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 September 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          83,126,916
  Class                                     Outstanding at November 11, 2003
  
  --------------------------------------------------------------------------------
  
  
  <PAGE>
  
  
                                      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
                     September 30, 2003 and December 31, 2002...................1
  
                  Condensed Consolidated Statements of Operations for the
                     Three and Nine Months Ended September 30, 2003 and 2002....2
  
                  Condensed Consolidated Statements of Cash Flows for the
                     Nine Months Ended September 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.................................12
  
      Item 3.     Quantitative and Qualitative Disclosures About Market Risk...27
  
      Item 4.     Controls and Procedures......................................28
  
  PART II OTHER INFORMATION
  
      Item 1.     Legal Proceedings............................................29
  
      Item 2.     Changes in Securities and Use of Proceeds....................29
  
      Item 3.     Defaults upon Senior Securities..............................29
  
      Item 4.     Submission of Matters to a Vote of Security Holders..........29
  
      Item 5.     Other Information............................................29
  
      Item 6.     Exhibits and Reports on Form 8-K.............................29
  
      Signatures...............................................................32
  
  
  
  
  <PAGE>
  
                           PART I - FINANCIAL INFORMATION
  
  ITEM 1.  CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
  
                                      XOMA Ltd.
                        CONDENSED CONSOLIDATED BALANCE SHEETS
                                   (In thousands)
  
  
  <TABLE>
  <CAPTION>
  
                                                                     September 30,     December 31,
                                                                          2003             2002
                                                                    ----------------- ----------------
  ASSETS                                                              (Unaudited)        (Note A)
  Current assets:
  <S>                                                                    <C>               <C>
       Cash and cash equivalents                                       $      80,078       $   36,262
       Short-term investments                                                    676              391
       Restricted cash                                                             -            1,500
       Receivables                                                            10,657            8,656
       Related party receivables - current                                       100              206
       Inventory                                                                   -            1,306
       Prepaid expenses and other                                              1,093              449
                                                                    ----------------- ----------------
           Total current assets                                               92,604           48,770
  Property and equipment, net                                                 22,050           22,650
  Related party receivables - long-term                                          107              190
  Deposits and other                                                             159              172
                                                                    ----------------- ----------------
           Total assets                                               $      114,920       $   71,782
                                                                    ================= ================
  
  LIABILITIES AND SHAREHOLDERS' EQUITY (Net Capital Deficiency)
  Current liabilities:
       Accounts payable                                               $        2,532       $    3,201
       Accrued liabilities                                                     6,520            7,096
       Short-term loan                                                             -              763
       Capital lease obligations - current                                       530              667
       Deferred revenue - current                                                635            1,729
       Convertible subordinated note - current                                 5,248            5,146
                                                                    ----------------- -----------------
           Total current liabilities                                          15,465           18,602
  
  Capital lease obligations - long-term                                          353              729
  Deferred revenue - long-term                                                     -              800
  Note payable long-term                                                       7,956                -
  Convertible subordinated note - long-term                                   69,282           63,016
                                                                    ----------------- -----------------
           Total liabilities                                                  93,056           83,147
  
  Shareholders' equity (net capital deficiency):
       Common shares                                                              41               36
       Additional paid-in capital                                            601,550          529,354
       Accumulated other comprehensive income                                    153              121
       Accumulated deficit                                                  (579,880)        (540,876)
                                                                    ----------------- -----------------
           Total shareholders' equity (net capital deficiency)                21,864          (11,365)
                                                                    ----------------- -----------------
           Total liabilities and shareholders' equity                 $      114,920      $    71,782
                                                                    ================= =================
  
  </TABLE>
  
  Note A - 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             Nine months ended
                                                                       September 30,                 September 30,
                                                                 -------------------------------- ----------------------------
                                                                       2003             2002          2003         2002
                                                                 -------------------------------- ----------------------------
  
  Revenues:
  <S>                                                            <C>                  <C>             <C>            <C>
     License and collaborative fees                              $          12,050    $    1,423      $   14,125   $    9,076
     Contract and other revenue                                                582         2,810           4,032        9,103
                                                                 ------------------  --------------   -----------  -----------
           Total revenues                                                   12,632         4,233          18,157       18,179
                                                                 ------------------  --------------   -----------  -----------
  
  Operating costs and expenses:
     Research and development                                               15,933         9,701          41,417       30,395
     Marketing, general and administrative                                   6,266         6,416          14,869       15,114
                                                                 ------------------  --------------   ------------  ----------
           Total operating costs and expenses                               22,199        16,117          56,286       45,509
                                                                 ------------------  --------------   ------------  ----------
           Loss from operations                                             (9,567)      (11,884)        (38,129)     (27,330)
  
  Other income (expense):
     Investment and other income                                               166           194             549          698
     Interest expense                                                         (449)         (572)         (1,424)      (1,714)
                                                                 ------------------  --------------   ------------  ----------
           Net loss                                              $          (9,850)   $  (12,262)     $  (39,004)   $ (28,346)
                                                                 ==================  ==============   ============  ==========
  
  Basic and diluted net loss per common share                    $           (0.13)   $    (0.17)     $    (0.54)   $   (0.40)
                                                                 ==================  ==============   ============  ==========
  
  Shares used in computing basic and diluted net loss per
  common share                                                              73,224        70,330          72,371       70,291
                                                                 ==================  ==============   ============  ==========
  </TABLE>
  
  
  
  
                                        -2-
  <PAGE>
  
  
  
                                      XOMA Ltd.
                   CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                              (Unaudited, in thousands)
  
  
  <TABLE>
  <CAPTION>
  
                                                                                                  Nine months ended
                                                                                                    September 30,
                                                                                              ---------------------------
                                                                                                  2003         2002
                                                                                              ---------------------------
  
  Cash flows from operating activities:
  <S>                                                                                          <C>            <C>
        Net loss                                                                               $   (39,004)   $   (28,346)
           Adjustments to reconcile net loss to net cash used in operating activities:
           Depreciation and amortization                                                             2,941          1,332
           Common shares contribution to 401(k) and management incentive plans                         754            541
           Increase in notes to a collaborative partner
               for cost allocations                                                                  2,245          2,050
           Accrued interest on convertible notes                                                     1,292          1,354
           (Gain) loss on disposal/retirement of property and equipment and investments               (298)             1
        Changes in assets and liabilities:
           Receivables and related party and other receivables                                      (1,812)        (4,438)
           Inventory                                                                                 1,306             (7)
           Prepaid expenses and other                                                                 (644)          (484)
           Deposits and other                                                                           13             22
           Accounts payable                                                                           (669)           365
           Accrued liabilities                                                                        (576)         2,577
           Deferred revenue                                                                         (1,894)        (2,510)
                                                                                              ------------- -------------
                Net cash used in operating activities                                              (36,346)       (27,543)
                                                                                              ------------- -------------
  
  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                                    (2,341)        (8,783)
        Proceeds from sale of short-term investments                                                 4,045             -
                                                                                              ------------- -------------
  
                Net cash used in investing activities                                                 (796)        (8,783)
                                                                                              ------------- -------------
  
  Cash flows from financing activities:
        Proceeds from short-term loan                                                                    -          1,000
        Principal payments - short-term loan                                                          (763)            -
        Principal payments under capital lease obligations                                            (513)          (627)
        Proceeds from issuance of convertible notes                                                 10,787          4,020
        Proceeds from issuance of common shares, net of issuance costs                              71,447            474
                                                                                              ------------- -------------
                Net cash provided by financing activities                                           80,958          4,867
                                                                                              ------------- -------------
  
  Net increase (decrease) in cash and cash equivalents                                              43,816        (31,459)
  Cash and cash equivalents at the beginning of the period                                          36,262         67,320
                                                                                              ------------- -------------
  
  Cash and cash equivalents at the end of the period                                              $ 80,078    $    35,861
                                                                                              ============= =============
  
  </TABLE>
  
  
  
                                        -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 adjustments, consisting only of 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 nine months ended September 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 nine months ended September 30, 2003, two
  customers represented 64% and 19% of total revenues and as of September 30, 2003
  there were billed and unbilled receivables outstanding from one of these
  customers of $10,000. For the nine months ended September 30, 2002, three
  customers represented 43%, 28% and 26% of total revenues and as of September 30,
  2002 billed and unbilled receivables totaled $1,725, $4,000, and $232 for these
  customers, respectively.
  
  
  
                                        -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 nine months ended September 30,
  2003 and 2002 (in thousands, except per share amounts):
  
  <TABLE>
  <CAPTION>
  
                                                          Three months ended                 Nine months ended
                                                             September 30,                     September 30,
                                                    --------------------------------  --------------------------------
                                                         2003             2002             2003             2002
                                                    ---------------  ---------------  ---------------  ---------------
  
  <S>                                                <C>             <C>              <C>              <C>
  Net loss - as reported                             $    (9,850)    $     (12,262)   $     (39,004)   $     (28,346)
  Deduct:
  
     Total share-based employee compensation
        expense determined under fair value
        method                                              (838)           (1,013)          (2,441)          (2,859)
                                                    ---------------  ---------------  ---------------  ---------------
  Pro forma net loss                                 $   (10,688)    $     (13,275)   $     (41,445)   $     (31,205)
                                                    ===============  ===============  ===============  ===============
  
  Loss per share:
     Basic and diluted - as reported                 $     (0.13)    $       (0.17)   $       (0.54)   $       (0.40)
     Basic and diluted - pro forma                   $     (0.15)    $       (0.19)   $       (0.57)   $       (0.44)
  
  </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 Nine months ended
                                                        September 30,
                                                 -------------------------------
                                                    2003             2002
                                                 --------------  ---------------
  Dividend yield                                            0%               0%
  Expected volatility                                      93%              99%
  Risk-free interest rate                                1.20%            1.50%
  Expected life                                      5.0 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)
  
       Revenue arrangements with multiple elements are divided into separate units
  of accounting if certain criteria are met, including whether the delivered item
  has value to the customer on a stand-alone basis and whether there is objective
  and reliable evidence of the fair value of the undelivered items. The
  consideration the Company receives is allocated among the separate units of
  accounting based on their respective fair values, and the applicable revenue
  recognition criteria are considered separately for each of the separate units.
  
  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 nine months ended September 30, 2003 and
  2002 are as follows (in thousands):
  
  <TABLE>
  <CAPTION>
                                                                 Three months ended              Nine months ended
                                                                    September 30,                  September 30,
                                                         ---------------------------------------------------------------
                                                                 2003              2002          2003          2002
                                                         --------------------- --------------------------- -------------
  
  <S>                                                         <C>               <C>            <C>            <C>
  Net loss                                                    $       (9,850)   $    (12,262)  $  (39,004)    $  (28,346)
  
  
                                        -6-
  <PAGE>
                                      XOMA Ltd.
          NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
                                     (Unaudited)
  
  
  Unrealized gain (loss) on securities available-for-sale                (75)          12            32             12
                                                         --------------------- ------------ ------------ --------------
  Comprehensive loss                                          $       (9,925)  $  (12,250) $    (38,972) $     (28,334)
                                                         ===================== ============ ============ ==============
  </TABLE>
  
  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 nine months ended September 30, 2003
  and 2002 (in thousands):
  
                                                            Nine months ended
                                                               September 30,
                                                        --------------------------
                                                             2003          2002
                                                        --------------- ----------
  
  Options for shares                                             5,601       4,661
  Warrants for shares                                              700         700
  Convertible notes, debentures and related interest,
    as if converted*                                             9,743      10,577
  
       *    The number of shares, as if converted, represents a conversion price
            equal to the average prevailing market prices as specified in the
            conversion terms of the note.
  
  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
  July of 2003 of EITF Issue No. 00-21 did not have a material impact on its
  consolidated financial position or results of operations.
  
       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
  
  
  
                                        -7-
  <PAGE>
                                      XOMA Ltd.
          NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
                                     (Unaudited)
  
  
  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 at the end of the first
  fiscal year or interim period ending after December 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 December 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 is effective for financial instruments
  entered into or modified after May 31, 2003 except for certain mandatorily
  redeemable financial instruments for which the FASB announced on November 5,
  2003 deferred effective dates for certain provisions of FAS150. The adoption of
  FAS 150 and the subsequent deferred effective dates did not and will 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 related principally to
  the Company's agreement with Baxter Healthcare Corporation ("Baxter") were
  reserved for during the quarter due to the termination of the arrangement in the
  third quarter of 2003 and the determination that the inventories would not be
  sold to Baxter as a result of the agreement termination (in thousands):
  
                                             September 30, December 31,
                                               2003              2002
                                          ----------------  ---------------
  
  Raw materials                            $          202   $          202
  Finished goods                                    1,104            1,104
                                          ----------------  ---------------
                                                    1,306            1,306
  Inventory reserve                        $       (1,306)               -
                                          ----------------  ---------------
  Total                                    $            -   $        1,306
                                          ================  ===============
  
  
  
  
  
                                        -8-
  <PAGE>
                                      XOMA Ltd.
          NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
                                     (Unaudited)
  
  
  Accrued Liabilities
  
  Accrued liabilities consist of the following (in thousands):
  
                                             September 30, December 31,
                                               2003             2002
                                          ---------------- ---------------
  
  Accrued payroll expenses                 $        3,501  $        3,198
  Accrued clinical trial expenses                     623             559
  Accrued legal and other professional
       fees                                         1,630           2,425
  Other                                               766             914
                                          ---------------- ---------------
  Total                                    $        6,520  $        7,096
                                          ================ ===============
  
  
  3.   LICENSE AGREEMENTS AND RELATED CONTINGENCIES
  
       In February of 2002, XOMA and MorphoSys AG ("MorphoSys") 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 were 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. As
  of September 30, 2003, the balance of these shares, totaling $0.3 million, was
  held as available-for-sale and was classified as short-term investments in the
  financial statements. Through September 30, 2003 the Company sold 340,499 shares
  for net proceeds of $4.0 million and a gain on the sale of investment of $0.3
  million was recognized as investment and other income. In October of 2003, the
  remaining shares were sold (see Note 8 Subsequent Events).
  
