have created an
  environment where, notwithstanding that we changed our legal domicile in a
  transaction that was approved by our shareholders and fully taxable to our
  company under U.S. law, we may be exposed to various prejudicial actions,
  including:
  
       o    "blacklisting" of our common shares by certain pension funds;
  
       o    legislation restricting certain types of transactions; and
  
       o    punitive tax legislation.
  
       We do not know whether any of these things will happen, but if implemented
  one or more of them may have an adverse impact on our future operations or our
  share price.
  
  If You Were To Obtain A Judgment Against Us, It May Be Difficult To Enforce
  Against Us Because We Are A Foreign Entity.
  
       We are a Bermuda company. All or a substantial portion of our assets may be
  located outside the United States. As a result, it may be difficult for
  shareholders and others to enforce in United States courts judgments obtained
  against us. We have irrevocably agreed that we may be served with process with
  respect to actions based on offers and sales of securities made hereby in the
  United States by serving Christopher J. Margolin, c/o XOMA Ltd., 2910 Seventh
  Street, Berkeley, California 94710, our United States agent appointed for that
  purpose. We have been advised by our Bermuda counsel, Conyers Dill & Pearman,
  that there is doubt as to whether Bermuda courts would enforce judgments of
  United States courts obtained in actions against XOMA or our directors and
  officers that are predicated upon the civil liability provisions of the U.S.
  securities laws or entertain original actions brought in Bermuda against XOMA or
  such persons predicated upon the U.S. securities laws. There is no treaty in
  effect between the United States and Bermuda providing for such enforcement, and
  there are grounds upon which Bermuda courts may not enforce judgments of United
  States courts. Certain remedies available under the United States federal
  securities laws may not be allowed in Bermuda courts as contrary to that
  nation's policy.
  
  Our Shareholder Rights Agreement Or Bye-laws May Prevent Transactions That Could
  Be Beneficial To Our Shareholders And May Insulate Our Management From Removal.
  
       In February of 2003, we renewed our shareholder rights agreement, which
  could make it considerably more difficult or costly for a person or group to
  acquire control of XOMA in a transaction that our board of directors opposes.
  
       Our bye-laws:
  
       o    require certain procedures to be followed and time periods to be met
            for any shareholder to propose matters to be considered at annual
            meetings of shareholders, including nominating directors for election
            at those meetings;
  
       o    authorize our board of directors to issue up to 1,000,000 preference
            shares without shareholder approval and to set the rights, preferences
            and other designations, including voting rights, of those shares as
            the board of directors may determine; and
  
  
                                        -25-
  <PAGE>
  
       o    contain provisions, similar to those contained in the Delaware General
            Corporation Law, that may make business combinations with interested
            shareholders more difficult.
  
       These provisions of our shareholders rights agreement and our bye-laws,
  alone or in combination with each other, may discourage transactions involving
  actual or potential changes of control, including transactions that otherwise
  could involve payment of a premium over prevailing market prices to holders of
  common shares, could limit the ability of shareholders to approve transactions
  that they may deem to be in their best interests, and could make it considerably
  more difficult for a potential acquiror to replace management.
  
  ITEM 3.  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 June 30, 2003, 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 at June 30, 2003:
  
                                                     Fair Value         Average
                                     Maturity      (in thousands)    Interest Rate
                                    ------------   ---------------   -------------
  
  Cash equivalents, fixed rate        Daily            $26,946           1.15%
  
  Other Market Risk
  
       At June 30, 2003, the Company had a long-term convertible note outstanding
  which is convertible into common shares based on the market price 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%.
  
       The Company's investment in MorphoSys stock is subject to market risk
  volatility as evidenced by the range of closing prices from $4.77 to $15.95 per
  share from October 23, 2002, the date of MorphoSys' election to issue shares,
  through August 11, 2003.
  
  ITEM 4.  CONTROLS AND PROCEDURES
  
       Under the supervision and with the participation of our management,
  including Chairman of the Board, President and Chief Executive Officer and our
  Vice President, Finance and Chief Financial Officer, we conducted an evaluation
  of our disclosure controls and procedures, as such term is defined under Rule
  13a-14(c) promulgated under the Securities Exchange Act of 1934, as amended, as
  of the end of the period covered by this report. Based on this evaluation, our
  Chairman of the Board, President and Chief Executive Officer and our Vice
  President, Finance and Chief Financial Officer concluded that our disclosure
  controls and procedures are effective in timely alerting them to material
  information relating to the Company and its consolidated subsidiaries required
  to be included in our periodic SEC filings.
  
       In April of 2003, the Company implemented a new financial reporting system
  which represents a significant change in our internal controls. During our
  evaluation of internal controls conducted for the second quarter of 2003,
  special procedures were performed regarding the system conversion and
  implementation. We concluded that the system conversion and implementation was
  properly controlled to ensure accurate financial reporting. Apart from this new
  system, there were no changes in the Company's internal control over financial
  reporting during the
  
  
                                        -26-
  <PAGE>
  
  fiscal quarter to which this report relates that have materially affected, or
  are reasonable likely to materially affect, the Company's internal control over
  financial accounting.
  
  
                                        -27-
  <PAGE>
  
  
  PART II - OTHER INFORMATION
  
  ITEM 1.  LEGAL PROCEEDINGS
  
       In July of 2003, a complaint was filed in the General Court of Justice,
  Superior Court Division, Orange County, North Carolina, in a lawsuit captioned
  Hamlet v. Genentech, Inc., et al., No. 03 CVS 1161, and was subsequently
  amended, by a participant in one of the Phase III clinical trials of
  Raptiva(TM). The complaint asserts claims for alleged negligence, breach of
  fiduciary duty, fraud, misrepresentation and medical negligence against the
  plaintiff's treating physician, the physician's medical practice, Genentech,
  XOMA, the institutional review board responsible for the trial and the contract
  research organization retained to conduct the trial. The complaint seeks
  unspecified compensatory damages alleged to be in excess of $10,000.00. As set
  forth in the complaint, the plaintiff was initially in the placebo group of this
  trial; he did not receive Raptiva(TM) during this time, and his claims are based
  on his failure to receive his indicated treatment, not his receipt of
  Raptiva(TM). Although this case is at an early stage, XOMA believes the claims
  against it to be without merit and intends to vigorously defend against them.
  
  ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS
  
       The Company continues to use the net proceeds from its June 2001 registered
  offering of common shares for general corporate purposes, including leasehold
  improvements, equipment acquisitions, current research and development projects,
  the development of new products or technologies, general working capital and
  operating expenses. Pending application of the net proceeds as described above,
  the Company has invested the remaining net proceeds of the offering in
  short-term, investment-grade, interest-bearing securities.
  
  ITEM 3.  DEFAULTS UPON SENIOR SECURITIES
  
       None.
  
  ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
       On May 21, 2003, the Company held its annual general meeting of
  shareholders. The following persons (the only nominees) were elected as the
  Company's directors, having received the indicated votes:
  
  Name                                          Votes For          Votes Withheld
  ----                                          ---------          --------------
  James G. Andress                             57,160,604             2,067,616
  William K. Bowes, Jr.                        54,754,802             4,473,418
  John L. Castello                             57,115,248             2,112,972
  Arthur Kornberg, M.D.                        57,155,671             2,072,549
  Steven C. Mendell                            56,484,064             2,744,156
  Patrick J. Scannon, M.D., Ph.D.              57,144,481             2,083,739
  W. Denman Van Ness                           54,765,642             4,462,578
  Patrick J. Zenner                            57,156,285             2,071,935
  
       The appointment of Ernst & Young LLP to act as the Company's independent
  auditors for the 2003 fiscal year was ratified and the authorization of the
  Board to agree to such auditors' fee was approved, having received 58,186,546
  votes for, 836,846 votes against, 204,828 abstentions and no broker non-votes.
  
       The amendments to the Company's 1981 Share Option Plan and Restricted Share
  Plan to increase the number of shares issuable over the term of the plans by
  2,500,000 shares to 11,150,000 shares in the aggregate was approved, having
  received 18,072,914 votes for, 4,430,910 votes against, 945,374 abstentions and
  35,779,022 broker non-votes.
  
       The amendment to the Company's Restricted Share Plan to increase the number
  of shares issuable over the term of the plan by 250,000 shares to 1,500,000
  shares in the aggregate was approved, having received 15,448,525 votes for,
  7,734,725 votes against, 265,948 abstentions and 35,779,022 broker non-votes.
  
  
                                        -28-
  <PAGE>
  
  ITEM 5.  OTHER INFORMATION
  
       None.
  
  ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K
  
       Exhibits:
  
       10.1 Letter Agreement dated May 16, 2003 by and among XOMA Ltd., Millennium
            Pharmaceuticals, Inc. and mHoldings Trust. (1)
  
       10.2 Press Release dated May 20, 2003. (1)
  
       10.3 Letter Agreement dated June 30, 2003 terminating the License Agreement
            dated as of January 25, 2000 between XOMA Ireland Limited and Baxter
            Healthcare Corporation. (2)
  
       10.4 Letter Agreement dated June 30, 2003 terminating the Supply Agreement
            effective as of January 25, 2000 between XOMA (US) LLC and Baxter
            Healthcare Corporation. (2)
  
       10.5 Press Release dated August 13, 2003. (3)
  
       31.1 Certification of John L. Castello, filed pursuant to Section 302 of
            the Sarbanes-Oxley Act of 2002. (2)
  
       31.2 Certification of Peter D. Davis, filed pursuant to Section 302 of the
            Sarbanes-Oxley Act of 2002. (2)
  
       32.1 Certification of John L. Castello ,furnished pursuant to Section 906
            of the Sarbanes-Oxley Act of 2002. (3)
  
       32.2 Certification of Peter D. Davis, furnished pursuant to Section 906 of
            the Sarbanes-Oxley Act of 2002 . (3)
  
  -------------------
            (1)  Incorporated by reference to the referenced exhibit to XOMA's
                 Amendment No. 1 to Current Report on Form 8-K/A filed May 21,
                 2003 (File No. 0-14710).
            (2)  Filed herewith.
            (3)  Furnished herewith.
  
  
  
       Reports on Form 8-K:
  
       1.   Current Report on Form 8-K dated and filed on November 27, 2001, as
            amended by amendments on Form 8-K/A dated and filed on December 13,
            2001, October 24, 2002 and May 21, 2003, respectively (file no.
            0-14710).
  
       2.   Current Report on Form 8-K dated and filed on April 11, 2003, as
            amended by amendment on Form 8-K/A dated and filed on April 18, 2003
            (file no. 0-14710).
  
       3.   Current Report on Form 8-K dated and filed on June 30, 2003 (file no.
            0-14710).
  
  
                                        -29-
  <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:    August 13, 2003            By:   /s/ JOHN L. CASTELLO
                                            --------------------
                                            John L. Castello
                                            Chairman of the Board, President and
                                            Chief Executive Officer
  
  
  Date:    August 13, 2003            By:   /s/ PETER D. DAVIS
                                            ------------------
                                            Peter D. Davis
                                            Vice President, Finance and
                                            Chief Financial Officer
  
  
  
                                        -30-
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text: --------------------------------------------------------------------------------
  
                  UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                               Washington, D.C. 20549
  
                                      FORM 10-Q
  
                [X] Quarterly Report Pursuant to Section 13 or 15(d)
                       of the Securities Exchange Act of 1934
  
                    For the Quarterly Period Ended June 30, 2003
  
                             Commission File No. 0-14710
  
                                      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) 204-7200
                (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 by check mark whether the registrant is an accelerated filer (as
  defined in Rule 12b-2 of the Securities Exchange Act of 1934).
  
