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                  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, 2002
  
  
                             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 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        70,341,504
  Class                                    Outstanding at November 1, 2002
  
  
  ================================================================================
  
  
  <PAGE>
  
  
  
  
                                      XOMA Ltd.
  
                                      FORM 10-Q
  
                                  TABLE OF CONTENTS
  
                                                                              Page
  
  PART I   FINANCIAL INFORMATION.................................................1
  
           Item 1.  Condensed Consolidated Financial Statements (unaudited)......1
  
                    Condensed Consolidated Balance Sheets as of September 30,
                    2002 and December 31, 2001...................................1
  
                    Condensed Consolidated Statements of Operations for the
                    Three and Nine Months Ended September 30, 2002 and 2001......2
  
                    Condensed Consolidated Statements of Cash Flows for the
                    Nine Months Ended September 30, 2002 and 2001................3
  
                    Notes to Condensed Consolidated Financial Statements.........4
  
           Item 2.  Management's Discussion and Analysis of Financial Condition
                    and Results of Operations...................................10
  
           Item 3.  Quantitative and Qualitative Disclosures About Market
                    Risk........................................................23
  
           Item 4.  Controls and Procedures.....................................23
  
  PART II        OTHER INFORMATION..............................................24
  
           Item 1.  Legal Proceedings...........................................24
  
           Item 2.  Changes in Securities and Use of Proceeds...................24
  
           Items 3, 4 and 5 are either inapplicable or nonexistent and therefore
                    are omitted from this report................................24
  
           Item 6.  Exhibits & Reports on Form 8-K..............................24
  
  Signatures....................................................................25
  
  Certifications................................................................26
  
  
                                        -i-
  <PAGE>
  
  
  
  
  PART I - FINANCIAL INFORMATION
  
  Item 1.  CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
  
  <TABLE>
  <CAPTION>
  
                                      XOMA Ltd.
  
                        CONDENSED CONSOLIDATED BALANCE SHEETS
  
                                   (In thousands)
  
                                                             September 30, 2002   December 31, 2001
                                                                (Unaudited)           (Note 1)
                                                             ------------------   -----------------
                                               ASSETS
  Current Assets:
  <S>                                                           <C>                  <C>
       Cash and cash equivalents                                $    35,861          $   67,320
       Short-term investments                                           332                 320
       Receivables                                                    6,124               1,662
       Related party receivables                                        394                 418
       Inventory                                                      1,306               1,299
       Prepaid expenses and other                                       733                 249
                                                                -----------          ----------
           Total current assets                                      44,750              71,268
  Property and equipment, net                                        22,095              14,645
  Deposits and other                                                    172                 194
                                                                -----------          ----------
           Total Assets                                         $    67,017          $   86,107
                                                                ===========          ==========
  
                     LIABILITIES & SHAREHOLDERS' EQUITY (Net Capital Deficiency)
  Current Liabilities:
       Accounts payable                                         $     3,885          $    3,520
       Accrued liabilities                                            6,999               4,422
       Capital lease obligations - current                              943                 673
       Deferred revenue - current                                     2,812               5,017
       Convertible note - current                                     5,112               5,013
                                                                -----------          ----------
           Total current liabilities                                 19,751              18,645
  Capital lease obligations - long-term                               1,496               1,393
  Deferred revenue - long-term                                        1,165               1,470
  Convertible notes - long-term                                      58,305              50,980
                                                                -----------          ----------
           Total Liabilities                                         80,717              72,488
  Shareholders' Equity (Net Capital Deficiency)                     (13,700)             13,619
                                                                -----------          ----------
           Total Liabilities & Shareholders' Equity             $    67,017          $   86,107
                                                                ===========          ==========
  
  </TABLE>
  
  Note 1 - Amounts derived from the Company's audited financial statements
  appearing in the Annual Report on Form 10-K for the year ended December 31, 2001
  as filed with the Securities and Exchange Commission.
  
       See accompanying notes to condensed consolidated financial statements.
  
  <PAGE>
  
  <TABLE>
  <CAPTION>
  
                                      XOMA Ltd.
  