       In June of 2003, Onyx Pharmaceuticals, Inc. ("Onyx") 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 are expected to be recognized primarily in the fourth quarter of 2003 as
  the Company's service commitments are completed. Additionally, the Company
  accelerated the amortization of $1.0 million remaining in deferred revenue over
  the 120-day notification period.
  
       On July 3, 2003, the Company and Baxter 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
  recognized the $10.0 million termi-
  
  
  
                                        -9-
  <PAGE>
                                      XOMA Ltd.
          NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
                                     (Unaudited)
  
  nation fee as revenue in the third quarter of 2003 and established an inventory
  reserve of $1.3 million and the related charge to research and development
  expense for NEUPREX(R) products that were included in inventory as of September
  30, 2003.
  
  4.   GENENTECH AGREEMENT MODIFICATION
  
       In the first quarter of 2003, the Company's financing arrangement with
  Genentech, Inc. ("Genentech") related to development and commercialization of
  RAPTIVATM (Efalizumab) was modified to provide the following terms:
  
       o    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 was to mature upon the
            earlier of (a) April of 2005, except for advances made after April of
            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 occurred on October 27, 2003; see Note 8 Subsequent
            Events ). At XOMA's election, the convertible subordinated note was to
            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 were triggered by product approval,
            XOMA could 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 September 30, 2003, the outstanding balance
            under this note totaled $69.3 million. On November 3, 2003, XOMA
            announced its election to defer payment of $40.0 million of this debt
            as provided above and to pay the remaining balance (approximately
            $29.3 million) with convertible preference shares (See Note 8
            Subsequent Events).
  
       o    A new $15.0 million debt facility was established to finance XOMA's
            share of U.S. commercialization costs. The note payable was to mature
            upon the earlier of (a) April of 2005, except for advances made after
            April of 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 occurred on October 27, 2003; see
            Note 8 Subsequent Events). The commercial note payable must be repaid
            in cash. At September 30, 2003 the outstanding balance under this note
            totaled approximately $8.0 million.
  
       o    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.
  ("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. In October of
  2003, the remaining commitments available under the agreement were reduced due
  to the discontinuation of one of the products (see Note 8 Subsequent Events).
  
  6.   SALE OF COMMON SHARES.
  
       On September 24, 2003, the Company sold 9,000,000 common shares at a price
  of $8.00 per share in an underwritten public offering. The Company received
  approximately $67.2 million of net proceeds during the third quarter of 2003. In
  October of 2003, the underwriters exercised their over-allotment option and
  purchased an additional 1,350,000 common shares (see Note 8 Subsequent Events).
  
  
  
  
  
                                        -10-
  <PAGE>
                                      XOMA Ltd.
          NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
                                     (Unaudited)
  
  7.   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 participants in one of the Phase III clinical trials of RAPTIVATM .
  The complaint asserts claims for alleged negligence, breach of fiduciary duty,
  fraud, misrepresentation and medial 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 RAPTIVATM during this time, and his claims are based on his failure to
  receive his indicated treatment, not his receipt of RAPTIVATM. 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. XOMA has filed a motion to
  dismiss all claims against it, and discovery has not yet commenced.
  
  8.   SUBSEQUENT EVENTS.
  
       On October 9, 2003, the Company sold the remaining 22,967 shares of
  MorphoSys stock at approximately the net carrying value of those shares and
  received net proceeds of approximately $0.2 million.
  
       On October 10, 2003, the Company announced the discontinuation of
  development of MLN2201, one of two products of ongoing development collaboration
  with Millennium. Under the terms of the amended investment agreement and as a
  result of the termination of the MLN2001 development program, if the Company
  decides to sell common shares to Millennium, the funding amounts will be reduced
  40% from a total of $33.5 million to a total of $20.1 million. Under the terms
  of the development agreement, the Company has no future obligations to pay
  milestone payments to Millennium for this product.
  
       On October 17, 2003, the underwriters for the public offering exercised
  their option to purchase 1,350,000 common shares at $8.00 per share to cover
  over-allotments. The Company received $10.2 million in additional net cash
  proceeds.
  
       On October 27, 2003, the FDA approved RAPTIVA(TM) for the treatment of
  adults with chronic moderate-to-severe plaque psoriasis who are candidates for
  systemic therapy or phototherapy. Under the terms of our financing arrangement
  with Genentech, this approval triggers a 90-day period at the end of which the
  convertible subordinated debt and the commercial note payable (see Note 4
  Genentech Agreement Modification) will mature. The commercial note payable must
  be paid in cash. For payment of the convertible subordinated debt, the Company
  elected pursuant to the development loan agreement 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 and to pay the remaining balance
  (approximately $29.3 million) with preference shares before December 31, 2003.
  These preference shares will be convertible upon issuance into common shares at
  a price of $7.75 per share. The commercial note payable, which had a balance of
  approximately $8.0 million as of September 30, 2003, will be paid in cash in
  January of 2004.
  
  
  
  
                                        -11-
  <PAGE>
  
  
  
  ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
           AND RESULTS OF OPERATIONS
  
  Results of Operations
  
       Revenues for the three months ended September 30, 2003 were $12.6 million
  compared with $4.2 million for the three months ended September 30, 2002, a
  200.0% increase. This increase was primarily due to license revenue for the
  $10.0 million termination fee related to the Company's agreement with Baxter
  Healthcare Corporation ("Baxter") and partially offset by $2.2 million of lower
  development service revenues from Baxter and Onyx Pharmaceuticals, Inc.
  ("Onyx"). Revenues for the nine months ended September 30, 2003 were $18.2
  million compared with $18.2 million for the same period of 2002. License and
  collaborative fee revenue was $14.1 million for the nine months ended September
  30, 2003 compared with $9.1 million for the same period of 2002, a net increase
  of $5.0 million. This change in license revenue represents the $10.0 million
  license termination fee from Baxter partially offset by a decrease in
  amortization of deferred revenue on the Baxter agreement compared with a
  non-recurring $5.0 million license fee from MorphoSys AG ("MorphoSys")
  recognized in the first quarter of 2002. Contract and other revenue was $4.0
  million for the nine months ended September 30, 2003 compared with $9.1 million
  for the same period of 2002, a decrease of $5.1 million primarily due to the
  discontinuance of development services by Baxter and Onyx. In October of 2003,
  the U.S. Food and Drug Administration ("FDA") approved RAPTIVATM (Efalizumab)
  for marketing. The Company expects no material revenues for the fourth quarter
  of 2003 from its 25% share of operating profits and other royalties related to
  RAPTIVATM. Revenues are expected to be lower in the fourth quarter of 2003
  compared with the third quarter due to the non-recurring license fee revenue
  related to Baxter that was recognized in the third quarter of 2003.
  
       Research and development expenses for the three months ended September 30,
  2003 were $15.9 million compared with $9.7 million for the same period of 2002,
  an increase of 63.9%. This increase reflected higher development costs
  associated with CAB-2, RAPTIVATM,, the Company's XMP.629 compound being
  developed for acne and a charge of $1.3 million for an inventory reserve of
  NEUPREX(R) products as a result of the cancellation of product sales associated
  with the termination of the Baxter agreement . This increase was partially
  offset by decreased spending on NEUPREX(R), Onyx-015, ING-1and, MLN2201
  (formerly known as MLN01). In October of 2003, the Company announced the
  discontinuation of development on MLN2201. Research and development expense for
  the nine months ended September 30, 2003 were $41.4 million compared with $30.4
  million in the same period of 2002, an increase of 36.2%. This increase
  reflected higher development costs associated with CAB-2, RAPTIVATM,, MLN2201,
  the Company's XMP.629 compound being developed for acne and a charge of $1.3
  million for the inventory reserve recorded for NEUPREX(R) products inventory
  related to the termination of the Baxter agreement partially offset by lower
  spending on NEUPREX(R), Onyx-015, and ING-1. The Company continues to explore
  new collaborative arrangements that may affect future spending for research and
  development.
  
       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           Nine months ended
                                 September 30,               September 30,
                            ------------------------   ---------------------------
                              2003          2002          2003          2002
                            -----------  -----------   -----------   -------------
  Earlier stage programs    $    11,024  $     4,620   $    27,715   $     15,536
  Later stage programs            4,909        5,081        13,702         14,859
                            -----------  -----------   -----------   -------------
  Total                     $    15,933  $     9,701   $    41,417   $     30,395
                            ===========  ============  ============  =============
  
       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):
  
  
  
                                        -12-
  <PAGE>
  
                               Three months ended           Nine months ended
                                  September 30,               September 30,
                             -------------------------  --------------------------
                               2003          2002          2003          2002
                             ------------  -----------  -------------  -----------
  Internal projects            $    7,282  $     2,991  $     16,782   $    12,605
  Collaborative arrangements        8,651        6,710        24,635        17,790
                               ----------  -----------  -------------  -----------
  Total                        $   15,933  $     9,701  $     41,417   $    30,395
                               ==========  ===========  =============  ===========
  
  
       For the three and nine months ended September 30, 2003, one project
  accounted for approximately 19% and 20%, respectively, 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 nine months ended September
  30, 2003 and 2002.
  
       Marketing, general and administrative expenses for the three months ended
  September 30, 2003 decreased to $6.3 million from $6.4 million for the three
  months ended September 30, 2002. This reflected pre-launch activities for
  RAPTIVATM partially offset by lower legal expenses. Marketing, general and
  administrative expenses for the nine months ended September 30, 2003 were $14.9
  million compared with $15.1 million for the same period of 2002. The net
  decrease of $0.3 million, or 1.0%, primarily represents an increase in
  pre-launch activities for RAPTIVATM and business development expenses, which
  were partially offset by lower legal expenses. RAPTIVATM marketing expenses are
  expected to increase in future quarters related to the product launch
  activities.
  
       Investment income was $0.2 million for the three months ended September 30,
  2003 and 2002 the major components were decreased interest income due to reduced
  cash balances partially offset by gains recognized on the sale of MorphoSys
  shares issued to XOMA on May 6, 2003. Investment income for the nine months
  ended September 30, 2003 decreased to $0.5 million, or 28.6%, compared to $0.7
  million for the same period of 2002. This decrease reflected lower interest
  rates on lower average cash balance. Interest expense for the three and nine
  months ended September 30, 2003 was $0.5 million and $1.4 million, respectively,
  compared to $0.6 million and $1.7 million, respectively, for the three and nine
  months ended September 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
  income is expected to be higher in the fourth quarter of 2003 due to increased
  cash balances.
  
  Liquidity and Capital Resources
  
       Cash, cash equivalents, short-term investments and restricted cash
  increased during the nine months ended September 30, 2003 by $43.8 million to
  $80.1 million at September 30, 2003, compared with $36.3 million at December 31,
  2002. This increase primarily reflects the net cash proceeds received from the
  Company's public offering during the third quarter of 2003.
  
       Net cash used in operating activities was $36.2 million for the nine months
  ended September 30, 2003, compared with $27.5 million for the nine months ended
  September 30, 2002. The increase in 2003 when compared with 2002 primarily
  reflected a higher net loss and reductions in accrued expenses related primarily
  to clinical trials, partially offset by reductions in accounts receivable in
  2003 compared to increases in 2002.
  