                                   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                72,629,047
  Class                                           Outstanding at August 11, 2003
  
  --------------------------------------------------------------------------------
  XOMA Ltd.
                                      FORM 10-Q
                                  TABLE OF CONTENTS
  Page
  PART I        FINANCIAL INFORMATION
  Item 1.     Condensed Consolidated Financial Statements (Unaudited)
  
                       Condensed Consolidated Balance Sheets as of June 30, 2003 and December 31, 2002..............1
  
                       Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30,
                          2003 and 2002.............................................................................2
  
                       Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2003
                          and 2002..................................................................................3
  
                       Notes to Condensed Consolidated Financial Statements.........................................4
  
           Item 2.     Management's Discussion and Analysis of Financial Condition and Results of Operations.......11
  
           Item 3.     Quantitative and Qualitative Disclosures About Market Risk..................................26
  
           Item 4.     Controls and Procedures.....................................................................26
  PART II       OTHER INFORMATION
  Item 1.     Legal Proceedings...........................................................................28
  
           Item 2.     Changes in Securities and Use of Proceeds...................................................28
  
           Item 3.     Defaults upon Senior Securities.............................................................28
  
           Item 4.     Submission of Matters to a Vote of Security Holders.........................................28
  
           Item 5.     Other Information...........................................................................29
  
           Item 6.     Exhibits and Reports on Form 8-K............................................................29
  
           Signatures..............................................................................................30
  PART I - FINANCIAL INFORMATION
  
  ITEM 1.  CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
  
                                      XOMA Ltd.
                        CONDENSED CONSOLIDATED BALANCE SHEETS
                                   (In thousands)
  June 30,       December 31,
                                                                          2003             2002
                                                                    ----------------- ----------------
  ASSETS                                                              (Unaudited)        (Note 1)
  Current assets:
  Cash and cash equivalents                                            $ 26,946         $ 36,262
       Short-term investments                                                  2,592              391
       Restricted cash                                                             -            1,500
       Receivables                                                               484            8,656
       Related party receivables - current                                       100              206
       Inventory                                                               1,306            1,306
       Prepaid expenses and other                                              1,044              449
                                                                    ----------------- ----------------
           Total current assets                                               32,472           48,770
  Property and equipment, net                                                 22,699           22,650
  Related party receivables - long-term                                          108              190
  Deposits and other                                                             159              172
                                                                    ----------------- ----------------
           Total assets                                                     $ 55,438         $ 71,782
                                                                    ================= ================
  LIABILITIES AND SHAREHOLDERS' EQUITY (Net Capital Deficiency)
  Current liabilities:
       Accounts payable                                                      $ 2,961           $ 3,201
       Accrued liabilities                                                     5,379             7,096
       Short-term loan                                                             -               763
       Capital lease obligations - current                                       542               667
       Deferred revenue - current                                              1,650             1,729
       Convertible subordinated note - current                                 5,214             5,146
                                                                    ----------------- -----------------
           Total current liabilities                                          15,746            18,602
  
  Capital lease obligations - long-term                                          497               729
  Deferred revenue - long-term                                                    30               800
  Note payable long-term                                                       5,260                 -
  Convertible subordinated note - long-term                                   69,617            63,016
                                                                    ----------------- -----------------
           Total liabilities                                                  91,150            83,147
  
  Shareholders' equity (Net capital deficiency):
       Common shares                                                              36                36
       Additional paid-in capital                                            534,054           529,354
       Accumulated comprehensive income                                          228               121
       Accumulated deficit                                                  (570,030)         (540,876)
                                                                    ----------------- -----------------
           Total shareholders' equity (Net capital deficiency)               (35,712)          (11,365)
                                                                    ----------------- -----------------
           Total liabilities and shareholders' equity                        $55,438          $ 71,782
                                                                    ================= =================
  Note 1 - Amounts derived from the Company's audited financial statements
  appearing in the Annual Report on Form 10-K for the year ended December 31, 2002
  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 amounts)
  Three months ended         Six months ended
                                                                       June 30,                  June 30,
                                                              -----------------------------------------------------
                                                                     2003         2002        2003          2002
                                                              -------------- ------------- ------------ -----------
  
  Revenues:
  License and collaborative fees                                   $ 920      $ 1,340       $ 2,075     $ 7,653
     Contract and other revenue                                       1,441        3,384         3,450       6,293
                                                              -------------- ------------- ------------- ----------
  
           Total revenues                                             2,361        4,724         5,525      13,946
                                                              -------------- ------------- ------------- ----------
  
  Operating costs and expenses:
     Research and development                                        13,502       10,759        25,484      20,694
     Marketing, general and administrative                            4,698        3,849         8,603       8,698
                                                              -------------- ------------- ------------- ----------
           Total operating costs and expenses                        18,200       14,608        34,087      29,392
                                                              -------------- ------------- ------------- ----------
  
           Loss from operations                                     (15,839)      (9,884)      (28,562)    (15,446)
  
  Other income (expense):
     Investment and other income                                        268          232           383         504
     Interest expense                                                  (489)        (493)         (975)     (1,142)
                                                              -------------- ------------- ------------- ----------
           Net loss                                               $ (16,060)   $ (10,145)    $ (29,154)  $ (16,084)
                                                              ============== ============= ============= ==========
  
  Basic and diluted net loss per common share                       $ (0.22)     $ (0.14)      $ (0.41)    $ (0.23)
                                                              ============== ============= ============= ==========
  
  Shares used in computing basic and diluted net loss
  per common share                                                   72,023       70,309        71,937      70,269
                                                              ============== ============= ============= ==========
  See accompanying notes to condensed consolidated financial statement.
  
                                        -2-
  XOMA Ltd.
                   CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                              (Unaudited, in thousands)
  Six months ended
                                                                                                      June 30,
                                                                                              --------------------------
                                                                                                  2003         2002
                                                                                              --------------- ----------
  
  Cash flows from operating activities:
  Net loss                                                                                 $ (29,154)   $ (16,084)
           Adjustments to reconcile net loss to net cash used in operating activities:
           Depreciation and amortization                                                             1,878          823
           Common shares contribution to 401(k) and management incentive plans                         685          541
           Increase (decrease) in notes to (from) a collaborative partner
               for cost allocations                                                                    270        1,250
           Accrued interest on convertible notes                                                       872          834
           (Gain) loss on disposal/retirement of property and equipment and investments               (193)           1
        Changes in assets and liabilities:
           Receivables and related party and other receivables                                       8,360       (5,169)
           Inventory                                                                                     -           (7)
           Prepaid expenses and other                                                                 (595)        (460)
           Deposits and other                                                                           13          (12)
           Accounts payable                                                                           (240)       2,346
           Accrued liabilities                                                                      (1,717)       1,164
           Deferred revenue                                                                           (849)      (2,593)
                                                                                              --------------- ----------
  
                Net cash used in operating activities                                              (20,670)     (17,366)
                                                                                              --------------- ----------
  
  Cash flows from investing activities:
        Issuance of short-term investments                                                          (4,000)           -
        Transfer from restricted cash                                                                1,500            -
        Purchase of property and equipment, net of sale proceeds                                    (1,927)      (5,851)
        Proceeds from sale of short-term investments                                                 2,099            -
                                                                                              --------------- ----------
  
                Net cash used in investing activities                                               (2,328)      (5,851)
                                                                                              --------------- ----------
  
  Cash flows from financing activities:
        Proceeds from short-term loan                                                                    -        1,000
        Principal payments - short-term loan                                                          (763)           -
        Principal payments under capital lease obligations                                            (357)        (374)
        Proceeds from issuance of convertible notes                                                 10,787        4,020
        Proceeds from issuance of common shares, net of closing costs                                4,015          399
                                                                                              --------------- ----------
  
                Net cash provided by financing activities                                           13,682        5,045
                                                                                              --------------- ----------
  
  Net increase (decrease) in cash and cash equivalents                                              (9,316)     (18,172)
  Cash and cash equivalents at the beginning of the period                                          36,262       67,320
                                                                                              --------------- ----------
  
  Cash and cash equivalents at the end of the period                                               $26,946     $ 49,148
                                                                                              =============== ==========
  See accompanying notes to condensed consolidated financial statements.
  
                                        -3-
  XOMA Ltd.
                NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                     (Unaudited)
  
  1.       OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
  
  Business
  
       XOMA Ltd. ("XOMA" or the "Company"), a Bermuda company, is a
  biopharmaceutical company that develops and manufactures products to treat
  cancer, immunologic and inflammatory disorders, and infectious diseases. The
  Company's products are presently in various stages of development and all are
  subject to regulatory approval before the Company or its collaborators can
  commercially introduce any products. There can be no assurance that any of the
  products under development by the Company will be developed successfully, obtain
  the requisite regulatory approval or be successfully manufactured or marketed.
  
  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 or future periods. The
  condensed consolidated balance sheet as of December 31, 2002 has been derived
  from the audited consolidated financial statements included in the Company's
  2002 Annual Report on Form 10-K. The unaudited consolidated condensed financial
  statements should be read in conjunction with the Company's audited consolidated
  financial statements for the year ended December 31, 2002 included in its Annual
  Report on Form 10-K.
  
  Critical Accounting Policies
  
       We believe there have been no significant changes in our critical
  accounting policies during the six months ended June 30, 2003 as compared to
  those previously disclosed in our Annual Report on Form 10-K for the year ended
  December 31, 2002 filed with the SEC on March 28, 2003.
  
  Consolidation
  
       The consolidated financial statements include the accounts of the Company
  and its wholly owned subsidiaries. All significant intercompany accounts and
  transactions have been eliminated in consolidation.
  
  Estimates
  
       The preparation of financial statements in conformity with accounting
  principles generally accepted in the United States 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.
  
  Concentration of Risk
  
       Cash, cash equivalents, short-term investments and accounts receivable are
  financial instruments, which potentially subject the Company to concentrations
  of credit risk. The Company maintains and invests excess cash in money market
  funds and short-term investments, which bear minimal risk. The Company has not
  experienced any significant credit losses and does not generally require
  collateral on receivables. For the six months ended June 30, 2003, four
  customers represented 43%, 28%, 18% and 10% of total revenues and as of June 30,
  2003 there were no billed or unbilled receivables outstanding from these
  customers. For the six months ended June 30, 2002, three customers represented
  40%, 36% and 22% of total revenues.
  
                                        -4-
  XOMA Ltd.
          NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
                                     (Unaudited)
  
  Share-Based Compensation
  
       In accordance with the provisions of the Statement of Financial Accounting
  Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 123), the
  Company has elected to continue to follow Accounting Principles Board Opinion
  No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related
  interpretations, and to adopt the "disclosure only" alternative described in
  SFAS 123. Under APB 25, if the exercise price of the Company's employee share
  options equals or exceeds the fair market value on the date of the grant or the
  fair value of the underlying shares on the date of the grant as determined by
  the Company's Board of Directors, no compensation expense is recognized.
  Accordingly, the financial statements reflect amortization of compensation
  resulting from options granted at exercise prices which were below market price
  at the grant date. Had compensation cost for the Company's shares-based
  compensation plans been based on the fair value method at the grant dates for
  awards under these plans consistent with the provisions of SFAS 123, the
  Company's net loss and net loss per share would have been increased to the pro
  forma amounts indicated below for the three and six months ended June 30, 2003
  and 2002 (in thousands, except per share amounts):
  Three months ended                 Six months ended
                                                               June 30,                          June 30,
                                                    --------------------------------  --------------------------------
                                                         2003             2002             2003             2002
                                                    ---------------  ---------------  ---------------  ---------------
  Net loss - as reported                                $ (16,060)       $ (10,145)       $ (29,154)       $ (16,084)
  Deduct:
  
     Total share-based employee compensation
        expense determined under fair value
        method                                               (948)          (1,053)          (1,602)          (1,846)
                                                    ---------------  ---------------  ---------------  ---------------
  Pro forma net loss                                    $ (17,008)       $ (11,198)       $ (30,756)       $ (17,930)
                                                    ===============  ===============  ===============  ===============
  
  Loss per share:
     Basic and diluted - as reported                      $ (0.22)         $ (0.14)         $ (0.41)         $ (0.23)
     Basic and diluted - pro forma                        $ (0.24)         $ (0.16)         $ (0.43)         $ (0.26)
  The fair value of each option grant under these plans is estimated on the date
  of grant using the Black-Scholes option-pricing model with the following
  weighted-average assumptions used for grants during the periods indicated below:
  
                                                 Three and six months ended
                                                          June 30,
                                                 ---------------------------
                                                    2003               2002
                                                 -------------     ------------
  Dividend yield                                            0%               0%
  Expected volatility                                      96%              99%
  Risk-free interest rate                                1.17%            1.50%
  Expected life                                      4.9 years        6.2 years
  
  Revenue Recognition
  
       Revenue is recognized when the related costs are incurred and the four
  basic criteria of revenue recognition are met: (1) persuasive evidence of an
  arrangement exists; (2) delivery has occurred or services rendered; (3) the fee
  is fixed and determinable; and (4) collectibility is reasonably assured.
  Determination of criteria (3) and (4) are based on management's judgments
  regarding the nature of the fee charged for products or services delivered and
  the collectibility of those fees.
  