                   CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
  
                   (Unaudited, in thousands except per share data)
  
                                                      Three Months Ended           Nine Months Ended
                                                        September 30,                September 30,
                                                      ------------------           ------------------
  
                                                      2002          2001          2002          2001
                                                   -----------   ----------    ----------    ----------
  Revenues:
  <S>                                              <C>           <C>           <C>           <C>
     License and collaborative fees                $    1,423    $    1,316    $    9,076    $    3,381
     Contract and other revenue                         2,810         1,969         9,103         7,972
                                                   -----------   ----------    ----------    ----------
        Total revenues                                  4,233         3,285        18,179        11,353
                                                   -----------   ----------    ----------    ----------
  
  Operating Costs and Expenses:
     Research and development                           9,701         8,162        30,395        26,097
     Marketing, general and administrative              6,416         2,002        15,114         5,707
                                                   -----------   ----------    ----------    ----------
        Total operating costs and expenses             16,117        10,164        45,509        31,804
                                                   -----------   ----------    ----------    ----------
           Loss from operations                       (11,884)       (6,879)      (27,330)      (20,451)
  
  Other Income (Expense):
     Investment and other income                          194           611           698         1,590
     Interest and other expense                          (572)         (551)       (1,714)       (2,181)
                                                   -----------   ----------    ----------    ----------
           Net Loss                                $  (12,262)   $   (6,819)   $  (28,346)   $  (21,042)
                                                   ===========   ==========    ==========    ==========
  
  Basic and diluted net loss per share             $    (0.17)   $    (0.10)   $    (0.40)   $    (0.31)
                                                   ===========   ==========    ==========    ==========
  
  Shares used in computing basic and diluted
  net loss per share                                   70,330        70,008        70,291        67,502
                                                   ===========   ==========    ==========    ==========
  </TABLE>
  
  
       See accompanying notes to condensed consolidated financial statements.
  
  
  
  
                                        -2-
  <PAGE>
  
  
  <TABLE>
  <CAPTION>
  
                                      XOMA Ltd.
  
                   CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
  
                              (Unaudited, in thousands)
  
                                                                                           Nine Months Ended
                                                                                             September 30,
                                                                                  ---------------------------------
                                                                                       2002                 2001
                                                                                  -------------      --------------
  Cash Flows from Operating Activities:
  <S>                                                                             <C>                 <C>
     Net loss                                                                     $   (28,346)        $   (21,042)
       Adjustments to reconcile net loss to net cash used in
         operating activities:
       Depreciation and amortization                                                    1,332                  877
       Shares contributed to 401(k) and management incentive plans                        541                  477
       Increase in convertible notes to a collaborative partner for
         cost allocation                                                                2,050                1,438
       Accrued interest on convertible notes                                            1,354                1,993
       (Gain) on investments                                                               --                  (21)
       (Gain) loss on disposal/retirement of property and equipment                         1                  (85)
  Change in assets and liabilities:
       Receivables and related party receivables                                       (4,438)                (898)
       Inventory                                                                           (7)                (714)
       Prepaid expenses and other                                                        (484)                  25
       Deposits and other assets                                                           22                   --
       Accounts payable                                                                   365                 (335)
       Accrued liabilities                                                              2,577                   (4)
       Deferred revenue                                                                (2,510)               1,236
                                                                                  -------------      --------------
           Net cash used in operating activities                                      (27,543)             (17,053)
                                                                                  -------------      --------------
  Cash Flows from Investing Activities:
       Proceeds from sale of short-term investments                                        --                  253
       Purchase of property and equipment, net of sales proceeds                       (8,783)              (4,993)
                                                                                  -------------      --------------
           Net cash used in investing activities                                       (8,783)              (4,740)
                                                                                  -------------      --------------
  Cash Flows from Financing Activities:
       Proceeds from sale and leaseback transactions                                    1,000                1,070
       Principal payments under capital lease obligations                                (627)                (188)
       Proceeds from issuance of convertible note                                       4,020                2,677
       Proceeds from issuance of shares and warrants                                      474               47,868
                                                                                  -------------      --------------
           Net cash provided by financing activities                                    4,867               51,427
                                                                                  -------------      --------------
  Net increase (decrease) in cash and cash equivalents                                (31,459)              29,634
  Cash and cash equivalents at beginning of year                                       67,320               35,043
                                                                                  -------------      --------------
  Cash and cash equivalents at end of period                                      $    35,861          $    64,677
                                                                                  =============      ==============
  
  </TABLE>
  
       See accompanying notes to condensed consolidated financial statements.
  