       Net cash used in investing activities was $0.9 million for the nine months
  ended September 30, 2003, compared to cash used in investing activities of $8.8
  million for the nine months ended September 30, 2002, a 90.0% decrease. The
  decrease in the first nine months of 2003 when compared to the first nine months
  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 and
  third quarters 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 $81.0 million for the nine
  months ended September 30, 2003, compared with $4.9 million for the nine months
  ended September 30, 2002. Financing activities in the first nine months of 2003
  included $67.2 million in net proceeds from common shares sold under a public
  offering, $10.8 mil-
  
  
  
                                        -13-
  <PAGE>
  
  lion net funding from Genentech, under our development and commercial loan
  agreements, $4.0 million proceeds from common shares sold under our investment
  agreement with Millennium, and $0.2 million from proceeds of common shares
  primarily related to employee share purchase and option incentive programs. This
  was partially offset by principal payments of $1.3 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:
  
       o    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 was to mature upon the
            earlier of (a) April of 2005, except for advances made after April of
            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 occurred on October 27, 2003). At XOMA's election, the
            convertible subordinated note was to 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. XOMA's
            repayment obligation was triggered by the product approval in October
            of 2003. The Company elected to defer payment of $40.0 million as an
            offset against the proceeds from its 25% share of U.S. operating
            profits on the product. The remaining balance (approximately $29.3
            million) will be paid with preference shares before December 31, 2003.
            These preference shares will be convertible upon issuance into common
            shares at a price of $7.75 per share. At September 30, 2003, the
            outstanding balance under this note totaled approximately $69.3
            million.
  
       o    A new $15.0 million debt facility was established to finance XOMA's
            share of U.S. commercialization costs. The note payable was to mature
            upon the earlier of (a) April of 2005, except for advances made after
            April of 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, occurred on October 27, 2003). The
            commercial note must be repaid in cash in January of 2004. At
            September 30, 2003 the outstanding balance under this note totaled
            $8.0 million.
  
       o    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 commitment of $33.5 million available
  under this arrangement, excluding the convertible debt. In October of 2003, the
  Company announced the discontinuation of development of MLN2201, one of the two
  products of an ongoing development agreement with Millennium. Under the terms of
  the amended investment agreement and the termination of the MLN2201development
  program, if the Company decides to sell common shares to Millennium the funding
  amounts will be reduced by 40% from a total of $33.5 million to a total of $20.1
  million.
  
       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. 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, revenue estimates, net proceeds received
  from our recent underwritten public offering, repayment obligations of our debt
  owed to Genentech for our share of RAPTIVA(TM) marketing
  
  
  
                                        -14-
  <PAGE>
  
  costs, deferral of a portion of the development loan from Genentech, issuance of
  shares in repayment of the remainder of the development loan from Genentech and
  financing commitments from Millennium under the collaborative agreement between
  the companies, the Company estimates it has sufficient cash resources, together
  with sources of funding available to us, to meet its current net cash
  consumption levels through at least the end of 2005. Any significant revenue
  shortfalls, or increases in planned spending on development programs could
  shorten this period. The recent FDA approval of RAPTIVATM is 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. Our actual share of
  profits or losses from RAPTIVATM may materially impact our cash reserves.
  Additional licensing arrangements or collaborations or otherwise entering into
  new equity or other financing arrangements could potentially extend or shorten
  this period. 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.
  
       As of September 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               $           -  $         89  $         698   $           -  $       787
  2004                                        -           572          2,894           5,248        8,714
  2005                                    7,956           221          2,890          69,282       80,349
  2006                                        -             -          2,900               -        2,900
  2007                                        -             -          2,730               -        2,730
  Thereafter                                  -             -            708               -          708
                                  -------------  ------------  -------------   -------------- ------------
  Total                           $       7,956  $        882  $      12,820   $      74,530  $    96,188
                                  =============  ============  =============   ============== ============
  </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 occurred on October 27, 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 occurred on October 27, 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 3,000,000 common shares were
  issued in 2001. In the third quarter of 2003, we filed 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. We issued 9,000,000 of
  our registered shares in September of 2003 in an underwritten public offering
  and an additional 1,350,000 of these shares in October of 2003 upon exercise of
  the underwriters' over-allotment option. We will be able to issue the remaining
  9,650,000 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. We are also obligated to file a registration statement
  covering the resale by Genentech of all of the common shares issuable upon
  conver-
  
  
  
                                        -15-
  <PAGE>
  
  sion of the preference shares we have elected to issue to Genentech in repayment
  of our convertible debt owed to them.
  
  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 nine months ended September 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.
  
  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.
  
       Revenue arrangements with multiple elements are divided into separate units
  of accounting if certain criteria are met, including whether the delivered item
  has value to the customer on a stand-alone basis and whether there is objective
  and reliable evidence of the fair value of the undelivered items. The
  consideration the Company receives is allocated among the separate units of
  accounting based on their respective fair values, and the applicable revenue
  recognition criteria are considered separately for each of the separate units.
  
  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.
  
  
  
                                        -16-
  <PAGE>
  
  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, and the sufficiency of its cash resources, as well as other
  statements related to current plans for product development 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; and the sufficiency 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 the
  marketing and sales effort for RAPTIVA(TM) may not be successful due to the
  strength of competition or if physicians do not adopt the product as treatment
  for their patients. These and other risks, including those related to the
  results of pre-clinical testing; the timing or results of pending and future
  clinical trials (including the design and progress of clinical trials; safety
  and efficacy of the products being tested; action, inaction or delay by the FDA,
  European or other regulators or their advisory bodies; and analysis or
  interpretation by, or submission to, these entities or others of scientific
  data); changes in the status of existing collaborative relationships; the
  ability of collaborators and other partners to meet their obligations;
  competition; market demand for products; scale-up and marketing capabilities;
  availability of additional licensing or collaboration opportunities;
  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.
  
  The Marketing And Sales Effort In Support Of Our Only Product To Receive
  Regulatory Approval Has Not Begun And May Not Be Successful.
  
       RAPTIVA(TM), our only product to receive regulatory approval, was approved
  by the FDA on October 27, 2003 for the treatment of chronic moderate-to-severe
  plaque psoriasis in adults who are candidates for systemic therapy or
  phototherapy. Genentech is responsible for the marketing and sales effort in
  support of this product and has not yet commenced, or launched, the full
  intended scope of this effort. Unless and until RAPTIVA(TM) is approved in this
  or other indications outside the United States, our interest in this product in
  this indication is limited to our 25% share of the operating profits from sales
  of the product in the United States. We currently have no active role in this
  marketing and sales effort. Successful commercialization of this product is
  subject to a number of risks, including Genentech's ability to implement its
  marketing and sales effort and achieve sales; the strength of competition from
  other products being marketed or developed to treat psoriasis; physicians' and
  patients' acceptance of RAPTIVA(TM) as a treatment for psoriasis; Genentech's
  ability to provide its manufacturing capacity to meet demand for the product;
  and pricing and reimbursement issues. Many of these risks are discussed in more
  detail below.
  
  Because All Of Our Products Are Still Being Developed, 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 file for bankruptcy protection in extreme circumstances. 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    various human clinical trials and
  
       o    protection of our intellectual property.
  
       Based on current spending levels, revenue estimates, net proceeds received
  from out recent underwritten public offering, repayment obligations of our debt
  owed to Genentech for our share of RAPTIVATM marketing costs, deferral of a
  portion of our development loan from Genentech, issuance of shares in repayment
  of the remainder of our development loan from Genentech and financing
  commitments from Millennium, we estimate we have sufficient cash resources,
  together with sources of funding available to us, to meet our current net cash
  consumption levels through at least the end of 2005. 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. In particular, our share of profits or losses from
  RAPTIVATM may materially impact our cash reserves. 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 the recent 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 also
  requires repayment in cash, shares or deferred repayment of up to $40.0 million
  of amounts owed to Genentech (approximately $77.2 million under both loan
  agreements as of September 30, 2003). In November of 2003, we announced our
  election to defer $40.0 million of such repayment and to repay the remainder of
  the development loan using shares. The commercialization loan is payable only in
  cash and is due in January of 2004. In addition, the receipt of regulatory
  approval terminated Genentech's obligation to continue to loan us our portion of
  commercialization expenses for RAPTIVA(TM).
  
  Most Of Our Therapeutic Products Have Not Received Regulatory Approval. If These
  Products Do Not Receive Regulatory Approval, Neither Our Third Party
  Collaborators Nor We Will Be Able To Manufacture And Market Them.
  
       Our products cannot be manufactured and marketed in the United States and
  other countries without required regulatory approvals. Only one of our
  therapeutic products has received regulatory approval. The United States
  government and governments of other countries extensively regulate many aspects
  of our products, including:
  
       o    testing,
  
       o    manufacturing,
  
  
  
                                        -18-
  <PAGE>
  
       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
  most of our products will be regulated by the FDA as biologics. The FDA has
  recently consolidated its responsibility for reviewing new pharmaceutical
  products into its Center for Drug Evaluation and Research, the body that
  formerly reviewed only 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 might 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,
  
       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 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 the summer of
            2002. 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 completed enrollment
            in a Phase II study of RAPTIVATM as a possible treatment for patients
            with psoriatic arthritis. Although we expect to know preliminary
            results of the psoriatic arthritis trial by the first quarter of 2004,
            we do not know whether or when such testing will demonstrate product
            safety and efficacy in this patient population or result in regulatory
            approval. As is our practice, more details regarding the
  
  
  
                                        -19-
  <PAGE>
  
            clinical data would be revealed at an upcoming medical conference or
            other appropriate scientific, peer-reviewed forum later in 2004.
  
       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.
  
       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 Being Developed, We Have Sustained Losses
  In The Past And We Expect To Sustain Losses In The Future.
  
       We have experienced significant losses and, as of September 30, 2003, we
  had an accumulated deficit of $580.0 million.
  
       For the nine months ended September 30, 2003, we had a net loss of
  approximately $39.0 million, or $0.54 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 sales and marketing
  expenses related to 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 being
  developed, 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 companies further
            expanded the agreement. In October of 2003, RAPTIVA(TM) was approved
            by the FDA for the treatment of chronic moderate-to-severe plaque
            psoriasis.
  
       o    In November of 2001, we entered into a collaboration with Millennium
            to develop two of Millennium's products for certain vascular
            inflammation indications. In October of 2003, we announced that we had
            discontinued one of these products, MLN2201.
  
              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.
  
  
  
                                        -20-
  <PAGE>
  
       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 to scale-up production to
            commercial volume of one of Onyx's cancer products. In June of 2003,
            Onyx notified XOMA that it was discontinuing development of the
            product and terminating the agreement so that it could focus on
            another of its anticancer compounds.
  
       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 November
  11, 2003, our share price has ranged from a high of $12.19 to a low of $2.84. On
  November 11, 2003, the last reported sale price of the common shares as reported
  on the Nasdaq National Market was $6.84 per share. Factors contributing to such
  volatility include, but are not limited to:
  
       o    sales and estimated or forecasted sales of products
  
       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
  
  
  
                                        -21-
  <PAGE>
  
       o    announcements regarding other participants in the biotechnology and
            pharmaceutical industries and
  
       o    market speculation regarding any of the foregoing.
  
  We Or Our Third Party Collaborators May Not Be Able To Increase Existing Or
  Acquire New Manufacturing Capacity Sufficient To Meet Market Demand.
  
       Genentech will be responsible for manufacturing commercial quantities of
  RAPTIVA(TM). Genentech may have difficulty or may not be able to increase its
  manufacturing capacity to produce RAPTIVA(TM) in sufficient quantities to meet
  market demand. If any of our other products are approved, because we have never
  commercially introduced any pharmaceutical products, 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 or our
  third party collaborators 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 Only Recently Received Approval For Our Only Approved Product And We
  Do Not And Cannot Currently Market Any Of Our Other Products For Commercial
  Sale, We Do Not Know Whether There Will Be A Viable Market For Our Products.
  
       Even though we and Genentech recently received FDA approval to market
  RAPTIVA(TM) and even if we receive regulatory approval for our other products,
  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.
  Similarly, physicians may not accept RAPTIVA(TM) if they believe other products
  to be more effective or are more comfortable prescribing other products that
  have been on the market longer than RAPTIVA(TM). Consequently, we do not know if
  physicians or patients will adopt or use our products for their approved
  indications.
  
  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    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 FDA for this medication was
            submitted in July of 2003;
  
       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 systemic therapy or phototherapy and the
            product has been launched in the U.S.;
  
       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    Abbott Laboratories has announced the commencement of a Phase II
            psoriasis trial and Phase III psoriatic arthritis trial of its
            rheumatoid arthritis drug HumiraTM;
  
       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; 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 product developed by
  XOMA.
  
  Even If We Or Our Third Party Collaborators 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 or our third party collaborators 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
  
  
  
                                        -23-
  <PAGE>
  
  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.
  
  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 70 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 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.
  
  
  
                                        -24-
  <PAGE>
  
  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.
  
  The Financial Terms Of Some Of Our Existing Or Future Collaborative Arrangements
  Could Result In Dilution Of Our Share Value.
  
       In November of 2003, we announced that we exercised our option to defer
  payment of $40 million of our convertible loan from Genentech related to the
  development of RAPTIVA(TM) and pay the remaining balance of approximately $29.3
  million under the development loan with preference shares before year-end 2003.
  These preference shares will be convertible upon issuance into common shares at
  a price of approximately $7.75 per share, the price determined under the loan
  agreements at the time we notified Genentech of our election. Although the
  precise numbers remain to be determined, we anticipate issuing preference shares
  convertible into approximately four million common shares in repayment of the
  non-deferred portion of the development loan.
  
       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 $20.1 million worth of common
  shares, excluding the convertible debt, to Millennium through February of 2005.
  The total amount issuable in the remainder of 2003 could be $5.4 million. The
  number of shares to be issued will be based on a conversion price to be
  calculated at the time of conversion. This arrangement, as well as future
  arrangements we may enter into with similar effect, could result in dilution in
  the value of our shares.
  