                                        -5-
  XOMA Ltd.
          NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
                                     (Unaudited)
  
  License and Collaborative Fees
  
       Revenue from non-refundable, license or technology access payments under
  license and collaborative agreements where the Company has a continuing
  obligation to perform is recognized as revenue over the period of the continuing
  performance obligation.
  
       Milestone payments under collaborative arrangements are recognized as
  revenue upon achievement of the milestone events, which represent the
  culmination of the earnings process because the Company has no future
  performance obligations related to the payment. Milestone payments that require
  a continuing performance obligation on the part of the Company are recognized
  over the period of the continuing performance obligation. Amounts received in
  advance are recorded as deferred revenue until the related milestone is
  completed.
  
  Contract Revenue
  
       Contract revenue for research and development involves the Company
  providing research, development, or manufacturing services to collaborative
  partners. The Company recognizes revenue under these arrangements as the related
  research and development costs are incurred and collectibility is reasonably
  assured.
  
  Product Sales
  
       The Company recognizes product revenue upon shipment when there is
  persuasive evidence that an arrangement exists, delivery has occurred, the price
  is fixed and determinable, and collectibility is reasonably assured. Allowances
  are established for estimated uncollectible amounts, product returns, and
  discounts, if any.
  
  Research and Development Expenses
  
       Research and development expenses consist of direct and research-related
  allocated overhead costs such as facilities costs, salaries and related
  personnel costs, and material and supply costs. In addition, research and
  development expenses include costs related to clinical trials to validate the
  Company's testing processes and procedures and related overhead expenses. From
  time to time, research and development expenses may include upfront fees and
  milestones paid to collaborative partners for the purchase of rights to
  in-process research and development. Such amounts are expensed as incurred. The
  timing of upfront fees and milestone payments in the future may cause
  variability in the Company's future research and development expenses.
  
  Comprehensive Income (Loss)
  
       Unrealized gains or losses on the Company's available-for-sale securities
  are included in other comprehensive income (loss). Comprehensive income (loss)
  and its components for the three and six months ended June 30, 2003 and 2002 are
  as follows (in thousands):
  Three months ended          Six months ended
                                                                    June 30,                   June 30,
                                                            -------------------------- --------------------------
                                                                2003         2002         2003         2002
                                                            ------------- ------------ ------------- ------------
  Net loss                                                     $ (16,060)   $ (10,145)   $ (29,154)    $ (16,084)
  Unrealized gain (loss) on securities available-for-sale            141           --          228            --
                                                            ------------- ------------ ------------- ------------
  Comprehensive loss                                           $ (15,919)   $ (10,145)   $ (28,926)    $ (16,084)
                                                            ============= ============ ============= ============
  -6-
  XOMA Ltd.
          NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
                                     (Unaudited)
  
  Net Loss Per Share
  
       Basic and diluted net loss per share is based on the weighted average
  number of shares outstanding during the period in accordance with Financial
  Accounting Standard No. 128. The following potentially dilutive outstanding
  securities were not considered in the computation of diluted net loss per share
  because they would be antidilutive for the six months ended June 30, 2003 and
  2002 (in thousands):
  Six months ended
                                                                                     June 30,
                                                                            ---------------------------
                                                                                 2003          2002
                                                                            --------------- -----------
  Options for shares                                                                 5,719       4,655
  Warrants for shares                                                                  700         700
  Convertible notes, debentures and related interest, as if converted*              13,021      16,834
  *    The number of shares, as if converted represents a conversion price equal
       to the prevailing market prices of $5.32 and $3.99 at the close of business
       on June 30, 2003 and June 28, 2002, respectively.
  
  Recent Accounting Pronouncements
  
       In November of 2002, the Financial Accounting Standards Board (or FASB)
  issued Interpretation No. 45 (or FIN 45), "Guarantor's Accounting and Disclosure
  Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
  Others." FIN 45 elaborates on the existing disclosure requirements for most
  guarantees, including residual value guarantees issued in conjunction with
  operating lease agreements. It also clarifies that at the time a company issues
  a guarantee, the company must recognize an initial liability for the fair value
  of the obligation it assumes under that guarantee and must disclose that
  information in its interim and annual financial statements. The initial
  recognition and measurement provisions apply on a prospective basis to
  guarantees issued or modified after December 31, 2002. The Company's adoption of
  the recognition requirements in January of 2003 of FIN 45 did not have a
  material impact on the Company's results of operations and financial position.
  
       In November of 2002, the Financial Accounting Standards Board issued
  Emerging Issues Task Force (referred to as EITF) Issue No. 00-21, "Revenue
  Arrangements with Multiple Deliverables." EITF Issue No. 00-21 addresses certain
  aspects of the accounting by a company for arrangements under which it will
  perform multiple revenue-generating activities. EITF Issue No. 00-21 addresses
  when and how an arrangement involving multiple deliverables should be divided
  into separate units of accounting. EITF Issue No. 00-21 provides guidance with
  respect to the effect of certain customer rights due to company nonperformance
  on the recognition of revenue allocated to delivered units of accounting. EITF
  Issue No. 00-21 also addresses the impact on the measurement and/or allocation
  of arrangement consideration of customer cancellation provisions and
  consideration that varies as a result of future actions of the customer or the
  company. Finally, EITF Issue No. 00-21 provides guidance with respect to the
  recognition of the cost of certain deliverables that are excluded from the
  revenue accounting for an arrangement. The provisions of EITF Issue No. 00-21
  will apply to revenue arrangements entered into in fiscal periods beginning
  after June 15, 2003. The Company's adoption of the recognition requirements in
  June of 2003 of EITF Issue No. 00-21 did not have a material impact on its
  consolidated financial position or results of operations.
  
       In December of 2002, the FASB issued Statement No. 148 (or FAS 148),
  "Accounting for Stock-Based Compensation - Transition and Disclosure." FAS 148
  amends SFAS 123 "Accounting for Stock-Based Compensation" to provide alternative
  methods of transition for a voluntary change to the fair based method of
  accounting for stock-based employee compensation. In addition, FAS 148 amends
  the disclosure requirements of SFAS 123 to require more prominent disclosures in
  both annual and interim financial statements about the method of accounting for
  stock-based employee compensation and the effect of the method used on reported
  results. The additional disclosure requirements of FAS 148 are effective for
  fiscal years ending after December 15, 2002. The Company elected to continue to
  follow the intrinsic value method of accounting as prescribed by Accounting
  Principles Board
  
                                        -7-
  XOMA Ltd.
          NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
                                     (Unaudited)
  
  Opinion No. 25 (or APB 25), "Accounting for Stock Issued to
  Employees," to account for employee stock options. See above in the "Significant
  Accounting Policies" note for the disclosure required by FAS 148.
  
       In January of 2003, the FASB issued Interpretation No. 46 (or FIN 46),
  "Consolidation of Variable Interest Entities." FIN 46 requires a variable
  interest entity to be consolidated by a company if that company is subject to a
  majority of the risk of loss from the variable interest entity's activities or
  entitled to receive a majority of the entity's residual returns or both. A
  variable interest entity is a corporation, partnership, trust, or any other
  legal structure used for business purposes that either (a) does not have equity
  investors with voting rights or (b) has equity investors that do not provide
  sufficient financial resources for the entity to support its activities. A
  variable interest entity often holds financial assets, including loans or
  receivables, real estate or other property. A variable interest entity may be
  essentially passive or it may engage in research and development or other
  activities on behalf of another company. The consolidation requirements of FIN
  46 apply immediately to variable interest entities created after January 31,
  2003. The consolidation requirements apply to older entities in the first fiscal
  year or interim period beginning after June 15, 2003. Certain of the disclosure
  requirements apply to all financial statements issued after January 31, 2003,
  regardless of when the variable interest entity was established. The Company's
  adoption of the disclosure requirements in January of 2003 did not have an
  impact on the Company's financial position and results of operations. The
  adoption of the recognition requirements of FIN 46 in July of 2003 is not
  expected to have a material impact on the Company's financial position or result
  of operations.
  
       In May 2003, the FASB issued Statements of Financial Accounting Standards
  No. 150, "Accounting for Certain Financial Instruments with Characteristics of
  both Liabilities and Equity" (FAS 150). FAS 150 establishes standards for the
  classification and measurement of financial instruments with characteristics of
  both liabilities and equity. FAS 150 will become effective for financial
  instruments entered into or modified after May 31, 2003. The adoption of FAS 150
  did not have a material effect on the Company's financial position or results of
  operations.
  
  2.       BALANCE SHEET COMPONENTS
  
  Inventories
  
       Inventories are stated at the lower of standard cost (which approximates
  first-in, first-out cost) or market. Inventories, which relate principally to
  the Company's agreement with Baxter Healthcare Corporation, consist of the
  following (in thousands):
  
                                             June 30,       December 31,
                                               2003             2002
                                          ---------------- ---------------
  
  Raw materials                                     $ 202           $ 202
  Finished goods                                    1,104           1,104
                                          ---------------- ---------------
  Total                                           $ 1,306         $ 1,306
                                          ================ ===============
  
                                        -8-
  XOMA Ltd.
          NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
                                     (Unaudited)
  
  Accrued Liabilities
  
  Accrued liabilities consist of the following (in thousands):
  
                                             June 30,       December 31,
                                               2003             2002
                                          ---------------- ---------------
  
  Accrued payroll expenses                        $ 3,054         $ 3,198
  Accrued clinical trial expenses                     356             559
  Accrued legal and other professional
       fees                                         1,100           2,425
  Other                                               869             914
                                          ---------------- ---------------
  Total                                           $ 5,379         $ 7,096
                                          ================ ===============
  
  3.       LICENSE AGREEMENTS AND RELATED CONTINGENCIES
  
       In February of 2002, XOMA and MorphoSys AG announced cross-licensing
  agreements for antibody-related technologies. The term of the XOMA license to
  MorphoSys commenced in February of 2002 and remains in effect until the
  expiration of the last patent within the XOMA patent rights provided under the
  terms of the agreement. Because there are no continuing performance obligations
  on the part of the Company under the MorphoSys agreement, the license fee
  provided for in that agreement was recognized as revenue in the first quarter of
  2002. Under the terms of the agreement, the $5.0 million license fee was to be
  paid in two installments. The first $1.0 million installment was due and paid in
  the first quarter of 2002, and the second portion in the amount of $4.0 million
  was due in the fourth quarter of 2002. The second installment could be paid in
  either cash or with MorphoSys shares valued at the time of MorphoSys' election
  to pay the second installment in shares.
  
  During the fourth quarter of 2002, we were notified by MorphoSys of its
  intention to exercise its option to pay the second installment totaling $4.0
  million owed to XOMA under the license agreement with 363,466 of its ordinary
  shares, which number of shares was determined with reference to the market price
  of MorphoSys shares at the time of such notice (October 23, 2002). XOMA applied
  for, and on January 31, 2003 was granted, an exemption from German withholding
  tax on the full license fee from MorphoSys. The administrative process in
  Germany for the issuance of the shares was delayed pending resolution of the
  withholding tax matter. Upon receipt of the tax exemption, MorphoSys
  re-initiated the process, and on May 6, 2003, the shares were issued to XOMA.
  The balance of these shares, totaling $2.1 million, are held as available-for-
  sale and are classified as short-term investments in the financial statements.
  During the second quarter of 2003, 171,581 shares were sold for net proceeds of
  $2.1 million and the gain on the sale of investment of $0.2 million was
  recognized as investment and other income.
  
       In June of 2003, Onyx Pharmaceuticals, Inc. announced that it was
  discontinuing its therapeutic virus program to focus its resources on its BAY
  43-9006 anticancer compound. Onyx subsequently notified XOMA on June 23, 2003 of
  its intention to terminate the Company's related process development and
  manufacturing agreement effective 120 days from the date of notification. Under
  the terms of the agreement, Onyx is obligated to pay $0.5 million as a facility
  fee plus $1.0 million as a termination fee by the end of the 120-day
  notification period. In accordance with our revenue recognition policy, these
  amounts will be recognized in future periods as the Company's service
  commitments are completed. Additionally, the Company plans to accelerate the
  amortization of $1.0 million remaining in deferred revenue over the 120-day
  notification period.
  