  
  
  
                                        -3-
  <PAGE>
  
  
  
                                      XOMA Ltd.
  
          NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
  
                          (Unaudited, dollars in thousands)
  
  
  
  
  NOTE 1 - OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
  
  Business
  
  XOMA Ltd. ("XOMA" or the "Company"), a Bermuda company, is a biopharmaceutical
  company that develops and manufactures products to treat cancer, immunologic and
  inflammatory disorders, and infectious diseases. The Company's products are
  presently in various stages of development and all are subject to regulatory
  approval before the Company or its collaborators can commercially introduce any
  products. There can be no assurance that any of the products under development
  by the Company will be developed successfully, obtain the requisite regulatory
  approval or be successfully manufactured or marketed.
  
  Basis of Presentation
  
  The interim information contained in this report is unaudited but, in
  management's opinion, includes all normal recurring adjustments necessary for a
  fair presentation of results for the periods presented. Interim results may not
  be indicative of results to be expected for the full year or future periods. The
  condensed consolidated balance sheet as of December 31, 2001 has been derived
  from the audited consolidated financial statements included in the Company's
  2001 Annual Report on Form 10-K. The unaudited condensed consolidated financial
  statements should be read in conjunction with the Company's audited consolidated
  financial statements for the year ended December 31, 2001 included in its Annual
  Report on Form 10-K.
  
  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, 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. For the nine months ended September 30, 2001, two
  customers represented 51% and 46% of total revenues.
  
  
  
                                        -4-
  <PAGE>
                                      XOMA Ltd.
  
          NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
  
                          (Unaudited, dollars in thousands)
  
  
  Recent Accounting Pronouncements
  
  In July of 2001, the Financial Accounting Standards Board, or FASB, issued
  Statement of Financial Accounting Standards No. 141, or SFAS 141, "Business
  Combinations." SFAS 141 eliminates the pooling-of-interests method of accounting
  for business combinations except for qualifying business combinations that were
  initiated prior to July 1, 2001. In addition, SFAS 141 further clarifies the
  criteria to recognize intangible assets separately from goodwill. Specifically,
  SFAS 141 requires that an intangible asset may be separately recognized only if
  such an asset meets the contractual-legal criterion or the separability
  criterion. The requirements of SFAS 141 are effective for any business
  combination accounted for by the purchase method that is completed after June
  30, 2001 (i.e., the acquisition date is July 1, 2001 or after). The adoption of
  SFAS 141 on January 1, 2002 had no material impact on the Company's financial
  position or results of operations.
  
  In July of 2001, the FASB issued Statement of Financial Accounting Standards No.
  142, or SFAS 142, "Goodwill and Other Intangible Assets." Under SFAS 142,
  goodwill and indefinite lived intangible assets are no longer amortized but are
  reviewed annually (or more frequently if impairment indicators arise) for
  impairment. For intangible assets with indefinite useful lives, the impairment
  review will involve a comparison of fair value to carrying value, with any
  excess of carrying value over fair value being recorded as an impairment loss.
  For goodwill, the impairment test shall be a two-step process, consisting of a
  comparison of the fair value of a reporting unit with its carrying amount,
  including the goodwill allocated to each reporting unit. If the carrying amount
  is in excess of the fair value, the implied fair value of the reporting unit
  goodwill is compared to the carrying amount of the reporting unit goodwill. Any
  excess of the carrying value of the reporting unit goodwill over the implied
  fair value of the reporting unit goodwill will be recorded as an impairment
  loss. Separable intangible assets that are deemed to have a finite life will
  continue to be amortized over their useful lives (but with no maximum life).
  Intangible assets with finite useful lives will continue to be reviewed for
  impairment in accordance with Statement of Financial Accounting Standards No.
  121, or SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for
  Long-Lived Assets to Be Disposed Of." The amortization provisions of SFAS 142
  apply to goodwill and intangible assets acquired after June 30, 2001. The
  adoption of SFAS 142 on January 1, 2002 had no material impact on the Company's
  financial position or results of operations.
  