  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
  transactions relating to our bacterial expression technology, we have in the
  past and may in the future agree to accept equity securities of the licensee in
  payment of license fees. The future value of these or any other shares we
  receive 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 may be subject.
  
  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:
  
       o    imposition of government controls,
  
       o    export license requirements,
  
  
  
                                        -25-
  <PAGE>
  
       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.
  
  We Are Exposed To An Increased Risk Of Product Liability Claims.
  
       The sale, 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 more large, unforeseen awards, such levels may not provide adequate
  coverage. We will seek to obtain additional insurance, if needed, as
  commercialization of RAPTIVA(TM) continues; however, because we have not yet
  determined whether additional insurance is needed, 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.
  
  
  
                                        -26-
  <PAGE>
  
       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 (1) actions against XOMA or our directors and
  officers that are predicated upon the civil liability provisions of the U.S.
  securities laws or (2) 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
  
       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
  
  
  
                                        -27-
  <PAGE>
  
  remains fixed over its term. As of September 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 September 30, 2003:
  
                                                    Fair Value         Average
                                      Maturity    (in thousands)    Interest Rate
                                      --------    --------------    -------------
  Cash equivalents, fixed rate         Daily         $ 80,078           1.05%
  
  Other Market Risk
  
       At September 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%.
  
  
  
  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
  continuing implementation of this new system, there were no changes in the
  Company's internal control over financial reporting during the third fiscal
  quarter of 2003 to which this report relates that have materially affected, or
  are reasonable likely to materially affect, the Company's internal control over
  financial accounting.
  
  
  
  
                                        -28-
  <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.
  XOMA has filed a motion to dismiss all claims against it, and discovery has not
  yet commenced.
  
  ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS
  
       On September 24, 2003, the Company completed a registered offering of
  9,000,000 common shares. On October 21, 2003, the underwriters exercised their
  over-allotment option and purchased an additional 1,350,000 common shares. The
  managing underwriters in the offering were UBS Securities LLC, CIBC World
  Markets Corp., U.S. Bancorp Piper Jaffray Inc., Adams, Harkness & Hill, Inc.,
  Jefferies & Company, Inc. and ThinkEquity Partners LLC. The common shares sold
  in the offering were registered under the Securities Act of 1933, as amended, on
  a Registration Statement on Form S-3 (Reg. No. 333-107929) that was declared
  effective by the SEC on September 8, 2003. After deducting the underwriting
  discounts and offering expenses, the Company received net proceeds from the
  offering, including the issuance to cover the underwriters' over-allotment
  option, of approximately $77.4 million. None of the net proceeds of the offering
  were paid directly or indirectly to any director, officer, general partner of
  ours or our associates, persons owning 10% or more of any class of equity
  securities of ours, or an affiliate of ours.
  
       The Company is using the net proceeds from its September 2003 registered
  offering of common shares for general corporate purposes, including current
  research and development projects, the development of new products or
  technologies, general working capital and operating expenses, leasehold
  improvements and equipment acquisitions. 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
  
       None.
  
  ITEM 5.  OTHER INFORMATION
  
       None.
  
  ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K
  
       Exhibits:
  
            1    Underwriting Agreement dated September 19, 2003 by and among the
                 Company and the underwriters named therein. (Exhibit 2) (1)
  
  
  
                                        -29-
  <PAGE>
  
            10.1 1981 Share Option Plan as amended and restated. (Exhibit 10.1)
                 (2)
  
            10.2 Form of Share Option Agreement for 1981 Share Option Plan.
                 (Exhibit 10.2) (2)
  
            10.3 Restricted Share Plan as amended and restated. (Exhibit 10.3) (2)
  
            10.4 Form of Share Option Agreement for Restricted Share Plan.
                 (Exhibit 10.4) (2)
  
            10.5 Form of Restricted Share Purchase Agreement for Restricted Share
                 Plan. (Exhibit 10.5) (2)
  
            10.6 Management Incentive Compensation Plan as amended and restated.
                 (Exhibit 10.6) (2)
  
            10.7 1992 Directors Share Option Plan as amended and restated.
                 (Exhibit 10.7) (2)
  
            10.8 Form of Share Option Agreement for 1992 Directors Share Option
                 Plan (initial grants). (Exhibit 10.8) (2)
  
            10.9 Form of Share Option Agreement for 1992 Directors Share Option
                 Plan (subsequent). (Exhibit 10.9) (2)
  
            10.10 2002 Director Share Option Plan. (Exhibit 10.10) (2)
  
            10.11 1998 Employee Share Purchase Plan as amended and restated.
                 (Exhibit 10.11) (2)
  
            31.1 Certification of John L. Castello, filed pursuant to Section 302
                 of the Sarbanes-Oxley Act of 2002. (3)
  
            31.2 Certification of Peter D. Davis, filed pursuant to Section 302 of
                 the Sarbanes-Oxley Act of 2002. (3)
  
            32.1 Certification of John L. Castello ,furnished pursuant to Section
                 906 of the Sarbanes-Oxley Act of 2002. (4)
  
            32.2 Certification of Peter D. Davis, furnished pursuant to Section
                 906 of the Sarbanes-Oxley Act of 2002 . (4)
  
            99   Press Release dated November 12, 2003. (4)
  
  ----------
  
  (1)  Incorporated by reference to the referenced exhibit to the Company's Form
       8-K dated September 19, 2003 and filed September 24, 2003 (File No.
       0-14710).
  
  (2)  Incorporated by reference to the referenced exhibit to the Company's
       Registration Statement on Form S-8 filed August 28, 2003 (File No.
       333-108306).
  
  (3)  Filed herewith.
  
  (4)  Furnished herewith.
  
  
  
  
  
                                        -30-
  <PAGE>
  
  Reports on Form 8-K:
  
  1.   Current Report on Form 8-K dated September 9, 2003 and filed on September
       10, 2003 (file no. 0-14710).
  
  2.   Current Report on Form 8-K dated September 19, 2003 and filed on September
       24, 2003 (file no. 0-14710).
  
  
  
  
                                        -31-
  <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:    November 12, 2003           By:  /s/ JOHN L. CASTELLO
                                            -------------------------------------
                                            John L. Castello
                                            Chairman of the Board, President and
                                            Chief Executive Officer
  
  
  
  Date:    November 12, 2003           By:  /s/ PETER D. DAVIS
                                            -------------------------------------
                                            Peter D. Davis
                                            Vice President, Finance and
                                            Chief Financial Officer
  
  
  
  
  
                                        -32-
  <PAGE>
  
  
  
                                                                      Exhibit 31.1
  
  
                                    Certification
              Pursuant to Section 302 Of The Sarbanes-Oxley Act Of 2002
                (Chapter 63, Title 18 U.S.C. Section 1350(A) And (B))
  
  
  I, John L. Castello, certify that:
  
  
  1.   I have reviewed this quarterly report on Form 10-Q of XOMA Ltd.;
  
  2.   Based on my knowledge, this report does not contain any untrue statement of
       a material fact or omit to state a material fact necessary to make the
       statements made, in light of the circumstances under which such statements
       were made, not misleading with respect to the period covered by this
       report;
  
  3.   Based on my knowledge, the financial statements, and other financial
       information included in this report, fairly present in all material
       respects the financial condition, results of operations and cash flows of
       the registrant as of, and for, the periods presented in this report;
  
  4.   The registrant's other certifying officers and I are responsible for
       establishing and maintaining disclosure controls and procedures (as defined
       in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we
       have:
  
       a)   Designed such disclosure controls and procedures, or caused such
            disclosure controls and procedures to be designed under our
            supervision, to ensure that material information relating to the
            registrant, including its consolidated subsidiaries, is made known to
            us by others within those entities, particularly during the period in
            which this report is being prepared;
  
       b)   Evaluated the effectiveness of the registrant's disclosure controls
            and procedures and presented in this report our conclusions about the
            effectiveness of the disclosure controls and procedures, as of the end
            of the period covered by this report based on such evaluation; and
  
       c)   Disclosed in this report any change in the registrant's internal
            control over financial reporting that occurred during the registrant's
            most recent fiscal quarter that has materially affected, or is
            reasonably likely to materially affect, the registrant's internal
            control over financial reporting; and
  
  5.   The registrant's other certifying officers and I have disclosed, based on
       our most recent evaluation of internal control over financial reporting, to
       the registrant's auditors and the audit committee of registrant's board of
       directors (or persons performing the equivalent function):
  
       a)   All significant deficiencies and material weaknesses in the design or
            operation of internal control over financial reporting which are
            reasonably likely to adversely affect the registrant's ability to
            record, process, summarize and report financial information; and
  
       b)   Any fraud, whether or not material, that involves management or other
            employees who have a significant role in the registrant's internal
            control over financial reporting.
  
  
  
  Date:  November 12, 2003           /s/ John L. Castello
                                     --------------------
                                     John L. Castello
                                     Chairman of the Board, President and
                                     Chief Executive Officer
  
  
                                        -33-
  <PAGE>
  
                                                                      Exhibit 31.2
  
  
                                    Certification
              Pursuant to Section 302 Of The Sarbanes-Oxley Act Of 2002
                (Chapter 63, Title 18 U.S.C. Section 1350(A) And (B))
  
  
  I, Peter B. Davis, certify that:
  
  
  1.   I have reviewed this quarterly report on Form 10-Q of XOMA Ltd.;
  
  2.   Based on my knowledge, this report does not contain any untrue statement of
       a material fact or omit to state a material fact necessary to make the
       statements made, in light of the circumstances under which such statements
       were made, not misleading with respect to the period covered by this
       report;
  
  3.   Based on my knowledge, the financial statements, and other financial
       information included in this report, fairly present in all material
       respects the financial condition, results of operations and cash flows of
       the registrant as of, and for, the periods presented in this report;
  
  4.   The registrant's other certifying officers and I are responsible for
       establishing and maintaining disclosure controls and procedures (as defined
       in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we
       have:
  
       a)   Designed such disclosure controls and procedures, or caused such
            disclosure controls and procedures to be designed under our
            supervision, to ensure that material information relating to the
            registrant, including its consolidated subsidiaries, is made known to
            us by others within those entities, particularly during the period in
            which this report is being prepared;
  
       b)   Evaluated the effectiveness of the registrant's disclosure controls
            and procedures and presented in this report our conclusions about the
            effectiveness of the disclosure controls and procedures, as of the end
            of the period covered by this report based on such evaluation; and
  
       c)   Disclosed in this report any change in the registrant's internal
            control over financial reporting that occurred during the registrant's
            most recent fiscal quarter that has materially affected, or is
            reasonably likely to materially affect, the registrant's internal
            control over financial reporting; and
  
  5.   The registrant's other certifying officers and I have disclosed, based on
       our most recent evaluation of internal control over financial reporting, to
       the registrant's auditors and the audit committee of registrant's board of
       directors (or persons performing the equivalent function):
  
       a)   All significant deficiencies and material weaknesses in the design or
            operation of internal control over financial reporting which are
            reasonably likely to adversely affect the registrant's ability to
            record, process, summarize and report financial information; and
  
       b)   Any fraud, whether or not material, that involves management or other
            employees who have a significant role in the registrant's internal
            control over financial reporting.
  
  
  
  Date:  November 12, 2003          /s/ Peter B. Davis
                                    ------------------
                                    Peter B. Davis
                                    Vice President, Finance and
                                    Chief Financial Officer
  
  
  
  
  
                                        -34-
  <PAGE>
  
                                                                      Exhibit 32.1
  
  
                                    Certification
              Pursuant to Section 906 Of The Sarbanes-Oxley Act Of 2002
                (Chapter 63, Title 18 U.S.C. Section 1350(A) And (B))
  
  
  Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chapter 63, Title 18
  U.S.C. Section 1350(a) and (b)), the undersigned hereby certifies in his
  capacity as an officer of XOMA Ltd. (the "Company") that the Quarterly Report of
  the Company on Form 10-Q for the period ended September 30, 2003 fully complies
  with the requirements of Section 13(a) of the Securities Exchange Act of 1934,
  as amended, and that the information contained in such report fairly presents,
  in all material respects, the financial condition and results of operations of
  the Company at the end of and for the periods covered by such Report.
  
  Date:  November 12, 2003          /s/ John L. Castello
                                    --------------------
                                    John L. Castello
                                    Chairman of the Board, President
                                    and Chief Executive Officer
  
  This certification will not be deemed filed for purposes of Section 18 of the
  Exchange Act (15 U.S.C. 78), or otherwise subject to the liability of that
  section. Such certification will not be deemed to be incorporated by reference
  into any filing under the Securities Act or the Exchange Act, except to the
  extent that the registrant specifically incorporates it by reference.
  
  
  
                                        -35-
  <PAGE>
  
  
  
                                                                      Exhibit 32.2
  
  
                                    Certification
              Pursuant to Section 906 Of The Sarbanes-Oxley Act Of 2002
                (Chapter 63, Title 18 U.S.C. Section 1350(A) And (B))
  
  
  Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chapter 63, Title 18
  U.S.C. Section 1350(a) and (b)), the undersigned hereby certifies in his
  capacity as an officer of XOMA Ltd. (the "Company") that the Quarterly Report of
  the Company on Form 10-Q for the period ended September 30, 2003 fully complies
  with the requirements of Section 13(a) of the Securities Exchange Act of 1934,
  as amended, and that the information contained in such report fairly presents,
  in all material respects, the financial condition and results of operations of
  the Company at the end of and for the periods covered by such Report.
  