  4.       GENENTECH AGREEMENT MODIFICATION
  
       In the first quarter of 2003, the Company's financing arrangement with
  Genentech, Inc. related to development and commercialization of RaptivaTM was
  modified to provide the following terms:
  
                                        -9-
  XOMA Ltd.
          NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
                                     (Unaudited)
  
       The credit limit under the convertible subordinated debt agreement to
  finance XOMA's share of development costs was increased to $80.0 million. The
  convertible subordinated note is due upon the earlier of (a) April of 2005,
  except for advances made after April 2003 in which case payment will be due on
  the second anniversary date(s) of such advances or (b) within 90 days after
  first product approval (which could be before the end of 2003). At XOMA's
  election, the convertible subordinated note may be repaid in cash or with shares
  with the conversion price to be calculated at the time of payment based on the
  fair market value at the time of election. If repayment is triggered by product
  approval, XOMA may elect to defer payment of up to $40.0 million as an offset
  against the Company's proceeds from its 25% share of U.S. operating profits on
  the product. At June 30, 2003, the outstanding balance under this note totaled
  $69.6 million.
  
       A new $15.0 million debt facility was established to finance XOMA's share
  of U.S. commercialization costs. The note payable is due upon the earlier of (a)
  April of 2005, except for advances made after April 2003 in which case payment
  will be due on the second anniversary date(s) of such advances or (b) within 90
  days after first product approval by the FDA (which could be before the end of
  2003). The commercial note payable must be repaid in cash. At June 30, 2003 the
  outstanding balance under this note totaled $5.3 million.
  
       XOMA granted Genentech a security interest in the Company's profit share on
  RaptivaTM as collateral against any unpaid past due amounts of the loans.
  
  5.       MILLENNIUM INVESTMENT AGREEMENT MODIFICATION
  
       In the second quarter of 2003, the Company announced the amendment of
  certain terms of the investment agreement with Millennium Pharmaceuticals, Inc.
  The key elements of the revised investment agreement include an extension of the
  maturity date of the $5.0 million outstanding convertible debt from May of 2003
  to February of 2004 and a re-scheduling of the Company's decision points
  regarding whether to sell the remaining common shares from three option dates
  through May of 2004 to six option dates through February of 2005. In June of
  2003, the Company exercised an option to sell 608,766 shares to Millennium for
  gross proceeds of $4.0 million or $6.57 per share, leaving a balance of $33.5
  million available under this arrangement, excluding the convertible debt.
  
  6.       SUBSEQUENT EVENTS
  
       On July 3, 2003, the Company and Baxter Healthcare Corporation terminated
  the license and supply agreements for the NEUPREX(R) product. Baxter has agreed
  to make a one-time termination payment of $10.0 million to the Company no later
  than January of 2004. Until such payment is made, Baxter is committed to
  reimburse the Company for a portion of certain development expenses which may be
  incurred. The Company expects to recognize the $10.0 million termination payment
  as revenue in the third quarter of 2003 and to establish an inventory reserve of
  $1.3 million for NEUPREX(R) products that were included in inventory as of June
  30, 2003.
  
       In July of 2003, a complaint was filed in the General Court of Justice,
  Superior Court Division, Orange County, North Carolina, in a lawsuit captioned
  Hamlet v. Genentech, Inc., et al., No. 03 CVS 1161, and was subsequently
  amended, by a participant in one of the Phase III clinical trials of
  Raptiva(TM). The complaint asserts claims for alleged negligence, breach of
  fiduciary duty, fraud, misrepresentation and medical negligence against the
  plaintiff's treating physician, the physician's medical practice, Genentech,
  XOMA, the institutional review board responsible for the trial and the contract
  research organization retained to conduct the trial. The complaint seeks
  unspecified compensatory damages alleged to be in excess of $10,000.00. As set
  forth in the complaint, the plaintiff was initially in the placebo group of this
  trial; he did not receive Raptiva(TM) during this time, and his claims are based
  on his failure to receive his indicated treatment, not his receipt of
  Raptiva(TM). Although this case is at an early stage, XOMA believes the claims
  against it to be without merit and intends to vigorously defend against them.
  
                                        -10-
  ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                    AND RESULTS OF OPERATIONS
  
  Results of Operations
  
           Revenues for the three months ended June 30, 2003 were $2.4 million
  compared with $4.7 million for the three months ended June 30, 2002, a 49%
  decrease. This decrease was primarily due to lower recognition of deferred
  revenue from license fees and milestone payments related to the NEUPREX(R)
  license agreement with Baxter Healthcare Corporation ("Baxter") as a result of
  achieving full amortization in the first quarter of 2003 and the fourth quarter
  of 2002, respectively, and to lower development service revenues from Onyx
  Pharmaceuticals, Inc. ("Onyx"). Revenues for the six months ended June 30, 2003
  were $5.5 million compared with $13.9 million for the same period of 2002. This
  decrease was primarily due to lower license fees due from the amortization of
  deferred revenue mentioned earlier, to lower development service revenues from
  Onyx, and to a non-recurring $5.0 million license fee from MorphoSys AG
  recognized in the first quarter of 2002. License fee revenue is expected to be
  higher in the second half of 2003 including the $11.0 million termination fees
  associated with Baxter and Onyx. Contract revenue is expected to be lower in the
  second half of 2003 due to reduced development services for Baxter and Onyx.
  
       Research and development expenses for the three and six months ended June
  30, 2003 were $13.5 million and $25.5 million, respectively, compared with $10.8
  million and $20.7 million, respectively, for the same periods of 2002, or
  increases of 25% and 23%, respectively. These increases reflected increased
  development costs associated with RaptivaTM, MLN2201 (formerly known as MLN01),
  CAB-2, and the Company's XMP.629 compound being developed for acne. These
  increases were partially offset by decreased spending on Onyx-015, NEUPREX(R),
  and ING-1. In July 2003, the Company's licensing arrangement with Baxter for
  NEUPREX(R) was terminated, and future development plans are under review. In the
  third quarter, the Company expects to establish an inventory reserve of $1.3
  million for NEUPREX(R) products.
  
           Our research and development activities can be divided into earlier
  stage programs, which include molecular biology, process development,
  pilot-scale production and preclinical testing, and later stage programs, which
  include clinical testing, regulatory affairs and manufacturing clinical
  supplies. The cost associated with these programs approximate the following (in
  thousands):
  
                               Three months ended           Six months ended
                                    June 30,                    June 30,
                              ------------------------    ------------------------
                                 2003          2002          2003          2002
                              ----------     ---------    ----------   -----------
  Earlier stage programs         $ 9,492       $ 6,252      $ 16,691      $ 10,916
  Later stage programs             4,010         4,507         8,793         9,778
                              ----------     ---------    ----------   -----------
  Total                         $ 13,502      $ 10,759      $ 25,484      $ 20,694
                              ==========     =========    ==========    ==========
  
       Our research and development activities also can be divided into those
  related to our internal projects and those related to collaborative
  arrangements. The cost related to internal projects versus collaborative
  arrangements approximate the following (in thousands):
  
                               Three months ended           Six months ended
                                    June 30,                    June 30,
                              ------------------------    ------------------------
                                 2003          2002          2003          2002
                              ----------     ---------    ----------    ----------
  Internal projects              $ 5,077       $ 4,653       $ 9,499       $ 9,613
  Collaborative arrangements       8,425         6,106        15,985        11,081
                              ----------     ---------    ----------   -----------
  Total                         $ 13,502      $ 10,759      $ 25,484      $ 20,694
                              ==========     =========    ==========    ==========
  
       For the three and six months ended June 30, 2003, one project accounted for
  approximately 20% of our total research and development costs. No other single
  project was greater than 20% of our total research and development costs during
  the three and six months ended June 30, 2003 and 2002.
  
                                        -11-
  Marketing, general and administrative expenses for the three months ended
  June 30, 2003 increased to $4.7 million, or 24%, from $3.8 million for the three
  months ended June 30, 2002. The most significant component of this increase was
  pre-launch activities for RaptivaTM offset by lower legal expenses. Marketing,
  general and administrative expenses for the six months ended June 30, 2003 were
  $8.6 million compared with $ 8.7 million for the same period of 2002. The net
  decrease of $0.1 million represents primarily an increase in pre-launch
  activities for RaptivaTM and business development expenses, which were offset by
  lower legal expenses. Pre-launch marketing expenses for RaptivaTM are expected
  to continue at similar or higher levels until the product launch date.
  
       Investment income for the three months ended June 30, 2003 increased to
  $0.3 million, or 50%, compared to $0.2 million for the three months ended June
  30, 2002 primarily due to gains recognized on the sale of MorphoSys AG shares
  issued to XOMA on May 6, 2003. The gains were partially offset by lower interest
  income due to lower interest rates and lower average cash balances. Investment
  income for the six months ended June 30, 2003 decreased to $0.4 million, or 20%,
  compared to $0.5 million for the same period of 2002. This decrease reflected
  lower interest rates on lower average cash balance. Interest expense for the
  three and six months ended June 30, 2003 were to $0.5 million and $1.0 million,
  respectively, compared to $0.5 million and $1.1 million, respectively, for the
  three and six months ended June 30, 2002. This reflected lower interest rates on
  a higher average outstanding balance of the convertible notes due to Genentech,
  Inc. ("Genentech") and Millennium Pharmaceuticals, Inc. ("Millennium"). Interest
  expense for the remainder of 2003 is expected to increase due to anticipated
  higher development and commercial loan balances due to Genentech.
  
  Liquidity and Capital Resources
  
       Cash, cash equivalents, short-term investments and restricted cash
  decreased during the six months ended June 30, 2003 by $8.7 million to $29.5
  million at June 30, 2003, compared with $38.2 million at December 31, 2002. The
  Company's cash, cash equivalents and short-term investments are expected to
  decrease through 2003, except to the extent that the Company may utilize debt
  funding by Genentech for XOMA's share of RaptivaTM development and marketing
  costs, obtain additional funding under the terms of our investment agreement
  with Millennium, or secure additional sources of funding.
  
       Net cash used in operating activities was $20.7 million for the six months
  ended June 30, 2003, compared with $17.4 million for the six months ended June
  30, 2002. The increase in the first half of 2003 when compared with the first
  half of 2002 primarily reflected a higher net loss and reductions in accrued
  expenses related primarily to legal expenses, partially offset by reductions in
  accounts receivable in the first half of 2003 compared to increases in the first
  half of 2002.
  
       Net cash used in investing activities was $2.3 million for the six months
  ended June 30, 2003, compared to cash used in investing activities of $5.9
  million for the six months ended June 30, 2002. The decrease in the first half
  of 2003 when compared to the first half of 2002 was primarily due to the release
  of $1.5 million of restricted cash, which was securing a short-term loan that
  was paid off during the first quarter of 2003, to proceeds received on the sale
  of MorphoSys shares in the second quarter of 2003, and to reduced purchases of
  property and equipment in 2003. Capital programs in 2002 included renovating and
  expanding our manufacturing and warehouse facilities and other infrastructure
  investments. Capital spending is expected to continue at this lower level for
  the remainder of 2003.
  
       Net cash provided by financing activities was $13.7 million for the six
  months ended June 30, 2003, compared with $5.0 million for the six months ended
  June 30, 2002. Financing activities in the first half of 2003 included $10.8
  million net funding from Genentech under our development and commercial loan
  agreements and $4.0 million proceeds from common share sold under our investment
  agreement with Millennium. This was partially offset by principal payments of
  $1.1 million to retire a short-term loan obligation and for principal payments
  on capital lease obligations.
  
       In the first quarter of 2003, the Company's financing arrangement with
  Genentech related to development and commercialization of RaptivaTM was modified
  to provide the following terms:
  
                                        -12-
  The credit limit under the convertible subordinated debt agreement to
  finance XOMA's share of development costs was increased to $80.0 million. The
  convertible subordinated debt is due upon the earlier of (a) April of 2005,
  except for advances made after April 2003 in which case payment will be due on
  the second anniversary date(s) of such advances or (b) within 90 days after
  first product approval (which could be before the end of 2003). At XOMA's
  election, the convertible subordinated debt may be repaid in cash or with shares
  with the conversion price to be calculated at the time of payment based on the
  fair market value at the time of election. If repayment is triggered by product
  approval, XOMA may elect to defer payment of up to $40.0 million as an offset
  against the Company's proceeds from its 25% share of U.S. operating profits on
  the product. At June 30, 2003, the outstanding balance under this note totaled
  $69.6 million.
  
       A new $15.0 million debt facility was established to finance XOMA's share
  of U.S. commercialization costs. The note payable is due upon the earlier of (a)
  April of 2005, except for advances made after April 2003 in which case payment
  will be due on the second anniversary date(s) of such advances or (b) within 90
  days after first product approval by the FDA (which could be before the end of
  2003). The commercial note must be repaid in cash. At June 30, 2003 the
  outstanding balance under this note totaled $5.3 million.
  
       XOMA granted Genentech a security interest in the Company's profit share on
  RaptivaTM as collateral against any unpaid past due amounts of the loans.
  
       In the second quarter of 2003, the Company announced the amendment of
  certain terms of the investment agreement with Millennium. The key elements of
  the revised investment agreement include an extension of the maturity date of
  the $5.0 million outstanding convertible debt from May of 2003 to February of
  2004 and a re-scheduling of the Company's decision points regarding whether to
  sell the remaining common shares from three option dates through May of 2004 to
  six option dates through February of 2005. In June of 2003, the Company
  exercised an option to sell 608,766 shares to Millennium for gross proceeds of
  $4.0 million or $6.57 per share, leaving a balance of $33.5 million available
  under this arrangement, excluding the convertible debt.
  
       The present outlook is for higher losses in 2003 than recorded in 2002,
  primarily due to increased expenses on RaptivaTM and on the Millennium
  collaboration. The Company's strategy is to attempt to continue broadening its
  product pipeline through additional development collaborations such as its
  arrangements with Genentech and Millennium. To support these activities, the
  Company expanded its manufacturing capacity and other development capabilities
  during 2001 and 2002. For example, the Company relocated its technical
  development and pilot plant facilities from Santa Monica to Berkeley in 2001 to
  improve efficiencies. XOMA also installed a third 2750-liter fermentation line
  in its Berkeley production facility, which became operational in the second half
  of 2002.
  
       Based on current spending levels, anticipated revenues, debt financing
  provided by Genentech for XOMA's share of RaptivaTM development and marketing
  costs, and financing commitments from Millennium under the collaborative
  agreement between the companies, the Company estimates it has sufficient cash
  resources to meet its operating needs through at least the end of 2004. Any
  significant revenue shortfalls, or increases in planned spending on development
  programs could shorten this period. Any change in spending on RaptivaTM prior to
  approval should have no material impact on liquidity due to the Company's
  financing arrangement with Genentech. Approval of RaptivaTM during this period
  would be expected to improve operating cash flow to the extent of XOMA's share
  of operating profits from sales of RaptivaTM in the U.S., but require repayment
  of amounts owed to Genentech under the financial arrangements discussed above.
  Additional licensing arrangements or collaborations or otherwise entering into
  new equity or other financing arrangements could potentially extend this period.
  In December of 2002, Genentech submitted a Biologics License Application (or
  BLA) to the U.S. Food and Drug Administration for marketing approval of
  RaptivaTM for the treatment of moderate-to-severe plaque psoriasis. The
  timeliness of review of the BLA by the FDA may have a material impact on the
  Company's cash flow, and its ability to raise new funding on acceptable terms.
  Progress or setbacks by the Company in its other development programs or by
  potentially competing companies' products may also affect XOMA's ability to
  raise new funding on acceptable terms. The Company continues to evaluate
  alternative financing arrangements to strengthen its overall financial position
  and mitigate risks. For a further discussion of the risks related to our
  business and their effects on our cash flow and ability to raise new funding on
  acceptable terms, see "Forward-Looking Statements and Cautionary Factors that
  May Affect Future Results," included in this Item 2 below.
  
                                        -13-
  As of June 30, 2003, future contractual obligations are as follows (in
  thousands):
  Note         Capital      Operating     Convertible
                                                   Payable*       Leases         Leases         Notes**        Total
                                                 -----------    ----------     -----------   ------------    ---------
  Remainder of 2003                                     $  -         $ 246        $ 1,515           $   -      $ 1,761
  2004                                                     -           572          2,894           5,214        8,680
  2005                                                 5,260           221          2,890          69,617       77,988
  2006                                                     -             -          2,900               -        2,900
  2007                                                     -             -          2,730               -        2,730
  Thereafter                                               -             -            708               -          708
                                                 -----------    ----------     -----------   ------------    ---------
  Total                                              $ 5,260       $ 1,039       $ 13,637        $ 74,831     $ 94,767
                                                 ===========    ==========     ===========   ============    =========
  *    The amount due in 2005 relates to XOMA's commercial loan agreement with
       Genenetech. This amount is due at the earlier of (a) April of 2005, except
       for advances made after April 2003 in which case payment will be due on the
       second anniversary date(s) of such advances or (b) within 90 days after
       first product approval (which could be before the end of 2003).
  
  **   The amount due in 2005 relates to XOMA's convertible subordinated debt
       agreement with Genentech. This amount is due at the earlier of (a) April of
       2005, except for advances made after April 2003 in which case payment will
       be due on the second anniversary date(s) of such advances or (b) within 90
       days after the first product approval (which could be before the end of
       2003). The amount due in 2004 represents the amount due to Millennium in
       February of 2004.
  
       Under an effective shelf registration statement filed on November 17, 2000,
  we registered 10,000,000 common shares, of which 7,000,000 common shares have
  not been issued and remain available to be sold from time to time by us. We also
  intend to file a registration statement with the SEC to increase the common
  shares available to be issued under this shelf registration by an additional
  13,000,000 shares. Once this registration statement becomes effective, we will
  be able to issue these shares from time to time in response to market conditions
  or other circumstances. This Form 10-Q does not itself constitute an offer to
  sell or the solicitation of offers to purchase any securities.
  
       In addition, pursuant to our agreements with Millennium, we have an
  effective registration statement filed on December 12, 2002 and amended on May
  23, 2003 covering the resale by Millennium of up to 6,000,000 common shares we
  have issued or may issue to Millennium, and we have issued a total of 2,052,184
  shares to Millennium which may be resold under that registration statement.
  Pursuant to our arrangement with Genentech, we have an effective registration
  statement filed on August 5, 1999 covering the resale by Genentech of up to
  2,000,000 common shares we may issue to Genentech, of which 482,000 have been
  issued and resold.
  
  Critical Accounting Policies
  
       The preparation of our financial statements in conformity with accounting
  principles generally accepted in the United States 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. The following critical accounting policies are important
  to our financial condition and results of operations presented in the financial
  statements and require management to make judgments, assumptions and estimates
  that are inherently uncertain:
  
       We believe there have been no significant changes in our critical
  accounting policies during the six months ended June 30, 2003 as compared to
  those previously disclosed in our Annual Report on Form 10-K for the year ended
  December 31, 2002 filed with the SEC on March 28, 2003.
  
                                        -14-
  Revenue Recognition
  
       Revenue is recognized when the related costs are incurred and the four
  basic criteria of revenue recognition are met: (1) persuasive evidence of an
  arrangement exists; (2) delivery has occurred or services rendered; (3) the fee
  is fixed and determinable; and (4) collectibility is reasonably assured.
  Determination of criteria (3) and (4) are based on management's judgments
  regarding the nature of the fee charged for products or services delivered and
  the collectibility of those fees.
  
  License and Collaborative Fees
  
       Revenue from non-refundable license or technology access payments under
  license and collaborative agreements where the Company has a continuing
  obligation to perform is recognized as revenue over the period of the continuing
  performance obligation.
  
       Milestone payments under collaborative arrangements are recognized as
  revenue upon completion of the milestone events, which represent the culmination
  of the earnings process because the Company has no future performance
  obligations related to the payment. Milestone payments that require a continuing
  performance obligation on the part of the Company are recognized over the period
  of the continuing performance obligation. Amounts received in advance are
  recorded as deferred revenue until the related milestone is completed.
  
  Contract Revenue
  
       Contract revenue for research and development involves the Company
  providing research, development or manufacturing services to collaborative
  partners. The Company recognizes revenue under these arrangements as the related
  research and development costs are incurred and collectibility is reasonably
  assured.
  
  Product Sales
  
       The Company recognizes product revenue upon shipment when there is
  persuasive evidence that an arrangement exists, delivery has occurred, the price
  is fixed and determinable and collectibility is reasonably assured. Allowances
  are established for estimated uncollectible amounts, product returns, and
  discounts, if any.
  
  Research and Development Expenses
  
       Research and development expenses consist of direct and research-related
  allocated overhead costs such as facilities costs, salaries and related
  personnel costs and material and supply costs. In addition, research and
  development expenses include costs related to clinical trials to validate our
  testing processes and procedures and related overhead expenses. From time to
  time, research and development expenses may include upfront fees and milestones
  paid to collaborative partners for the purchase of rights to in-process research
  and development. Such amounts are expensed as incurred. The timing of upfront
  fees and milestone payments in the future may cause variability in our future
  research and development expenses.
  
  Forward-Looking Statements And Cautionary Factors That May Affect Future Results
  
       Certain statements contained herein related to the relative size of the
  Company's loss for 2003, the estimated levels of its expenses and revenues for
  the balance of 2003, the sufficiency of its cash resources, the FDA advisory
  committee review and the BLA review timeframe, as well as other statements
  related to current plans for product development (including the progress of
  clinical trials, the regulatory process and the timing of clinical trials and
  regulatory filings and approvals) and existing and potential collaborative and
  licensing relationships, 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. Among other things, the actual loss for 2003
  could be higher depending on revenues from licensees and collaborators, the size
  and timing of expenditures, and whether there are unanticipated expenses. The
  suf-
  
                                        -15-
  ficiency of cash resources could be shortened if expenditures are made
  earlier or in larger amounts than anticipated or are unanticipated or if funds
  are not available on acceptable terms; and regulatory approvals could be delayed
  or denied as a result of safety or efficacy issues regarding the products being
  tested, action, inaction or delay by the FDA, European or other regulators or
  their advisory bodies, or issues relating to analysis or interpretation by, or
  submission to, these entities or others of scientific data. These and other
  risks, including those related to the results of pre-clinical testing, the
  design and progress of clinical trials, changes in the status of existing
  collaborative relationships, availability of additional licensing or
  collaboration opportunities, the timing 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 U.S. Food and Drug
  Administration, the U.S. Patent and Trademark Office or the U.S. Securities and
  Exchange Commission, scale-up and marketing capabilities, competition,
  international operations, share price volatility, the Company's financing needs
  and opportunities, uncertainties regarding the status of biotechnology patents,
  uncertainties as to the costs of protecting intellectual property, and risks
  associated with our status as a Bermuda company are described in more detail in
  the remainder of this section.
  
  None Of Our Therapeutic Products Have Received Regulatory Approval. If Our
  Products Do Not Receive Regulatory Approval, Neither Our Third Party
  Collaborators Nor We Will Be Able To Manufacture And Market Them.
  
       Even our most advanced therapeutic product has not received regulatory
  approval. Our products cannot be manufactured and marketed in the United States
  and other countries without required regulatory approvals. The United States
  government and governments of other countries extensively regulate many aspects
  of our products, including:
  
       o    testing,
  
       o    manufacturing,
  
       o    promotion and marketing, and
  
       o    exporting.
  
       In the United States, the FDA regulates pharmaceutical products under the
  Federal Food, Drug, and Cosmetic Act and other laws, including, in the case of
  biologics, the Public Health Service Act. At the present time, we believe that
  our products will be regulated by the FDA as biologics. The FDA has announced
  that it is consolidating its responsibility for reviewing new pharmaceutical
  products into its Center for Drug Evaluation and Research, the body that
  currently reviews drug products, combining that operation with part of its
  biologics review operation, the Center for Biologics Evaluation and Research.
  Because implementation of this plan may not be complete, we do not know when or
  how this change will affect us. State regulations may also affect our proposed
  products.
  