  Date:  November 12, 2003          /s/ Peter B. Davis
                                    ------------------
                                    Peter B. Davis
                                    Vice President, Finance and
                                    Chief Financial Officer
  
  This certification will not be deemed filed for purposes of Section 18 of the
  Exchange Act (15 U.S.C. 78), or otherwise subject to the liability of that
  section. Such certification will not be deemed to be incorporated by reference
  into any filing under the Securities Act or the Exchange Act, except to the
  extent that the registrant specifically incorporates it by reference.
  
  
  
  
  
  
  
                                        -36-
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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 September 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          83,126,916
  Class                                     Outstanding at November 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
                     September 30, 2003 and December 31, 2002...................1
  
                  Condensed Consolidated Statements of Operations for the
                     Three and Nine Months Ended September 30, 2003 and 2002....2
  
                  Condensed Consolidated Statements of Cash Flows for the
                     Nine Months Ended September 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.................................12
  
      Item 3.     Quantitative and Qualitative Disclosures About Market Risk...27
  
      Item 4.     Controls and Procedures......................................28
  
  PART II OTHER INFORMATION
  
      Item 1.     Legal Proceedings............................................29
  
      Item 2.     Changes in Securities and Use of Proceeds....................29
  
      Item 3.     Defaults upon Senior Securities..............................29
  
      Item 4.     Submission of Matters to a Vote of Security Holders..........29
  
      Item 5.     Other Information............................................29
  
      Item 6.     Exhibits and Reports on Form 8-K.............................29
  
      Signatures...............................................................32
  PART I - FINANCIAL INFORMATION
  
  ITEM 1.  CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
  
                                      XOMA Ltd.
                        CONDENSED CONSOLIDATED BALANCE SHEETS
                                   (In thousands)
  September 30,     December 31,
                                                                          2003             2002
                                                                    ----------------- ----------------
  ASSETS                                                              (Unaudited)        (Note A)
  Current assets:
  Cash and cash equivalents                                       $      80,078       $   36,262
       Short-term investments                                                    676              391
       Restricted cash                                                             -            1,500
       Receivables                                                            10,657            8,656
       Related party receivables - current                                       100              206
       Inventory                                                                   -            1,306
       Prepaid expenses and other                                              1,093              449
                                                                    ----------------- ----------------
           Total current assets                                               92,604           48,770
  Property and equipment, net                                                 22,050           22,650
  Related party receivables - long-term                                          107              190
  Deposits and other                                                             159              172
                                                                    ----------------- ----------------
           Total assets                                               $      114,920       $   71,782
                                                                    ================= ================
  
  LIABILITIES AND SHAREHOLDERS' EQUITY (Net Capital Deficiency)
  Current liabilities:
       Accounts payable                                               $        2,532       $    3,201
       Accrued liabilities                                                     6,520            7,096
       Short-term loan                                                             -              763
       Capital lease obligations - current                                       530              667
       Deferred revenue - current                                                635            1,729
       Convertible subordinated note - current                                 5,248            5,146
                                                                    ----------------- -----------------
           Total current liabilities                                          15,465           18,602
  
  Capital lease obligations - long-term                                          353              729
  Deferred revenue - long-term                                                     -              800
  Note payable long-term                                                       7,956                -
  Convertible subordinated note - long-term                                   69,282           63,016
                                                                    ----------------- -----------------
           Total liabilities                                                  93,056           83,147
  
  Shareholders' equity (net capital deficiency):
       Common shares                                                              41               36
       Additional paid-in capital                                            601,550          529,354
       Accumulated other comprehensive income                                    153              121
       Accumulated deficit                                                  (579,880)        (540,876)
                                                                    ----------------- -----------------
           Total shareholders' equity (net capital deficiency)                21,864          (11,365)
                                                                    ----------------- -----------------
           Total liabilities and shareholders' equity                 $      114,920      $    71,782
                                                                    ================= =================
  Note A - 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             Nine months ended
                                                                       September 30,                 September 30,
                                                                 -------------------------------- ----------------------------
                                                                       2003             2002          2003         2002
                                                                 -------------------------------- ----------------------------
  
  Revenues:
  License and collaborative fees                              $          12,050    $    1,423      $   14,125   $    9,076
     Contract and other revenue                                                582         2,810           4,032        9,103
                                                                 ------------------  --------------   -----------  -----------
           Total revenues                                                   12,632         4,233          18,157       18,179
                                                                 ------------------  --------------   -----------  -----------
  
  Operating costs and expenses:
     Research and development                                               15,933         9,701          41,417       30,395
     Marketing, general and administrative                                   6,266         6,416          14,869       15,114
                                                                 ------------------  --------------   ------------  ----------
           Total operating costs and expenses                               22,199        16,117          56,286       45,509
                                                                 ------------------  --------------   ------------  ----------
           Loss from operations                                             (9,567)      (11,884)        (38,129)     (27,330)
  
  Other income (expense):
     Investment and other income                                               166           194             549          698
     Interest expense                                                         (449)         (572)         (1,424)      (1,714)
                                                                 ------------------  --------------   ------------  ----------
           Net loss                                              $          (9,850)   $  (12,262)     $  (39,004)   $ (28,346)
                                                                 ==================  ==============   ============  ==========
  
  Basic and diluted net loss per common share                    $           (0.13)   $    (0.17)     $    (0.54)   $   (0.40)
                                                                 ==================  ==============   ============  ==========
  
  Shares used in computing basic and diluted net loss per
  common share                                                              73,224        70,330          72,371       70,291
                                                                 ==================  ==============   ============  ==========
  -2-
  XOMA Ltd.
                   CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                              (Unaudited, in thousands)
  Nine months ended
                                                                                                    September 30,
                                                                                              ---------------------------
                                                                                                  2003         2002
                                                                                              ---------------------------
  
  Cash flows from operating activities:
  Net loss                                                                               $   (39,004)   $   (28,346)
           Adjustments to reconcile net loss to net cash used in operating activities:
           Depreciation and amortization                                                             2,941          1,332
           Common shares contribution to 401(k) and management incentive plans                         754            541
           Increase in notes to a collaborative partner
               for cost allocations                                                                  2,245          2,050
           Accrued interest on convertible notes                                                     1,292          1,354
           (Gain) loss on disposal/retirement of property and equipment and investments               (298)             1
        Changes in assets and liabilities:
           Receivables and related party and other receivables                                      (1,812)        (4,438)
           Inventory                                                                                 1,306             (7)
           Prepaid expenses and other                                                                 (644)          (484)
           Deposits and other                                                                           13             22
           Accounts payable                                                                           (669)           365
           Accrued liabilities                                                                        (576)         2,577
           Deferred revenue                                                                         (1,894)        (2,510)
                                                                                              ------------- -------------
                Net cash used in operating activities                                              (36,346)       (27,543)
                                                                                              ------------- -------------
  
  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                                    (2,341)        (8,783)
        Proceeds from sale of short-term investments                                                 4,045             -
                                                                                              ------------- -------------
  
                Net cash used in investing activities                                                 (796)        (8,783)
                                                                                              ------------- -------------
  
  Cash flows from financing activities:
        Proceeds from short-term loan                                                                    -          1,000
        Principal payments - short-term loan                                                          (763)            -
        Principal payments under capital lease obligations                                            (513)          (627)
        Proceeds from issuance of convertible notes                                                 10,787          4,020
        Proceeds from issuance of common shares, net of issuance costs                              71,447            474
                                                                                              ------------- -------------
                Net cash provided by financing activities                                           80,958          4,867
                                                                                              ------------- -------------
  
  Net increase (decrease) in cash and cash equivalents                                              43,816        (31,459)
  Cash and cash equivalents at the beginning of the period                                          36,262         67,320
                                                                                              ------------- -------------
  
  Cash and cash equivalents at the end of the period                                              $ 80,078    $    35,861
                                                                                              ============= =============
  -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 adjustments, consisting only of 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 nine months ended September 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 nine months ended September 30, 2003, two
  customers represented 64% and 19% of total revenues and as of September 30, 2003
  there were billed and unbilled receivables outstanding from one of these
  customers of $10,000. For the nine months ended September 30, 2002, three
  customers represented 43%, 28% and 26% of total revenues and as of September 30,
  2002 billed and unbilled receivables totaled $1,725, $4,000, and $232 for these
  customers, respectively.
  
                                        -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 nine months ended September 30,
  2003 and 2002 (in thousands, except per share amounts):
  Three months ended                 Nine months ended
                                                             September 30,                     September 30,
                                                    --------------------------------  --------------------------------
                                                         2003             2002             2003             2002
                                                    ---------------  ---------------  ---------------  ---------------
  Net loss - as reported                             $    (9,850)    $     (12,262)   $     (39,004)   $     (28,346)
  Deduct:
  
     Total share-based employee compensation
        expense determined under fair value
        method                                              (838)           (1,013)          (2,441)          (2,859)
                                                    ---------------  ---------------  ---------------  ---------------
  Pro forma net loss                                 $   (10,688)    $     (13,275)   $     (41,445)   $     (31,205)
                                                    ===============  ===============  ===============  ===============
  
  Loss per share:
     Basic and diluted - as reported                 $     (0.13)    $       (0.17)   $       (0.54)   $       (0.40)
     Basic and diluted - pro forma                   $     (0.15)    $       (0.19)   $       (0.57)   $       (0.44)
  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 Nine months ended
                                                        September 30,
                                                 -------------------------------
                                                    2003             2002
                                                 --------------  ---------------
  Dividend yield                                            0%               0%
  Expected volatility                                      93%              99%
  Risk-free interest rate                                1.20%            1.50%
  Expected life                                      5.0 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)
  
       Revenue arrangements with multiple elements are divided into separate units
  of accounting if certain criteria are met, including whether the delivered item
  has value to the customer on a stand-alone basis and whether there is objective
  and reliable evidence of the fair value of the undelivered items. The
  consideration the Company receives is allocated among the separate units of
  accounting based on their respective fair values, and the applicable revenue
  recognition criteria are considered separately for each of the separate units.
  
  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 nine months ended September 30, 2003 and
  2002 are as follows (in thousands):
  Three months ended              Nine months ended
                                                                    September 30,                  September 30,
                                                         ---------------------------------------------------------------
                                                                 2003              2002          2003          2002
                                                         --------------------- --------------------------- -------------
  Net loss                                                    $       (9,850)   $    (12,262)  $  (39,004)    $  (28,346)
  
                                        -6-
  XOMA Ltd.
          NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
                                     (Unaudited)
  
  Unrealized gain (loss) on securities available-for-sale                (75)          12            32             12
                                                         --------------------- ------------ ------------ --------------
  Comprehensive loss                                          $       (9,925)  $  (12,250) $    (38,972) $     (28,334)
                                                         ===================== ============ ============ ==============
  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 nine months ended September 30, 2003
  and 2002 (in thousands):
  
                                                            Nine months ended
                                                               September 30,
                                                        --------------------------
                                                             2003          2002
                                                        --------------- ----------
  
  Options for shares                                             5,601       4,661
  Warrants for shares                                              700         700
  Convertible notes, debentures and related interest,
    as if converted*                                             9,743      10,577
  
       *    The number of shares, as if converted, represents a conversion price
            equal to the average prevailing market prices as specified in the
            conversion terms of the note.
  
  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
  July of 2003 of EITF Issue No. 00-21 did not have a material impact on its
  consolidated financial position or results of operations.
  
       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
  
                                        -7-
  XOMA Ltd.
          NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
                                     (Unaudited)
  
  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 at the end of the first
  fiscal year or interim period ending after December 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 December 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 is effective for financial instruments
  entered into or modified after May 31, 2003 except for certain mandatorily
  redeemable financial instruments for which the FASB announced on November 5,
  2003 deferred effective dates for certain provisions of FAS150. The adoption of
  FAS 150 and the subsequent deferred effective dates did not and will 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 related principally to
  the Company's agreement with Baxter Healthcare Corporation ("Baxter") were
  reserved for during the quarter due to the termination of the arrangement in the
  third quarter of 2003 and the determination that the inventories would not be
  sold to Baxter as a result of the agreement termination (in thousands):
  
                                             September 30, December 31,
                                               2003              2002
                                          ----------------  ---------------
  
  Raw materials                            $          202   $          202
  Finished goods                                    1,104            1,104
                                          ----------------  ---------------
                                                    1,306            1,306
  Inventory reserve                        $       (1,306)               -
                                          ----------------  ---------------
  Total                                    $            -   $        1,306
                                          ================  ===============
  
                                        -8-
  XOMA Ltd.
          NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
                                     (Unaudited)
  
  Accrued Liabilities
  
  Accrued liabilities consist of the following (in thousands):
  
                                             September 30, December 31,
                                               2003             2002
                                          ---------------- ---------------
  
  Accrued payroll expenses                 $        3,501  $        3,198
  Accrued clinical trial expenses                     623             559
  Accrued legal and other professional
       fees                                         1,630           2,425
  Other                                               766             914
                                          ---------------- ---------------
  Total                                    $        6,520  $        7,096
                                          ================ ===============
  
  3.   LICENSE AGREEMENTS AND RELATED CONTINGENCIES
  
       In February of 2002, XOMA and MorphoSys AG ("MorphoSys") 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 were 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. As
  of September 30, 2003, the balance of these shares, totaling $0.3 million, was
  held as available-for-sale and was classified as short-term investments in the
  financial statements. Through September 30, 2003 the Company sold 340,499 shares
  for net proceeds of $4.0 million and a gain on the sale of investment of $0.3
  million was recognized as investment and other income. In October of 2003, the
  remaining shares were sold (see Note 8 Subsequent Events).
  
       In June of 2003, Onyx Pharmaceuticals, Inc. ("Onyx") 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 are expected to be recognized primarily in the fourth quarter of 2003 as
  the Company's service commitments are completed. Additionally, the Company
  accelerated the amortization of $1.0 million remaining in deferred revenue over
  the 120-day notification period.
  
       On July 3, 2003, the Company and Baxter 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
  recognized the $10.0 million termi-
  
                                        -9-
  XOMA Ltd.
          NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
                                     (Unaudited)
  
  nation fee as revenue in the third quarter of 2003 and established an inventory
  reserve of $1.3 million and the related charge to research and development
  expense for NEUPREX(R) products that were included in inventory as of September
  30, 2003.
  
  4.   GENENTECH AGREEMENT MODIFICATION
  
       In the first quarter of 2003, the Company's financing arrangement with
  Genentech, Inc. ("Genentech") related to development and commercialization of
  RAPTIVATM (Efalizumab) was modified to provide the following terms:
  
       o    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 was to mature upon the
            earlier of (a) April of 2005, except for advances made after April of
            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 occurred on October 27, 2003; see Note 8 Subsequent
            Events ). At XOMA's election, the convertible subordinated note was to
            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 were triggered by product approval,
            XOMA could 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 September 30, 2003, the outstanding balance
            under this note totaled $69.3 million. On November 3, 2003, XOMA
            announced its election to defer payment of $40.0 million of this debt
            as provided above and to pay the remaining balance (approximately
            $29.3 million) with convertible preference shares (See Note 8
            Subsequent Events).
  
       o    A new $15.0 million debt facility was established to finance XOMA's
            share of U.S. commercialization costs. The note payable was to mature
            upon the earlier of (a) April of 2005, except for advances made after
            April of 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 occurred on October 27, 2003; see
            Note 8 Subsequent Events). The commercial note payable must be repaid
            in cash. At September 30, 2003 the outstanding balance under this note
            totaled approximately $8.0 million.
  
       o    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.
  ("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. In October of
  2003, the remaining commitments available under the agreement were reduced due
  to the discontinuation of one of the products (see Note 8 Subsequent Events).
  
  6.   SALE OF COMMON SHARES.
  
       On September 24, 2003, the Company sold 9,000,000 common shares at a price
  of $8.00 per share in an underwritten public offering. The Company received
  approximately $67.2 million of net proceeds during the third quarter of 2003. In
  October of 2003, the underwriters exercised their over-allotment option and
  purchased an additional 1,350,000 common shares (see Note 8 Subsequent Events).
  
                                        -10-
  XOMA Ltd.
          NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
                                     (Unaudited)
  
  7.   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 participants in one of the Phase III clinical trials of RAPTIVATM .
  The complaint asserts claims for alleged negligence, breach of fiduciary duty,
  fraud, misrepresentation and medial 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 RAPTIVATM during this time, and his claims are based on his failure to
  receive his indicated treatment, not his receipt of RAPTIVATM. 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. XOMA has filed a motion to
  dismiss all claims against it, and discovery has not yet commenced.
  
  8.   SUBSEQUENT EVENTS.
  
       On October 9, 2003, the Company sold the remaining 22,967 shares of
  MorphoSys stock at approximately the net carrying value of those shares and
  received net proceeds of approximately $0.2 million.
  
       On October 10, 2003, the Company announced the discontinuation of
  development of MLN2201, one of two products of ongoing development collaboration
  with Millennium. Under the terms of the amended investment agreement and as a
  result of the termination of the MLN2001 development program, if the Company
  decides to sell common shares to Millennium, the funding amounts will be reduced
  40% from a total of $33.5 million to a total of $20.1 million. Under the terms
  of the development agreement, the Company has no future obligations to pay
  milestone payments to Millennium for this product.
  
       On October 17, 2003, the underwriters for the public offering exercised
  their option to purchase 1,350,000 common shares at $8.00 per share to cover
  over-allotments. The Company received $10.2 million in additional net cash
  proceeds.
  
       On October 27, 2003, the FDA approved RAPTIVA(TM) for the treatment of
  adults with chronic moderate-to-severe plaque psoriasis who are candidates for
  systemic therapy or phototherapy. Under the terms of our financing arrangement
  with Genentech, this approval triggers a 90-day period at the end of which the
  convertible subordinated debt and the commercial note payable (see Note 4
  Genentech Agreement Modification) will mature. The commercial note payable must
  be paid in cash. For payment of the convertible subordinated debt, the Company
  elected pursuant to the development loan agreement 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 and to pay the remaining balance
  (approximately $29.3 million) with preference shares before December 31, 2003.
  These preference shares will be convertible upon issuance into common shares at
  a price of $7.75 per share. The commercial note payable, which had a balance of
  approximately $8.0 million as of September 30, 2003, will be paid in cash in
  January of 2004.
  
                                        -11-
  ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
           AND RESULTS OF OPERATIONS
  
  Results of Operations
  
       Revenues for the three months ended September 30, 2003 were $12.6 million
  compared with $4.2 million for the three months ended September 30, 2002, a
  200.0% increase. This increase was primarily due to license revenue for the
  $10.0 million termination fee related to the Company's agreement with Baxter
  Healthcare Corporation ("Baxter") and partially offset by $2.2 million of lower
  development service revenues from Baxter and Onyx Pharmaceuticals, Inc.
  ("Onyx"). Revenues for the nine months ended September 30, 2003 were $18.2
  million compared with $18.2 million for the same period of 2002. License and
  collaborative fee revenue was $14.1 million for the nine months ended September
  30, 2003 compared with $9.1 million for the same period of 2002, a net increase
  of $5.0 million. This change in license revenue represents the $10.0 million
  license termination fee from Baxter partially offset by a decrease in
  amortization of deferred revenue on the Baxter agreement compared with a
  non-recurring $5.0 million license fee from MorphoSys AG ("MorphoSys")
  recognized in the first quarter of 2002. Contract and other revenue was $4.0
  million for the nine months ended September 30, 2003 compared with $9.1 million
  for the same period of 2002, a decrease of $5.1 million primarily due to the
  discontinuance of development services by Baxter and Onyx. In October of 2003,
  the U.S. Food and Drug Administration ("FDA") approved RAPTIVATM (Efalizumab)
  for marketing. The Company expects no material revenues for the fourth quarter
  of 2003 from its 25% share of operating profits and other royalties related to
  RAPTIVATM. Revenues are expected to be lower in the fourth quarter of 2003
  compared with the third quarter due to the non-recurring license fee revenue
  related to Baxter that was recognized in the third quarter of 2003.
  
       Research and development expenses for the three months ended September 30,
  2003 were $15.9 million compared with $9.7 million for the same period of 2002,
  an increase of 63.9%. This increase reflected higher development costs
  associated with CAB-2, RAPTIVATM,, the Company's XMP.629 compound being
  developed for acne and a charge of $1.3 million for an inventory reserve of
  NEUPREX(R) products as a result of the cancellation of product sales associated
  with the termination of the Baxter agreement . This increase was partially
  offset by decreased spending on NEUPREX(R), Onyx-015, ING-1and, MLN2201
  (formerly known as MLN01). In October of 2003, the Company announced the
  discontinuation of development on MLN2201. Research and development expense for
  the nine months ended September 30, 2003 were $41.4 million compared with $30.4
  million in the same period of 2002, an increase of 36.2%. This increase
  reflected higher development costs associated with CAB-2, RAPTIVATM,, MLN2201,
  the Company's XMP.629 compound being developed for acne and a charge of $1.3
  million for the inventory reserve recorded for NEUPREX(R) products inventory
  related to the termination of the Baxter agreement partially offset by lower
  spending on NEUPREX(R), Onyx-015, and ING-1. The Company continues to explore
  new collaborative arrangements that may affect future spending for research and
  development.
  
       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           Nine months ended
                                 September 30,               September 30,
                            ------------------------   ---------------------------
                              2003          2002          2003          2002
                            -----------  -----------   -----------   -------------
  Earlier stage programs    $    11,024  $     4,620   $    27,715   $     15,536
  Later stage programs            4,909        5,081        13,702         14,859
                            -----------  -----------   -----------   -------------
  Total                     $    15,933  $     9,701   $    41,417   $     30,395
                            ===========  ============  ============  =============
  
       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):
  
                                        -12-
  Three months ended           Nine months ended
                                  September 30,               September 30,
                             -------------------------  --------------------------
                               2003          2002          2003          2002
                             ------------  -----------  -------------  -----------
  Internal projects            $    7,282  $     2,991  $     16,782   $    12,605
  Collaborative arrangements        8,651        6,710        24,635        17,790
                               ----------  -----------  -------------  -----------
  Total                        $   15,933  $     9,701  $     41,417   $    30,395
                               ==========  ===========  =============  ===========
  
       For the three and nine months ended September 30, 2003, one project
  accounted for approximately 19% and 20%, respectively, 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 nine months ended September
  30, 2003 and 2002.
  
       Marketing, general and administrative expenses for the three months ended
  September 30, 2003 decreased to $6.3 million from $6.4 million for the three
  months ended September 30, 2002. This reflected pre-launch activities for
  RAPTIVATM partially offset by lower legal expenses. Marketing, general and
  administrative expenses for the nine months ended September 30, 2003 were $14.9
  million compared with $15.1 million for the same period of 2002. The net
  decrease of $0.3 million, or 1.0%, primarily represents an increase in
  pre-launch activities for RAPTIVATM and business development expenses, which
  were partially offset by lower legal expenses. RAPTIVATM marketing expenses are
  expected to increase in future quarters related to the product launch
  activities.
  
       Investment income was $0.2 million for the three months ended September 30,
  2003 and 2002 the major components were decreased interest income due to reduced
  cash balances partially offset by gains recognized on the sale of MorphoSys
  shares issued to XOMA on May 6, 2003. Investment income for the nine months
  ended September 30, 2003 decreased to $0.5 million, or 28.6%, compared to $0.7
  million for the same period of 2002. This decrease reflected lower interest
  rates on lower average cash balance. Interest expense for the three and nine
  months ended September 30, 2003 was $0.5 million and $1.4 million, respectively,
  compared to $0.6 million and $1.7 million, respectively, for the three and nine
  months ended September 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
  income is expected to be higher in the fourth quarter of 2003 due to increased
  cash balances.
  
  Liquidity and Capital Resources
  
       Cash, cash equivalents, short-term investments and restricted cash
  increased during the nine months ended September 30, 2003 by $43.8 million to
  $80.1 million at September 30, 2003, compared with $36.3 million at December 31,
  2002. This increase primarily reflects the net cash proceeds received from the
  Company's public offering during the third quarter of 2003.
  
       Net cash used in operating activities was $36.2 million for the nine months
  ended September 30, 2003, compared with $27.5 million for the nine months ended
  September 30, 2002. The increase in 2003 when compared with 2002 primarily
  reflected a higher net loss and reductions in accrued expenses related primarily
  to clinical trials, partially offset by reductions in accounts receivable in
  2003 compared to increases in 2002.
  
       Net cash used in investing activities was $0.9 million for the nine months
  ended September 30, 2003, compared to cash used in investing activities of $8.8
  million for the nine months ended September 30, 2002, a 90.0% decrease. The
  decrease in the first nine months of 2003 when compared to the first nine months
  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 and
  third quarters 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 $81.0 million for the nine
  months ended September 30, 2003, compared with $4.9 million for the nine months
  ended September 30, 2002. Financing activities in the first nine months of 2003
  included $67.2 million in net proceeds from common shares sold under a public
  offering, $10.8 mil-
  
                                        -13-
  lion net funding from Genentech, under our development and commercial loan
  agreements, $4.0 million proceeds from common shares sold under our investment
  agreement with Millennium, and $0.2 million from proceeds of common shares
  primarily related to employee share purchase and option incentive programs. This
  was partially offset by principal payments of $1.3 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:
  
       o    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 was to mature upon the
            earlier of (a) April of 2005, except for advances made after April of
            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 occurred on October 27, 2003). At XOMA's election, the
            convertible subordinated note was to 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. XOMA's
            repayment obligation was triggered by the product approval in October
            of 2003. The Company elected to defer payment of $40.0 million as an
            offset against the proceeds from its 25% share of U.S. operating
            profits on the product. The remaining balance (approximately $29.3
            million) will be paid with preference shares before December 31, 2003.
            These preference shares will be convertible upon issuance into common
            shares at a price of $7.75 per share. At September 30, 2003, the
            outstanding balance under this note totaled approximately $69.3
            million.
  
       o    A new $15.0 million debt facility was established to finance XOMA's
            share of U.S. commercialization costs. The note payable was to mature
            upon the earlier of (a) April of 2005, except for advances made after
            April of 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, occurred on October 27, 2003). The
            commercial note must be repaid in cash in January of 2004. At
            September 30, 2003 the outstanding balance under this note totaled
            $8.0 million.
  
       o    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 commitment of $33.5 million available
  under this arrangement, excluding the convertible debt. In October of 2003, the
  Company announced the discontinuation of development of MLN2201, one of the two
  products of an ongoing development agreement with Millennium. Under the terms of
  the amended investment agreement and the termination of the MLN2201development
  program, if the Company decides to sell common shares to Millennium the funding
  amounts will be reduced by 40% from a total of $33.5 million to a total of $20.1
  million.
  