       The FDA has substantial discretion in both the product approval process and
  manufacturing facility approval process and, as a result of this discretion and
  uncertainties about outcomes of testing, we cannot predict at what point, or
  whether, the FDA will be satisfied with our or our collaborators' submissions or
  whether the FDA will raise questions which may be material and delay or preclude
  product approval or manufacturing facility approval. As we accumulate additional
  clinical data, we will submit it to the FDA, which may have a material impact on
  the FDA product approval process.
  
       Our potential products will require significant additional research and
  development, extensive preclinical studies and clinical trials and regulatory
  approval prior to any commercial sales. This process is lengthy, often taking a
  number of years, and expensive. As clinical results are frequently susceptible
  to varying interpretations that may delay, limit or prevent regulatory
  approvals, the length of time necessary to complete clinical trials and to
  submit an application for marketing approval for a final decision by a
  regulatory authority varies significantly. As a result, it is uncertain whether:
  
       o    our future filings will be delayed,
  
                                        -16-
  o    our studies will be successful,
  
       o    we will be able to provide necessary additional data,
  
       o    our future results will justify further development, or
  
       o    we will ultimately achieve regulatory approval for any of these
            products.
  
  For example,
  
            o    in 1996, we and Genentech began testing RaptivaTM (Efalizumab) in
                 patients with moderate-to-severe psoriasis. In April of 2002, we
                 and Genentech announced that a pharmacokinetic study conducted on
                 RaptivaTM comparing XOMA-produced material and Genentech-produced
                 material did not achieve the pre-defined statistical definition
                 of comparability, and the FDA requested that another Phase III
                 study be completed before the filing of a Biologics License
                 Application for RaptivaTM, delaying the filing of a Biologics
                 Licensing Application with the FDA for RaptivaTM beyond the
                 previously-planned time frame of summer 2002. In September of
                 2002, we and Genentech announced the results of the additional
                 Phase III study which achieved its primary efficacy endpoint. In
                 December of 2002, Genentech submitted a Biologics License
                 Application for RaptivaTM for the treatment of moderate-to-severe
                 plaque psoriasis, which was accepted by the FDA in February of
                 2003. Genentech has projected a single cycle (approximately
                 10-month) regulatory review period, which could potentially lead
                 to FDA action in late 2003. A FDA advisory committee is scheduled
                 to review the Biologics License Application for RaptivaTM on
                 September 9, 2003. However, we do not yet know what issues the
                 FDA or its advisory committee may raise with respect to efficacy
                 or safety of the drug or other elements of the application. In
                 March 2003, we announced completion of enrollment in a Phase II
                 study of RaptivaTM in patients suffering from rheumatoid
                 arthritis. In May of 2003, we and Genentech announced our
                 decision to terminate Phase II testing of RaptivaTM in patients
                 suffering from rheumatoid arthritis based on an evaluation by an
                 independent Data Safety Monitoring Board that suggested no
                 overall net clinical benefit in patients receiving the study
                 drug. We have also announced the initiation of enrollment in a
                 Phase II study of RaptivaTM as a possible treatment for patients
                 with psoriatic arthritis. We do not know whether or when any such
                 testing will demonstrate product safety and efficacy in this
                 patient population or result in regulatory approval.
  
            o    in December of 1992, we began human testing of our
                 NEUPREX(R)product, a genetically engineered fragment of a
                 particular human protein, and licensed certain worldwide rights
                 to Baxter. In April of 2000, members of the FDA and
                 representatives of XOMA and Baxter discussed results from the
                 Phase III trial that tested NEUPREX(R)in pediatric patients with
                 a potentially deadly bacterial infection called meningococcemia,
                 and senior representatives of the FDA indicated that the data
                 presented were not sufficient to support the filing of an
                 application for marketing approval at that time. In November of
                 2002, Baxter completed enrollment in a Phase II pilot study with
                 NEUPREX(R) in Crohn's disease patients. In July of 2003, XOMA
                 announced the termination of its license and supply agreements
                 with Baxter for XOMA's NEUPREX(R)product, and the rights returned
                 to XOMA.
  
       Given that regulatory review is an interactive and continuous process, we
  maintain a policy of limiting announcements and comments upon the specific
  details of the ongoing regulatory review of our products, subject to our
  obligations under the securities laws, until definitive action is taken.
  
  Because All Of Our Products Are Still In Development, We Will Require
  Substantial Funds To Continue; We Cannot Be Certain That Funds Will Be Available
  And, If Not Available, We May Have To Take Actions Which Could Adversely Affect
  Your Investment.
  
                                        -17-
  If adequate funds are not available, we may have to dilute or otherwise
  adversely affect the rights of existing shareholders, curtail or cease
  operations or, in extreme circumstances, file for bankruptcy protection. We have
  spent, and we expect to continue to spend, substantial funds in connection with:
  
       o    research and development relating to our products and production
            technologies
  
       o    expansion of our production capabilities
  
       o    extensive human clinical trials and
  
       o    protection of our intellectual property.
  
       Based on current spending levels, anticipated revenues, debt financing
  provided by Genentech for our share of RaptivaTM development and marketing
  costs, and financing commitments from Millennium under the collaborative
  agreement between the companies, we estimate we have sufficient cash resources
  to meet our operating needs through at least the end of 2004. However, to the
  extent we experience changes in the timing or size of expenditures or
  unanticipated expenditures, or if our collaborators do not meet their
  obligations to us or anticipated revenues otherwise do not materialize, these
  funds may not be adequate for this period. As a result, we do not know whether:
  
       o    operations will generate meaningful funds
  
       o    additional agreements for product development funding can be reached
  
       o    strategic alliances can be negotiated or
  
       o    adequate additional financing will be available for us to finance our
            own development on acceptable terms, if at all.
  
       Cash balances and operating cash flow are influenced primarily by the
  timing and level of payments by our licensees and development partners, as well
  as by our operating costs.
  
       Specifically, although changes in spending on RaptivaTM should not impact
  liquidity due to our financing arrangements with Genentech and FDA approval of
  RaptivaTM would generally be expected to improve operating cash flow to the
  extent of XOMA's share of operating profits from sales of RaptivaTM in the U.S.,
  such approval will also require repayment in cash, shares or deferred repayment
  of up to $40.0 million of amounts owed to Genentech (approximately $74.9 million
  under both loan agreements as of June 30, 2003). In addition, any delays in the
  review by the FDA of the Biologics License Application for RaptivaTM may have a
  material impact on our cash flow and on our ability to raise new funding on
  acceptable terms.
  
  The Financial Terms Of Some Of Our Existing Collaborative Arrangements Could
  Result In Dilution Of Our Share Value.
  
       We have financed, and anticipate continuing to finance, our most
  significant development program, RaptivaTM, principally by borrowing from
  Genentech, and this debt is convertible at XOMA's option into our common shares
  with the conversion price to be calculated at the time of conversion. The
  outstanding amount of such convertible debt as of June 30, 2003 was
  approximately $69.6 million. This debt will come due at the earlier of April of
  2005 or within 90 days after first product approval (which could be before the
  end of 2003). Unless we secure substantial alternative financing, it is likely
  that some or all of this debt, as well as some or all of any convertible debt
  issued in the future as part of this financing arrangement, will be converted
  into equity when it comes due rather than be repaid in cash, resulting in the
  issuance of additional common shares.
  
       Our financing arrangement with Millennium includes a $5.0 million
  convertible note we issued to Millennium in November of 2001, which comes due in
  February of 2004 and may be converted into common shares at that time. In
  addition, we have the option to issue up to $33.5 million worth of common
  shares, excluding the converti-
  
                                        -18-
  ble debt, to Millennium through February of 2005. The total amount issuable in
  the remainder of 2003 could be $9.0 million. The number of shares to be issued
  will be based on a conversion price to be calculated at the time of conversion.
  
       These arrangements, as well as future arrangements we may enter into with
  similar effect, could result in dilution in the value of our shares.
  
  Because All Of Our Products Are Still In Development, We Have Sustained Losses
  In The Past And We Expect To Sustain Losses In The Future.
  
       We have experienced significant losses and, as of June 30, 2003, we had an
  accumulated deficit of $570.0 million.
  
       For the six months ended June 30, 2003, we had a net loss of approximately
  $29.2 million, or $0.41 per common share (basic and diluted). For the year ended
  December 31, 2002, we had a net loss of approximately $33.2 million, or $0.47
  per common share (basic and diluted). We expect to incur additional losses in
  the future, primarily due to increased expenses on RaptivaTM, on the Millennium
  collaboration and on our XMP.629 compound.
  
       Our ability to make profits is dependent in large part on obtaining
  regulatory approval for our products and entering into agreements for product
  development and commercialization, both of which are uncertain. Our ability to
  fund our ongoing operations is dependent on the foregoing factors and on our
  ability to secure additional funds. Because all of our products are still in
  development, we do not know whether we will ever make a profit or whether cash
  flow from future operations will be sufficient to meet our needs.
  
  If Third Party Collaborators Do Not Successfully Develop And Market Our
  Products, We May Not Be Able To Do So On Our Own.
  
       Our financial resources and our marketing experience and expertise are
  limited. Consequently, we depend to a large extent upon securing the financial
  resources and marketing capabilities of third parties with whom we collaborate.
  
       o    In April of 1996, we and Genentech entered into an agreement whereby
            we agreed to co-develop Genentech's humanized monoclonal antibody
            product RaptivaTM. In April of 1999, the companies extended and
            expanded the agreement. In March of 2003, the Company further expanded
            the agreement.
  
       o    In November of 2001, we entered into a collaboration with Millennium
            Pharmaceuticals, Inc. to develop two of Millennium's products for
            certain vascular inflammation indications.
  
       Because our collaborators are independent third parties, they may be
  subject to different risks than we are and have significant discretion in
  determining the efforts and resources they will apply. We do not know whether
  Genentech or Millennium will successfully develop or market any of the products
  we are collaborating on.
  
       Even when we have a collaborative relationship, other circumstances may
  prevent it from resulting in successful development of marketable products.
  
       o    In January of 2000, we licensed the worldwide rights to all
            pharmaceutical compositions containing a particular human protein for
            treatment of meningococcemia and additional potential future human
            clinical indications to Baxter. In July of 2003, this arrangement was
            terminated, and the rights returned to XOMA. Although we are
            evaluating future options for developing this product, we do not know
            whether any options we may pursue will succeed.
  
       o    In January of 2001, we entered into a strategic process development
            and manufacturing alliance with Onyx Pharmaceuticals, Inc. pursuant to
            which we are scaling up production to commercial volume to manufacture
            one of Onyx's cancer products. In June of 2003, Onyx notified XOMA
  
                                        -19-
  that it was discontinuing development of the product and terminating
            the agreement so that it could focus on its anticancer compound.
  
       Although we continue to evaluate additional strategic alliances and
  potential partnerships, we do not know whether or when any such alliances or
  partnerships will be entered into.
  
  Because We Have No History Of Profitability And Because The Biotechnology Sector
  Has Been Characterized By Highly Volatile Stock Prices, Announcements We Make
  And General Market Conditions For Biotechnology Stocks Could Result In A Sudden
  Change In The Value Of Our Common Shares.
  
       As a biopharmaceutical company, we have experienced significant volatility
  in our common shares. Fluctuations in our operating results and general market
  conditions for biotechnology stocks could have a significant impact on the
  volatility of our common share price. From December 31, 2001 through August 12,
  2003, our share price has ranged from a high of $12.19 to a low of $2.84. On
  August 11, 2003, the last reported sale price of the common shares as reported
  on the Nasdaq National Market was $8.40 per share. Factors contributing to such
  volatility include, but are not limited to:
  
       o    results of preclinical studies and clinical trials
  
       o    information relating to the safety or efficacy of our products
  
       o    developments regarding regulatory filings
  
       o    announcements of new collaborations
  
       o    failure to enter into collaborations
  
       o    developments in existing collaborations
  
       o    our funding requirements and the terms of our financing arrangements
  
       o    announcements of technological innovations or new indications for our
            therapeutic products
  
       o    government regulations
  
       o    developments in patent or other proprietary rights
  
       o    the number of shares outstanding
  
       o    the number of shares trading on an average trading day
  
       o    announcements regarding other participants in the biotechnology and
            pharmaceutical industries
  
       o    market speculation regarding any of the foregoing.
  