       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. 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, revenue estimates, net proceeds received
  from our recent underwritten public offering, repayment obligations of our debt
  owed to Genentech for our share of RAPTIVA(TM) marketing
  
                                        -14-
  costs, deferral of a portion of the development loan from Genentech, issuance of
  shares in repayment of the remainder of the development loan from Genentech and
  financing commitments from Millennium under the collaborative agreement between
  the companies, the Company estimates it has sufficient cash resources, together
  with sources of funding available to us, to meet its current net cash
  consumption levels through at least the end of 2005. Any significant revenue
  shortfalls, or increases in planned spending on development programs could
  shorten this period. The recent FDA approval of RAPTIVATM is 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. Our actual share of
  profits or losses from RAPTIVATM may materially impact our cash reserves.
  Additional licensing arrangements or collaborations or otherwise entering into
  new equity or other financing arrangements could potentially extend or shorten
  this period. 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.
  
       As of September 30, 2003, future contractual obligations are as follows (in
  thousands):
  Note         Capital      Operating      Convertible
                                    Payable*       Leases         Leases         Notes**        Total
                                  -------------  -----------   -------------  --------------  -----------
  Remainder of 2003               $           -  $         89  $         698   $           -  $       787
  2004                                        -           572          2,894           5,248        8,714
  2005                                    7,956           221          2,890          69,282       80,349
  2006                                        -             -          2,900               -        2,900
  2007                                        -             -          2,730               -        2,730
  Thereafter                                  -             -            708               -          708
                                  -------------  ------------  -------------   -------------- ------------
  Total                           $       7,956  $        882  $      12,820   $      74,530  $    96,188
                                  =============  ============  =============   ============== ============
  *    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 occurred on October 27, 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 occurred on October 27, 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 3,000,000 common shares were
  issued in 2001. In the third quarter of 2003, we filed 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. We issued 9,000,000 of
  our registered shares in September of 2003 in an underwritten public offering
  and an additional 1,350,000 of these shares in October of 2003 upon exercise of
  the underwriters' over-allotment option. We will be able to issue the remaining
  9,650,000 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. We are also obligated to file a registration statement
  covering the resale by Genentech of all of the common shares issuable upon
  conver-
  
                                        -15-
  sion of the preference shares we have elected to issue to Genentech in repayment
  of our convertible debt owed to them.
  
  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 nine months ended September 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.
  
  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.
  
       Revenue arrangements with multiple elements are divided into separate units
  of accounting if certain criteria are met, including whether the delivered item
  has value to the customer on a stand-alone basis and whether there is objective
  and reliable evidence of the fair value of the undelivered items. The
  consideration the Company receives is allocated among the separate units of
  accounting based on their respective fair values, and the applicable revenue
  recognition criteria are considered separately for each of the separate units.
  
  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.
  
                                        -16-
  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, and the sufficiency of its cash resources, as well as other
  statements related to current plans for product development 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; and the sufficiency 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 the
  marketing and sales effort for RAPTIVA(TM) may not be successful due to the
  strength of competition or if physicians do not adopt the product as treatment
  for their patients. These and other risks, including those related to the
  results of pre-clinical testing; the timing or results of pending and future
  clinical trials (including the design and progress of clinical trials; safety
  and efficacy of the products being tested; action, inaction or delay by the FDA,
  European or other regulators or their advisory bodies; and analysis or
  interpretation by, or submission to, these entities or others of scientific
  data); changes in the status of existing collaborative relationships; the
  ability of collaborators and other partners to meet their obligations;
  competition; market demand for products; scale-up and marketing capabilities;
  availability of additional licensing or collaboration opportunities;
  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.
  
  The Marketing And Sales Effort In Support Of Our Only Product To Receive
  Regulatory Approval Has Not Begun And May Not Be Successful.
  
       RAPTIVA(TM), our only product to receive regulatory approval, was approved
  by the FDA on October 27, 2003 for the treatment of chronic moderate-to-severe
  plaque psoriasis in adults who are candidates for systemic therapy or
  phototherapy. Genentech is responsible for the marketing and sales effort in
  support of this product and has not yet commenced, or launched, the full
  intended scope of this effort. Unless and until RAPTIVA(TM) is approved in this
  or other indications outside the United States, our interest in this product in
  this indication is limited to our 25% share of the operating profits from sales
  of the product in the United States. We currently have no active role in this
  marketing and sales effort. Successful commercialization of this product is
  subject to a number of risks, including Genentech's ability to implement its
  marketing and sales effort and achieve sales; the strength of competition from
  other products being marketed or developed to treat psoriasis; physicians' and
  patients' acceptance of RAPTIVA(TM) as a treatment for psoriasis; Genentech's
  ability to provide its manufacturing capacity to meet demand for the product;
  and pricing and reimbursement issues. Many of these risks are discussed in more
  detail below.
  
  Because All Of Our Products Are Still Being Developed, 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 file for bankruptcy protection in extreme circumstances. 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    various human clinical trials and
  
       o    protection of our intellectual property.
  
       Based on current spending levels, revenue estimates, net proceeds received
  from out recent underwritten public offering, repayment obligations of our debt
  owed to Genentech for our share of RAPTIVATM marketing costs, deferral of a
  portion of our development loan from Genentech, issuance of shares in repayment
  of the remainder of our development loan from Genentech and financing
  commitments from Millennium, we estimate we have sufficient cash resources,
  together with sources of funding available to us, to meet our current net cash
  consumption levels through at least the end of 2005. 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. In particular, our share of profits or losses from
  RAPTIVATM may materially impact our cash reserves. 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 the recent 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 also
  requires repayment in cash, shares or deferred repayment of up to $40.0 million
  of amounts owed to Genentech (approximately $77.2 million under both loan
  agreements as of September 30, 2003). In November of 2003, we announced our
  election to defer $40.0 million of such repayment and to repay the remainder of
  the development loan using shares. The commercialization loan is payable only in
  cash and is due in January of 2004. In addition, the receipt of regulatory
  approval terminated Genentech's obligation to continue to loan us our portion of
  commercialization expenses for RAPTIVA(TM).
  
  Most Of Our Therapeutic Products Have Not Received Regulatory Approval. If These
  Products Do Not Receive Regulatory Approval, Neither Our Third Party
  Collaborators Nor We Will Be Able To Manufacture And Market Them.
  
       Our products cannot be manufactured and marketed in the United States and
  other countries without required regulatory approvals. Only one of our
  therapeutic products has received regulatory approval. The United States
  government and governments of other countries extensively regulate many aspects
  of our products, including:
  
       o    testing,
  
       o    manufacturing,
  
                                        -18-
  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
  most of our products will be regulated by the FDA as biologics. The FDA has
  recently consolidated its responsibility for reviewing new pharmaceutical
  products into its Center for Drug Evaluation and Research, the body that
  formerly reviewed only 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 might 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,
  
       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 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 the summer of
            2002. 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 completed enrollment
            in a Phase II study of RAPTIVATM as a possible treatment for patients
            with psoriatic arthritis. Although we expect to know preliminary
            results of the psoriatic arthritis trial by the first quarter of 2004,
            we do not know whether or when such testing will demonstrate product
            safety and efficacy in this patient population or result in regulatory
            approval. As is our practice, more details regarding the
  
                                        -19-
  clinical data would be revealed at an upcoming medical conference or
            other appropriate scientific, peer-reviewed forum later in 2004.
  
       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.
  
       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 Being Developed, We Have Sustained Losses
  In The Past And We Expect To Sustain Losses In The Future.
  
       We have experienced significant losses and, as of September 30, 2003, we
  had an accumulated deficit of $580.0 million.
  
       For the nine months ended September 30, 2003, we had a net loss of
  approximately $39.0 million, or $0.54 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 sales and marketing
  expenses related to 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 being
  developed, 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 companies further
            expanded the agreement. In October of 2003, RAPTIVA(TM) was approved
            by the FDA for the treatment of chronic moderate-to-severe plaque
            psoriasis.
  
       o    In November of 2001, we entered into a collaboration with Millennium
            to develop two of Millennium's products for certain vascular
            inflammation indications. In October of 2003, we announced that we had
            discontinued one of these products, MLN2201.
  
              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.
  
                                        -20-
  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 to scale-up production to
            commercial volume of one of Onyx's cancer products. In June of 2003,
            Onyx notified XOMA that it was discontinuing development of the
            product and terminating the agreement so that it could focus on
            another of its anticancer compounds.
  
       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 November
  11, 2003, our share price has ranged from a high of $12.19 to a low of $2.84. On
  November 11, 2003, the last reported sale price of the common shares as reported
  on the Nasdaq National Market was $6.84 per share. Factors contributing to such
  volatility include, but are not limited to:
  
       o    sales and estimated or forecasted sales of products
  
       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
  
                                        -21-
  o    announcements regarding other participants in the biotechnology and
            pharmaceutical industries and
  
       o    market speculation regarding any of the foregoing.
  
  We Or Our Third Party Collaborators May Not Be Able To Increase Existing Or
  Acquire New Manufacturing Capacity Sufficient To Meet Market Demand.
  
       Genentech will be responsible for manufacturing commercial quantities of
  RAPTIVA(TM). Genentech may have difficulty or may not be able to increase its
  manufacturing capacity to produce RAPTIVA(TM) in sufficient quantities to meet
  market demand. If any of our other products are approved, because we have never
  commercially introduced any pharmaceutical products, 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 or our
  third party collaborators 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 Only Recently Received Approval For Our Only Approved Product And We
  Do Not And Cannot Currently Market Any Of Our Other Products For Commercial
  Sale, We Do Not Know Whether There Will Be A Viable Market For Our Products.
  
       Even though we and Genentech recently received FDA approval to market
  RAPTIVA(TM) and even if we receive regulatory approval for our other products,
  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.
  Similarly, physicians may not accept RAPTIVA(TM) if they believe other products
  to be more effective or are more comfortable prescribing other products that
  have been on the market longer than RAPTIVA(TM). Consequently, we do not know if
  physicians or patients will adopt or use our products for their approved
  indications.
  
  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    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 FDA for this medication was
            submitted in July of 2003;
  
       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 systemic therapy or phototherapy and the
            product has been launched in the U.S.;
  
       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    Abbott Laboratories has announced the commencement of a Phase II
            psoriasis trial and Phase III psoriatic arthritis trial of its
            rheumatoid arthritis drug HumiraTM;
  
       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; 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 product developed by
  XOMA.
  
  Even If We Or Our Third Party Collaborators 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 or our third party collaborators 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
  
                                        -23-
  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.
  
  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 70 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 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.
  
                                        -24-
  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.
  
  The Financial Terms Of Some Of Our Existing Or Future Collaborative Arrangements
  Could Result In Dilution Of Our Share Value.
  
       In November of 2003, we announced that we exercised our option to defer
  payment of $40 million of our convertible loan from Genentech related to the
  development of RAPTIVA(TM) and pay the remaining balance of approximately $29.3
  million under the development loan with preference shares before year-end 2003.
  These preference shares will be convertible upon issuance into common shares at
  a price of approximately $7.75 per share, the price determined under the loan
  agreements at the time we notified Genentech of our election. Although the
  precise numbers remain to be determined, we anticipate issuing preference shares
  convertible into approximately four million common shares in repayment of the
  non-deferred portion of the development loan.
  
       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 $20.1 million worth of common
  shares, excluding the convertible debt, to Millennium through February of 2005.
  The total amount issuable in the remainder of 2003 could be $5.4 million. The
  number of shares to be issued will be based on a conversion price to be
  calculated at the time of conversion. This arrangement, as well as future
  arrangements we may enter into with similar effect, could result in dilution in
  the value of our shares.
  
  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
  transactions relating to our bacterial expression technology, we have in the
  past and may in the future agree to accept equity securities of the licensee in
  payment of license fees. The future value of these or any other shares we
  receive 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 may be subject.
  
  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:
  
       o    imposition of government controls,
  
       o    export license requirements,
  
                                        -25-
  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.
  
  We Are Exposed To An Increased Risk Of Product Liability Claims.
  
       The sale, 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 more large, unforeseen awards, such levels may not provide adequate
  coverage. We will seek to obtain additional insurance, if needed, as
  commercialization of RAPTIVA(TM) continues; however, because we have not yet
  determined whether additional insurance is needed, 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.
  
                                        -26-
  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 (1) actions against XOMA or our directors and
  officers that are predicated upon the civil liability provisions of the U.S.
  securities laws or (2) 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
  
       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
  
                                        -27-
  remains fixed over its term. As of September 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 September 30, 2003:
  
                                                    Fair Value         Average
                                      Maturity    (in thousands)    Interest Rate
                                      --------    --------------    -------------
  Cash equivalents, fixed rate         Daily         $ 80,078           1.05%
  
  Other Market Risk
  
       At September 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%.
  
  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
  continuing implementation of this new system, there were no changes in the
  Company's internal control over financial reporting during the third fiscal
  quarter of 2003 to which this report relates that have materially affected, or
  are reasonable likely to materially affect, the Company's internal control over
  financial accounting.
  
                                        -28-
  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.
  XOMA has filed a motion to dismiss all claims against it, and discovery has not
  yet commenced.
  
  ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS
  
       On September 24, 2003, the Company completed a registered offering of
  9,000,000 common shares. On October 21, 2003, the underwriters exercised their
  over-allotment option and purchased an additional 1,350,000 common shares. The
  managing underwriters in the offering were UBS Securities LLC, CIBC World
  Markets Corp., U.S. Bancorp Piper Jaffray Inc., Adams, Harkness & Hill, Inc.,
  Jefferies & Company, Inc. and ThinkEquity Partners LLC. The common shares sold
  in the offering were registered under the Securities Act of 1933, as amended, on
  a Registration Statement on Form S-3 (Reg. No. 333-107929) that was declared
  effective by the SEC on September 8, 2003. After deducting the underwriting
  discounts and offering expenses, the Company received net proceeds from the
  offering, including the issuance to cover the underwriters' over-allotment
  option, of approximately $77.4 million. None of the net proceeds of the offering
  were paid directly or indirectly to any director, officer, general partner of
  ours or our associates, persons owning 10% or more of any class of equity
  securities of ours, or an affiliate of ours.
  
       The Company is using the net proceeds from its September 2003 registered
  offering of common shares for general corporate purposes, including current
  research and development projects, the development of new products or
  technologies, general working capital and operating expenses, leasehold
  improvements and equipment acquisitions. 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
  
       None.
  
  ITEM 5.  OTHER INFORMATION
  
       None.
  
  ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K
  
       Exhibits:
  
            1    Underwriting Agreement dated September 19, 2003 by and among the
                 Company and the underwriters named therein. (Exhibit 2) (1)
  
                                        -29-
  10.1 1981 Share Option Plan as amended and restated. (Exhibit 10.1)
                 (2)
  
            10.2 Form of Share Option Agreement for 1981 Share Option Plan.
                 (Exhibit 10.2) (2)
  
            10.3 Restricted Share Plan as amended and restated. (Exhibit 10.3) (2)
  
            10.4 Form of Share Option Agreement for Restricted Share Plan.
                 (Exhibit 10.4) (2)
  
            10.5 Form of Restricted Share Purchase Agreement for Restricted Share
                 Plan. (Exhibit 10.5) (2)
  
            10.6 Management Incentive Compensation Plan as amended and restated.
                 (Exhibit 10.6) (2)
  
            10.7 1992 Directors Share Option Plan as amended and restated.
                 (Exhibit 10.7) (2)
  
            10.8 Form of Share Option Agreement for 1992 Directors Share Option
                 Plan (initial grants). (Exhibit 10.8) (2)
  
            10.9 Form of Share Option Agreement for 1992 Directors Share Option
                 Plan (subsequent). (Exhibit 10.9) (2)
  
            10.10 2002 Director Share Option Plan. (Exhibit 10.10) (2)
  
            10.11 1998 Employee Share Purchase Plan as amended and restated.
                 (Exhibit 10.11) (2)
  
            31.1 Certification of John L. Castello, filed pursuant to Section 302
                 of the Sarbanes-Oxley Act of 2002. (3)
  
            31.2 Certification of Peter D. Davis, filed pursuant to Section 302 of
                 the Sarbanes-Oxley Act of 2002. (3)
  
            32.1 Certification of John L. Castello ,furnished pursuant to Section
                 906 of the Sarbanes-Oxley Act of 2002. (4)
  
            32.2 Certification of Peter D. Davis, furnished pursuant to Section
                 906 of the Sarbanes-Oxley Act of 2002 . (4)
  
            99   Press Release dated November 12, 2003. (4)
  
  ----------
  
  (1)  Incorporated by reference to the referenced exhibit to the Company's Form
       8-K dated September 19, 2003 and filed September 24, 2003 (File No.
       0-14710).
  
  (2)  Incorporated by reference to the referenced exhibit to the Company's
       Registration Statement on Form S-8 filed August 28, 2003 (File No.
       333-108306).
  
  (3)  Filed herewith.
  
  (4)  Furnished herewith.
  
                                        -30-
  Reports on Form 8-K:
  
  1.   Current Report on Form 8-K dated September 9, 2003 and filed on September
       10, 2003 (file no. 0-14710).
  
  2.   Current Report on Form 8-K dated September 19, 2003 and filed on September
       24, 2003 (file no. 0-14710).
  
                                        -31-
  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:    November 12, 2003           By:  /s/ JOHN L. CASTELLO
                                            -------------------------------------
                                            John L. Castello
                                            Chairman of the Board, President and
                                            Chief Executive Officer
  
  Date:    November 12, 2003           By:  /s/ PETER D. DAVIS
                                            -------------------------------------
                                            Peter D. Davis
                                            Vice President, Finance and
                                            Chief Financial Officer
  
                                        -32-
  Exhibit 31.1
  
                                    Certification
              Pursuant to Section 302 Of The Sarbanes-Oxley Act Of 2002
                (Chapter 63, Title 18 U.S.C. Section 1350(A) And (B))
  
  I, John L. Castello, certify that:
  
  1.   I have reviewed this quarterly report on Form 10-Q of XOMA Ltd.;
  
  2.   Based on my knowledge, this report does not contain any untrue statement of
       a material fact or omit to state a material fact necessary to make the
       statements made, in light of the circumstances under which such statements
       were made, not misleading with respect to the period covered by this
       report;
  
  3.   Based on my knowledge, the financial statements, and other financial
       information included in this report, fairly present in all material
       respects the financial condition, results of operations and cash flows of
       the registrant as of, and for, the periods presented in this report;
  
  4.   The registrant's other certifying officers and I are responsible for
       establishing and maintaining disclosure controls and procedures (as defined
       in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we
       have:
  
       a)   Designed such disclosure controls and procedures, or caused such
            disclosure controls and procedures to be designed under our
            supervision, to ensure that material information relating to the
            registrant, including its consolidated subsidiaries, is made known to
            us by others within those entities, particularly during the period in
            which this report is being prepared;
  
       b)   Evaluated the effectiveness of the registrant's disclosure controls
            and procedures and presented in this report our conclusions about the
            effectiveness of the disclosure controls and procedures, as of the end
            of the period covered by this report based on such evaluation; and
  
       c)   Disclosed in this report any change in the registrant's internal
            control over financial reporting that occurred during the registrant's
            most recent fiscal quarter that has materially affected, or is
            reasonably likely to materially affect, the registrant's internal
            control over financial reporting; and
  
  5.   The registrant's other certifying officers and I have disclosed, based on
       our most recent evaluation of internal control over financial reporting, to
       the registrant's auditors and the audit committee of registrant's board of
       directors (or persons performing the equivalent function):
  
       a)   All significant deficiencies and material weaknesses in the design or
            operation of internal control over financial reporting which are
            reasonably likely to adversely affect the registrant's ability to
            record, process, summarize and report financial information; and
  
       b)   Any fraud, whether or not material, that involves management or other
            employees who have a significant role in the registrant's internal
            control over financial reporting.
  
  Date:  November 12, 2003           /s/ John L. Castello
                                     --------------------
                                     John L. Castello
                                     Chairman of the Board, President and
                                     Chief Executive Officer
  
                                        -33-
  Exhibit 31.2
  
                                    Certification
              Pursuant to Section 302 Of The Sarbanes-Oxley Act Of 2002
                (Chapter 63, Title 18 U.S.C. Section 1350(A) And (B))
  
  I, Peter B. Davis, certify that:
  
  1.   I have reviewed this quarterly report on Form 10-Q of XOMA Ltd.;
  
  2.   Based on my knowledge, this report does not contain any untrue statement of
       a material fact or omit to state a material fact necessary to make the
       statements made, in light of the circumstances under which such statements
       were made, not misleading with respect to the period covered by this
       report;
  
  3.   Based on my knowledge, the financial statements, and other financial
       information included in this report, fairly present in all material
       respects the financial condition, results of operations and cash flows of
       the registrant as of, and for, the periods presented in this report;
  
  4.   The registrant's other certifying officers and I are responsible for
       establishing and maintaining disclosure controls and procedures (as defined
       in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we
       have:
  
       a)   Designed such disclosure controls and procedures, or caused such
            disclosure controls and procedures to be designed under our
            supervision, to ensure that material information relating to the
            registrant, including its consolidated subsidiaries, is made known to
            us by others within those entities, particularly during the period in
            which this report is being prepared;
  
       b)   Evaluated the effectiveness of the registrant's disclosure controls
            and procedures and presented in this report our conclusions about the
            effectiveness of the disclosure controls and procedures, as of the end
            of the period covered by this report based on such evaluation; and
  
       c)   Disclosed in this report any change in the registrant's internal
            control over financial reporting that occurred during the registrant's
            most recent fiscal quarter that has materially affected, or is
            reasonably likely to materially affect, the registrant's internal
            control over financial reporting; and
  
  5.   The registrant's other certifying officers and I have disclosed, based on
       our most recent evaluation of internal control over financial reporting, to
       the registrant's auditors and the audit committee of registrant's board of
       directors (or persons performing the equivalent function):
  
       a)   All significant deficiencies and material weaknesses in the design or
            operation of internal control over financial reporting which are
            reasonably likely to adversely affect the registrant's ability to
            record, process, summarize and report financial information; and
  
       b)   Any fraud, whether or not material, that involves management or other
            employees who have a significant role in the registrant's internal
            control over financial reporting.
  
  Date:  November 12, 2003          /s/ Peter B. Davis
                                    ------------------
                                    Peter B. Davis
                                    Vice President, Finance and
                                    Chief Financial Officer
  
                                        -34-
  Exhibit 32.1
  
                                    Certification
              Pursuant to Section 906 Of The Sarbanes-Oxley Act Of 2002
                (Chapter 63, Title 18 U.S.C. Section 1350(A) And (B))
  
  Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chapter 63, Title 18
  U.S.C. Section 1350(a) and (b)), the undersigned hereby certifies in his
  capacity as an officer of XOMA Ltd. (the "Company") that the Quarterly Report of
  the Company on Form 10-Q for the period ended September 30, 2003 fully complies
  with the requirements of Section 13(a) of the Securities Exchange Act of 1934,
  as amended, and that the information contained in such report fairly presents,
  in all material respects, the financial condition and results of operations of
  the Company at the end of and for the periods covered by such Report.
  
  Date:  November 12, 2003          /s/ John L. Castello
                                    --------------------
                                    John L. Castello
                                    Chairman of the Board, President
                                    and Chief Executive Officer
  
  This certification will not be deemed filed for purposes of Section 18 of the
  Exchange Act (15 U.S.C. 78), or otherwise subject to the liability of that
  section. Such certification will not be deemed to be incorporated by reference
  into any filing under the Securities Act or the Exchange Act, except to the
  extent that the registrant specifically incorporates it by reference.
  
                                        -35-
  Exhibit 32.2
  
                                    Certification
              Pursuant to Section 906 Of The Sarbanes-Oxley Act Of 2002
                (Chapter 63, Title 18 U.S.C. Section 1350(A) And (B))
  
  Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chapter 63, Title 18
  U.S.C. Section 1350(a) and (b)), the undersigned hereby certifies in his
  capacity as an officer of XOMA Ltd. (the "Company") that the Quarterly Report of
  the Company on Form 10-Q for the period ended September 30, 2003 fully complies
  with the requirements of Section 13(a) of the Securities Exchange Act of 1934,
  as amended, and that the information contained in such report fairly presents,
  in all material respects, the financial condition and results of operations of
  the Company at the end of and for the periods covered by such Report.
  
  Date:  November 12, 2003          /s/ Peter B. Davis
                                    ------------------
                                    Peter B. Davis
                                    Vice President, Finance and
                                    Chief Financial Officer
  
  This certification will not be deemed filed for purposes of Section 18 of the
  Exchange Act (15 U.S.C. 78), or otherwise subject to the liability of that
  section. Such certification will not be deemed to be incorporated by reference
  into any filing under the Securities Act or the Exchange Act, except to the
  extent that the registrant specifically incorporates it by reference.
  
                                        -36-