  Because Many Of The Companies We Do Business With Are Also In The Biotechnology
  Sector, The Volatility Of That Sector Can Affect Us Indirectly As Well As
  Directly.
  
       The same factors that affect us directly because we are a biotechnology
  company can also adversely impact us indirectly by affecting the ability of our
  collaborators, partners and others we do business with to meet their obligations
  to us or our ability to realize the value of the consideration provided to us by
  these other companies. For example, in connection with our licensing transaction
  with MorphoSys AG, MorphoSys has announced that it has exercised its option to
  pay a portion of the license fee owed to us in the form of equity securities of
  MorphoSys.
  
                                        -20-
  XOMA has only recently received these shares and the future value of
  these shares is subject both to market risks affecting our ability to realize
  the value of these shares and more generally to the business and other risks to
  which the issuer of these shares is subject. Since the date of MorphoSys'
  election on October 23, 2002, the per share closing price for MorphoSys shares
  has ranged from approximately $4.77 to $15.95, which demonstrates the volatility
  of these shares in the current market.
  
  If Any Of Our Products Receives Regulatory Approval, We May Not Be Able To
  Increase Existing Or Acquire New Manufacturing Capacity Sufficient To Meet
  Market Demand.
  
       Because we have never commercially introduced any pharmaceutical products
  and none of our products have received regulatory approval, we do not know
  whether the capacity of our existing manufacturing facilities can be increased
  to produce sufficient quantities of our products to meet market demand. Also, if
  we need additional manufacturing facilities to meet market demand, we cannot
  predict that we will successfully obtain those facilities because we do not know
  whether they will be available on acceptable terms. In addition, any
  manufacturing facilities acquired or used to meet market demand must meet the
  FDA's quality assurance guidelines.
  
  Because We Do Not And Cannot Currently Market Any Of Our Products For Commercial
  Sale, We Do Not Know Whether There Will Be A Viable Market For Our Products.
  
       Even if we receive regulatory approval for our products and we or our third
  party collaborators successfully manufacture them, our products may not be
  accepted in the marketplace. For example, physicians and/or patients may not
  accept a product for a particular indication because it has been biologically
  derived (and not discovered and developed by more traditional means) if no
  biologically derived products are currently in widespread use in that
  indication, as is currently the case with psoriasis. Consequently, we do not
  know if physicians or patients will adopt or use our products for their approved
  indications.
  
  If Our And Our Partners' Patent Protection For Our Principal Products And
  Processes Is Not Enforceable, We May Not Realize Our Profit Potential.
  
       Because of the length of time and the expense associated with bringing new
  products to the marketplace, we and our partners hold and are in the process of
  applying for a number of patents in the United States and abroad to protect our
  products and important processes and also have obtained or have the right to
  obtain exclusive licenses to certain patents and applications filed by others.
  However, the patent position of biotechnology companies generally is highly
  uncertain and involves complex legal and factual questions, and no consistent
  policy regarding the breadth of allowed claims has emerged from the actions of
  the U.S. Patent and Trademark Office with respect to biotechnology patents.
  Legal considerations surrounding the validity of biotechnology patents continue
  to be in transition, and historical legal standards surrounding questions of
  validity may not continue to be applied, and current defenses as to issued
  biotechnology patents may not in fact be considered substantial in the future.
  These factors have contributed to uncertainty as to:
  
       o    the degree and range of protection any patents will afford against
            competitors with similar technologies
  
       o    if and when patents will issue
  
       o    whether or not others will obtain patents claiming aspects similar to
            those covered by our patent applications or
  
       o    the extent to which we will be successful in avoiding infringement of
            any patents granted to others.
  
       The Patent Office has issued approximately 69 patents to us related to our
  products based on human bactericidal permeability-increasing protein, which we
  call BPI, including novel compositions, their manufacture, formulation, assay
  and use. In addition, we are the exclusive licensee of BPI-related patents and
  applications owned by
  
                                        -21-
  New York University and Incyte Pharmaceuticals Inc. The Patent Office has also
  issued nine patents to us related to our bacterial expression technology.
  
       If certain patents issued to others are upheld or if certain patent
  applications filed by others issue and are upheld, we may require licenses from
  others in order to develop and commercialize certain potential products
  incorporating our technology or we may become involved in litigation to
  determine the proprietary rights of others. These licenses, if required, may not
  be available on acceptable terms, and any such litigation may be costly and may
  have other adverse effects on our business, such as inhibiting our ability to
  compete in the marketplace and absorbing significant management time.
  
       Due to the uncertainties regarding biotechnology patents, we also have
  relied and will continue to rely upon trade secrets, know-how and continuing
  technological advancement to develop and maintain our competitive position. All
  of our employees have signed confidentiality agreements under which they have
  agreed not to use or disclose any of our proprietary information. Research and
  development contracts and relationships between us and our scientific
  consultants and potential customers provide access to aspects of our know-how
  that are protected generally under confidentiality agreements. These
  confidentiality agreements may not be honored or may not be enforced by a court.
  To the extent proprietary information is divulged to competitors or to the
  public generally, such disclosure may adversely affect our ability to develop or
  commercialize our products by giving others a competitive advantage or by
  undermining our patent position.
  
  Protecting Our Intellectual Property Can Be Costly And Expose Us To Risks Of
  Counterclaims Against Us.
  
       We may be required to engage in litigation or other proceedings to protect
  our intellectual property. The cost to us of this litigation, even if resolved
  in our favor, could be substantial. Such litigation could also divert
  management's attention and resources. In addition, if this litigation is
  resolved against us, our patents may be declared invalid, and we could be held
  liable for significant damages. In addition, if the litigation included a claim
  of infringement by us of another party's patent that was resolved against us, we
  or our collaborators may be enjoined from developing, manufacturing, selling or
  importing products, processes or services without a license from the other
  party.
  
  Other Companies May Render Some Or All Of Our Products Noncompetitive Or
  Obsolete.
  
       Developments by others may render our products or technologies obsolete or
  uncompetitive. Technologies developed and utilized by the biotechnology and
  pharmaceutical industries are continuously and substantially changing.
  Competition in the areas of genetically engineered DNA-based and antibody-based
  technologies is intense and expected to increase in the future as a number of
  established biotechnology firms and large chemical and pharmaceutical companies
  advance in these fields. Many of these competitors may be able to develop
  products and processes competitive with or superior to our own for many reasons,
  including that they may have:
  
       o    significantly greater financial resources
  
       o    larger research and development and marketing staffs
  
       o    larger production facilities
  
       o    entered into arrangements with, or acquired, biotechnology companies
            to enhance their capabilities or
  
       o    extensive experience in preclinical testing and human clinical trials.
  
       These factors may enable others to develop products and processes
  competitive with or superior to our own or those of our collaborators. In
  addition, a significant amount of research in biotechnology is being carried out
  in universities and other non-profit research organizations. These entities are
  becoming increasingly interested in the
  
                                        -22-
  commercial value of their work and may become more aggressive in seeking patent
  protection and licensing arrangements.
  
       Furthermore, positive or negative developments in connection with a
  potentially competing product may have an adverse impact on our ability to raise
  additional funding on acceptable terms. For example, if another product is
  perceived to have a competitive advantage, or another product's failure is
  perceived to increase the likelihood that our product will fail, then investors
  may choose not to invest in us on terms we would accept or at all.
  
       Without limiting the foregoing, we are aware that:
  
       o    Biogen Inc. has announced that the FDA has approved Amevive(R)to treat
            moderate-to-severe chronic plaque psoriasis in adult patients who are
            candidates for systematic therapy or phototherapy;
  
       o    Centocor Inc., a unit of Johnson & Johnson, has announced that it has
            tested its rheumatoid arthritis and Crohn's disease drug, Remicade(R),
            in psoriasis showing clinical benefits (and it has been announced that
            the drug has shown promising results in patients with psoriatic
            arthritis);
  
       o    it has been announced that Amgen Inc. tested its rheumatoid arthritis
            and psoriatic arthritis drug, Enbrel(R), in a Phase III clinical trial
            in patients with moderate-to-severe plaque psoriasis; meeting the
            primary endpoint and all secondary endpoints, that the primary and key
            secondary endpoints were met in a second Phase III trial, and that a
            filing for regulatory approval with the U.S. FDA for this medication
            was submitted in July of 2003;
  
       o    MedImmune, Inc. has completed enrollment in three Phase II trials to
            evaluate its anti-T cell monoclonal antibody in psoriasis;
  
       o    GenMab A/S has announced that its investigational new drug application
            for HuMax-CD4 for psoriasis has been cleared through the FDA to
            initiate a Phase II study;
  
       o    Abbott Laboratories has announced the commencement of a Phase II
            psoriasis trial and Phase III psoriatic arthritis trial of its
            rheumatoid arthritis drug HumiraTM; and
  
       o    other companies, including Medarex, Inc., are developing monoclonal
            antibody or other products for treatment of inflammatory skin
            disorders.
  
       A number of companies are developing monoclonal antibodies targeting
  cancers, which may prove more effective than the ING-1 antibody.
  
       It is possible that one or more other companies may be developing one or
  more products based on the same human protein as our NEUPREX(R) product, and
  these product(s) may prove to be more effective than NEUPREX(R) or receive
  regulatory approval prior to NEUPREX(R) or any BPI-derived ophthalmic product
  developed by XOMA.
  
  As We Do More Business Internationally, We Will Be Subject To Additional
  Political, Economic And Regulatory Uncertainties.
  
       We may not be able to successfully operate in any foreign market. We
  believe that, because the pharmaceutical industry is global in nature,
  international activities will be a significant part of our future business
  activities and that, when and if we are able to generate income, a substantial
  portion of that income will be derived from product sales and other activities
  outside the United States. Foreign regulatory agencies often establish standards
  different from those in the United States, and an inability to obtain foreign
  regulatory approvals on a timely basis could put us at a competitive
  disadvantage or make it uneconomical to proceed with a product's development.
  International operations may be limited or disrupted by:
  
                                        -23-
  o    imposition of government controls,
  
       o    export license requirements,
  
       o    political or economic instability,
  
       o    trade restrictions,
  
       o    changes in tariffs,
  
       o    restrictions on repatriating profits,
  
       o    exchange rate fluctuations,
  
       o    withholding and other taxation, and
  
       o    difficulties in staffing and managing international operations.
  
  Because We Are A Relatively Small Biopharmaceutical Company With Limited
  Resources, We May Not Be Able To Attract And Retain Qualified Personnel, And The
  Loss Of Key Personnel Could Delay Or Prevent Achieving Our Objectives.
  
       Our success in developing marketable products and achieving a competitive
  position will depend, in part, on our ability to attract and retain qualified
  scientific and management personnel, particularly in areas requiring specific
  technical, scientific or medical expertise. There is intense competition for
  such personnel. Our research, product development and business efforts would be
  adversely affected by the loss of one or more of key members of our scientific
  or management staff, particularly our executive officers: John L. Castello, our
  Chairman of the Board, President and Chief Executive Officer; Patrick J.
  Scannon, M.D., Ph.D., our Senior Vice President and Chief Scientific and Medical
  Officer; Clarence L. Dellio, our Senior Vice President and Chief Operating
  Officer; Peter B. Davis, our Vice President, Finance and Chief Financial
  Officer; and Christopher J. Margolin, our Vice President, General Counsel and
  Secretary. We have employment agreements with Mr. Castello, Dr. Scannon and Mr.
  Davis. We currently have no key person insurance on any of our employees.
  
  Even If We Bring Products To Market, We May Be Unable To Effectively Price Our
  Products Or Obtain Adequate Reimbursement For Sales Of Our Products, Which Would
  Prevent Our Products From Becoming Profitable.
  
       If we succeed in bringing our product candidates to the market, they may
  not be considered cost-effective, and reimbursement to the patient may not be
  available or may not be sufficient to allow us to sell our products on a
  competitive basis. In both the United States and elsewhere, sales of medical
  products and treatments are dependent, in part, on the availability of
  reimbursement to the patient from third-party payors, such as government and
  private insurance plans. Third-party payors are increasingly challenging the
  prices charged for pharmaceutical products and services. Our business is
  affected by the efforts of government and third-party payors to contain or
  reduce the cost of health care through various means. In the United States,
  there have been and will continue to be a number of federal and state proposals
  to implement government controls on pricing. In addition, the emphasis on
  managed care in the United States has increased and will continue to increase
  the pressure on the pricing of pharmaceutical products. We cannot predict
  whether any legislative or regulatory proposals will be adopted or the effect
  these proposals or managed care efforts may have on our business.
  
  Because We Engage In Human Testing, We Are Exposed To An Increased Risk Of
  Product Liability Claims.
  
       The testing and marketing of medical products entails an inherent risk of
  allegations of product liability. We believe that we currently have adequate
  levels of insurance for our clinical trials, however, in the event of one or
  
                                        -24-
  more large, unforeseen awards, such levels may not provide adequate coverage. We
  will seek to obtain additional insurance, if needed, if and when our products
  are commercialized; however, because we do not know when this will occur, we do
  not know whether adequate insurance coverage will be available or be available
  at acceptable costs. A significant product liability claim for which we were not
  covered by insurance would have to be paid from cash or other assets. To the
  extent we have sufficient insurance coverage, such a claim would result in
  higher subsequent insurance rates.
  
  We May Be Subject To Increased Risks Because We Are A Bermuda Company.
  
       Alleged abuses by certain companies that have changed their legal domicile
  from jurisdictions within the United States to Bermuda have created an
  environment where, notwithstanding that we changed our legal domicile in a
  transaction that was approved by our shareholders and fully taxable to our
  company under U.S. law, we may be exposed to various prejudicial actions,
  including:
  
       o    "blacklisting" of our common shares by certain pension funds;
  
       o    legislation restricting certain types of transactions; and
  
       o    punitive tax legislation.
  
       We do not know whether any of these things will happen, but if implemented
  one or more of them may have an adverse impact on our future operations or our
  share price.
  
  If You Were To Obtain A Judgment Against Us, It May Be Difficult To Enforce
  Against Us Because We Are A Foreign Entity.
  
       We are a Bermuda company. All or a substantial portion of our assets may be
  located outside the United States. As a result, it may be difficult for
  shareholders and others to enforce in United States courts judgments obtained
  against us. We have irrevocably agreed that we may be served with process with
  respect to actions based on offers and sales of securities made hereby in the
  United States by serving Christopher J. Margolin, c/o XOMA Ltd., 2910 Seventh
  Street, Berkeley, California 94710, our United States agent appointed for that
  purpose. We have been advised by our Bermuda counsel, Conyers Dill & Pearman,
  that there is doubt as to whether Bermuda courts would enforce judgments of
  United States courts obtained in actions against XOMA or our directors and
  officers that are predicated upon the civil liability provisions of the U.S.
  securities laws or entertain original actions brought in Bermuda against XOMA or
  such persons predicated upon the U.S. securities laws. There is no treaty in
  effect between the United States and Bermuda providing for such enforcement, and
  there are grounds upon which Bermuda courts may not enforce judgments of United
  States courts. Certain remedies available under the United States federal
  securities laws may not be allowed in Bermuda courts as contrary to that
  nation's policy.
  
  Our Shareholder Rights Agreement Or Bye-laws May Prevent Transactions That Could
  Be Beneficial To Our Shareholders And May Insulate Our Management From Removal.
  
       In February of 2003, we renewed our shareholder rights agreement, which
  could make it considerably more difficult or costly for a person or group to
  acquire control of XOMA in a transaction that our board of directors opposes.
  
       Our bye-laws:
  
       o    require certain procedures to be followed and time periods to be met
            for any shareholder to propose matters to be considered at annual
            meetings of shareholders, including nominating directors for election
            at those meetings;
  
       o    authorize our board of directors to issue up to 1,000,000 preference
            shares without shareholder approval and to set the rights, preferences
            and other designations, including voting rights, of those shares as
            the board of directors may determine; and
  
                                        -25-
  o    contain provisions, similar to those contained in the Delaware General
            Corporation Law, that may make business combinations with interested
            shareholders more difficult.
  
       These provisions of our shareholders rights agreement and our bye-laws,
  alone or in combination with each other, may discourage transactions involving
  actual or potential changes of control, including transactions that otherwise
  could involve payment of a premium over prevailing market prices to holders of
  common shares, could limit the ability of shareholders to approve transactions
  that they may deem to be in their best interests, and could make it considerably
  more difficult for a potential acquiror to replace management.
  
  ITEM 3.  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 June 30, 2003, 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 at June 30, 2003:
  
                                                     Fair Value         Average
                                     Maturity      (in thousands)    Interest Rate
                                    ------------   ---------------   -------------
  
  Cash equivalents, fixed rate        Daily            $26,946           1.15%
  
  Other Market Risk
  
       At June 30, 2003, the Company had a long-term convertible note outstanding
  which is convertible into common shares based on the market price 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%.
  
       The Company's investment in MorphoSys stock is subject to market risk
  volatility as evidenced by the range of closing prices from $4.77 to $15.95 per
  share from October 23, 2002, the date of MorphoSys' election to issue shares,
  through August 11, 2003.
  
  ITEM 4.  CONTROLS AND PROCEDURES
  
       Under the supervision and with the participation of our management,
  including Chairman of the Board, President and Chief Executive Officer and our
  Vice President, Finance and Chief Financial Officer, we conducted an evaluation
  of our disclosure controls and procedures, as such term is defined under Rule
  13a-14(c) promulgated under the Securities Exchange Act of 1934, as amended, as
  of the end of the period covered by this report. Based on this evaluation, our
  Chairman of the Board, President and Chief Executive Officer and our Vice
  President, Finance and Chief Financial Officer concluded that our disclosure
  controls and procedures are effective in timely alerting them to material
  information relating to the Company and its consolidated subsidiaries required
  to be included in our periodic SEC filings.
  
       In April of 2003, the Company implemented a new financial reporting system
  which represents a significant change in our internal controls. During our
  evaluation of internal controls conducted for the second quarter of 2003,
  special procedures were performed regarding the system conversion and
  implementation. We concluded that the system conversion and implementation was
  properly controlled to ensure accurate financial reporting. Apart from this new
  system, there were no changes in the Company's internal control over financial
  reporting during the
  
                                        -26-
  fiscal quarter to which this report relates that have materially affected, or
  are reasonable likely to materially affect, the Company's internal control over
  financial accounting.
  
                                        -27-
  PART II - OTHER INFORMATION
  
  ITEM 1.  LEGAL PROCEEDINGS
  
       In July of 2003, a complaint was filed in the General Court of Justice,
  Superior Court Division, Orange County, North Carolina, in a lawsuit captioned
  Hamlet v. Genentech, Inc., et al., No. 03 CVS 1161, and was subsequently
  amended, by a participant in one of the Phase III clinical trials of
  Raptiva(TM). The complaint asserts claims for alleged negligence, breach of
  fiduciary duty, fraud, misrepresentation and medical negligence against the
  plaintiff's treating physician, the physician's medical practice, Genentech,
  XOMA, the institutional review board responsible for the trial and the contract
  research organization retained to conduct the trial. The complaint seeks
  unspecified compensatory damages alleged to be in excess of $10,000.00. As set
  forth in the complaint, the plaintiff was initially in the placebo group of this
  trial; he did not receive Raptiva(TM) during this time, and his claims are based
  on his failure to receive his indicated treatment, not his receipt of
  Raptiva(TM). Although this case is at an early stage, XOMA believes the claims
  against it to be without merit and intends to vigorously defend against them.
  
  ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS
  
       The Company continues to use the net proceeds from its June 2001 registered
  offering of common shares for general corporate purposes, including leasehold
  improvements, equipment acquisitions, current research and development projects,
  the development of new products or technologies, general working capital and
  operating expenses. Pending application of the net proceeds as described above,
  the Company has invested the remaining net proceeds of the offering in
  short-term, investment-grade, interest-bearing securities.
  
  ITEM 3.  DEFAULTS UPON SENIOR SECURITIES
  
       None.
  
  ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
       On May 21, 2003, the Company held its annual general meeting of
  shareholders. The following persons (the only nominees) were elected as the
  Company's directors, having received the indicated votes:
  
  Name                                          Votes For          Votes Withheld
  ----                                          ---------          --------------
  James G. Andress                             57,160,604             2,067,616
  William K. Bowes, Jr.                        54,754,802             4,473,418
  John L. Castello                             57,115,248             2,112,972
  Arthur Kornberg, M.D.                        57,155,671             2,072,549
  Steven C. Mendell                            56,484,064             2,744,156
  Patrick J. Scannon, M.D., Ph.D.              57,144,481             2,083,739
  W. Denman Van Ness                           54,765,642             4,462,578
  Patrick J. Zenner                            57,156,285             2,071,935
  
       The appointment of Ernst & Young LLP to act as the Company's independent
  auditors for the 2003 fiscal year was ratified and the authorization of the
  Board to agree to such auditors' fee was approved, having received 58,186,546
  votes for, 836,846 votes against, 204,828 abstentions and no broker non-votes.
  
       The amendments to the Company's 1981 Share Option Plan and Restricted Share
  Plan to increase the number of shares issuable over the term of the plans by
  2,500,000 shares to 11,150,000 shares in the aggregate was approved, having
  received 18,072,914 votes for, 4,430,910 votes against, 945,374 abstentions and
  35,779,022 broker non-votes.
  
       The amendment to the Company's Restricted Share Plan to increase the number
  of shares issuable over the term of the plan by 250,000 shares to 1,500,000
  shares in the aggregate was approved, having received 15,448,525 votes for,
  7,734,725 votes against, 265,948 abstentions and 35,779,022 broker non-votes.
  
                                        -28-
  ITEM 5.  OTHER INFORMATION
  
       None.
  
  ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K
  
       Exhibits:
  
       10.1 Letter Agreement dated May 16, 2003 by and among XOMA Ltd., Millennium
            Pharmaceuticals, Inc. and mHoldings Trust. (1)
  
       10.2 Press Release dated May 20, 2003. (1)
  
       10.3 Letter Agreement dated June 30, 2003 terminating the License Agreement
            dated as of January 25, 2000 between XOMA Ireland Limited and Baxter
            Healthcare Corporation. (2)
  
       10.4 Letter Agreement dated June 30, 2003 terminating the Supply Agreement
            effective as of January 25, 2000 between XOMA (US) LLC and Baxter
            Healthcare Corporation. (2)
  
       10.5 Press Release dated August 13, 2003. (3)
  
       31.1 Certification of John L. Castello, filed pursuant to Section 302 of
            the Sarbanes-Oxley Act of 2002. (2)
  
       31.2 Certification of Peter D. Davis, filed pursuant to Section 302 of the
            Sarbanes-Oxley Act of 2002. (2)
  
       32.1 Certification of John L. Castello ,furnished pursuant to Section 906
            of the Sarbanes-Oxley Act of 2002. (3)
  
       32.2 Certification of Peter D. Davis, furnished pursuant to Section 906 of
            the Sarbanes-Oxley Act of 2002 . (3)
  
  -------------------
            (1)  Incorporated by reference to the referenced exhibit to XOMA's
                 Amendment No. 1 to Current Report on Form 8-K/A filed May 21,
                 2003 (File No. 0-14710).
            (2)  Filed herewith.
            (3)  Furnished herewith.
  
       Reports on Form 8-K:
  
       1.   Current Report on Form 8-K dated and filed on November 27, 2001, as
            amended by amendments on Form 8-K/A dated and filed on December 13,
            2001, October 24, 2002 and May 21, 2003, respectively (file no.
            0-14710).
  
       2.   Current Report on Form 8-K dated and filed on April 11, 2003, as
            amended by amendment on Form 8-K/A dated and filed on April 18, 2003
            (file no. 0-14710).
  
       3.   Current Report on Form 8-K dated and filed on June 30, 2003 (file no.
            0-14710).
  
                                        -29-
  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:    August 13, 2003            By:   /s/ JOHN L. CASTELLO
                                            --------------------
                                            John L. Castello
                                            Chairman of the Board, President and
                                            Chief Executive Officer
  
  Date:    August 13, 2003            By:   /s/ PETER D. DAVIS
                                            ------------------
                                            Peter D. Davis
                                            Vice President, Finance and
                                            Chief Financial Officer
  
                                        -30-