  In August of 2001, the FASB issued Statement of Financial Accounting Standards
  No. 143, or SFAS 143, "Accounting for Asset Retirement Obligations." SFAS 143
  addresses financial accounting and reporting for obligations associated with the
  retirement of tangible long-lived assets and the associated retirement costs.
  The adoption of SFAS 143 on January 1, 2002 had no material impact on the
  Company's financial position or results of operations.
  
  In October of 2001, the FASB issued Statement of Financial Accounting Standards
  No. 144, or SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived
  Assets," which supersedes SFAS 121, "Accounting for the Impairment of Long-Lived
  Assets and for Long-Lived Assets to be Disposed of." SFAS 144 addresses
  financial accounting and reporting for the impairment of long-lived assets and
  for long-lived assets to be disposed of. However, SFAS 144 retains the
  fundamental provisions of SFAS 121 for: (1) recognition and measurement of the
  impairment of long-lived assets to be held and used; and (2) measurement of
  long-lived assets to be disposed of by sale. SFAS 144 is effective for fiscal
  years beginning after December 15, 2001. The adoption of SFAS 144 on January 1,
  2002 had no material effect on the Company's financial position or results of
  operations.
  
  In April of 2002, the FASB issued Statement of Financial Accounting Standards
  No. 145, or SFAS 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment
  of FASB Statement No. 13, and Technical Corrections," which
  
  
  
                                        -5-
  <PAGE>
                                      XOMA Ltd.
  
          NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
  
                          (Unaudited, dollars in thousands)
  
  
  provides guidance on the classification of gains and losses from the
  extinguishment of debt and on the accounting for certain specified lease
  transactions. The provisions of SFAS 145 which relate to the rescission of
  Statement 4 are applicable in fiscal years beginning after May 15, 2002. The
  remaining provisions of SFAS 145 are effective for financial statements issued
  on or after May 15, 2002. The Company does not expect the adoption of SFAS 145
  will have a material impact on its financial position or results of operations.
  
  In July of 2002, the FASB issued Statement of Financial Accounting Standards No.
  146, or SFAS 146, "Accounting for Costs Associated with Exit or Disposal
  Activities." SFAS 146 requires that a liability for costs associated with an
  exit or disposal activity be recognized and measured initially at fair value
  only when the liability is incurred. SFAS 146 addresses costs associated with
  restructuring activities that are currently accounted for under Emerging Issues
  Task Force ("EITF") Issue No. 94-3, "Liability Recognition for Certain Employee
  Termination Benefits and Other Costs to Exit an Activity (Including Certain
  Costs Incurred in a Restructuring)." The scope of SFAS 146 also covers
  termination benefits that employees who are involuntarily terminated receive
  under the terms of a one-time benefit arrangement, costs related to terminating
  a contract that is not a capital lease and costs to consolidate facilities. SFAS
  146 is effective for exit or disposal activities that are initiated after
  December 31, 2002. The Company does not expect the adoption of SFAS 146 to have
  a material impact on its financial position or results of operations.
  
  Revenue Recognition
  
  Revenue is recognized when the related costs are incurred and the four basic
  criteria of revenue recognition are met: (1) persuasive evidence of an
  arrangement exists; (2) delivery has occurred or services rendered; (3) the fee
  is fixed and determinable; and (4) collectibility is reasonably assured.
  Determination of criteria (3) and (4) are based on management's judgments
  regarding the nature of the fee charged for products or services delivered and
  the collectibility of those fees.
  
  License and Collaborative Fees
  
  Revenue from non-refundable license or technology access payments under license
  and collaborative agreements where the Company has a continuing obligation to
  perform is recognized as revenue over the period of the continuing performance
  obligation.
  
  Milestone payments under collaborative arrangements are recognized as revenue
  upon 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 achieved.
  
  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.
  
  
  
                                        -6-
  <PAGE>
                                      XOMA Ltd.
  
          NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
  
                          (Unaudited, dollars in thousands)
  
  
  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
  
  The Company expenses research and development costs as incurred. 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. The Company's research
  and development expenses include costs incurred to provide services to third
  parties under terms of various collaborative arrangements.
  
  Comprehensive Income (Loss)
  
  Unrealized gains or losses on the Company's available-for-sale securities are
  included in other comprehensive income (loss). Comprehensive loss and its
  components for the three and nine months ended September 30, 2002 and 2001 are
  as follows:
  
  <TABLE>
  <CAPTION>
                                          Three Months Ended                    Nine Months Ended
                                             September 30,                        September 30,
                                      --------------------------         -----------------------------
                                         2002            2001               2002               2001
                                      ----------      ----------         -----------       -----------
  <S>                                 <C>             <C>                <C>                <C>
  Net loss                            $ (12,262)      $  (6,819)         $ (28,346)         $ (21,042)
  Unrealized gain (loss) on
  securities available-for-sale              12            (17)                 12                (17)
                                      ----------      ----------         -----------       -----------
  Comprehensive loss                  $ (12,250)      $  (6,836)         $ (28,334)         $ (21,059)
                                      ==========      ==========         ===========       ===========
  
  </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 the FASB's Statement of
  Financial Accounting Standards 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 each of the periods ended
  September 30:
  
                                              Nine months ended September 30,
                                             ---------------------------------
                                                 2002                   2001
                                             ------------       --------------
                                                       (in thousands)
  Options for shares                              4,661                 4,201
  Warrants for shares                               700                   700
  Convertible notes and related interest         10,577                 4,789
  
  
  
  
                                        -7-
  <PAGE>
                                      XOMA Ltd.
  
          NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
  
                          (Unaudited, dollars in thousands)
  
  
  NOTE 2 - BALANCE SHEET COMPONENTS
  
  Inventories
  
  Inventories are stated at the lower of standard cost (which approximates
  first-in, first-out cost) or market. Inventories, which relate principally to
  the Company's agreement with Baxter Healthcare Corporation, consist of the
  following:
  
                                  September 30               December 31,
                                      2002                       2001
                               -----------------        ---------------------
  Raw minerals                 $             202        $                 195
  Finished goods                           1,104                        1,104
                               -----------------        ---------------------
  Total                        $           1,306        $               1,299
                               =================        =====================
  
  Accrued Liabilities
  
  Accrued liabilities consist of the following:
  
                                          September 30,             December 31,
                                               2002                     2001
                                      ------------------       ------------------
  Accrued payroll expenses            $            2,765       $           2,347
  Accrued clinical trial expenses                    494                     445
  Accrued legal fees                               2,825                     505
  Other                                              915                   1,125
                                      ------------------       ------------------
  Total                               $            6,999       $           4,422
                                      ==================       ==================
  
  
  NOTE 3 - LICENSE AGREEMENT
  
  In February of 2002, XOMA and MorphoSys AG announced cross-licensing agreements
  for antibody-related technologies. Under the agreements, XOMA is entitled to
  receive license payments from MorphoSys in addition to a license to use the
  MorphoSys HuCAL(R) GOLD antibody library for its target discovery and research
  programs. MorphoSys and its partners receive a license to use the XOMA antibody
  expression technology for developing antibody products using MorphoSys' phage
  display-based HuCAL(R) antibody library. MorphoSys also receives a license for
  the production of antibodies under the XOMA patents. The term of this license
  agreement commenced in February of 2002 and remains in effect until the
  expiration of the last patent within the XOMA patent rights provided under the
  terms of the agreement. Because there are no continuing performance obligations
  on the part of the Company under the MorphoSys agreement, the license fee
  provided for in that agreement was recognized as revenue in the first quarter of
  2002. Under the terms of the agreement, the license fee was to be paid in two
  installments. The first was due and paid in the first quarter of 2002, and the
  second portion, which was recognized as revenue in the first quarter of 2002 in
  the amount of $4,000, is due in the fourth quarter of 2002. At MorphoSys'
  option, the second installment could be paid in either cash in the amount of
  $4,000 or with MorphoSys shares equivalent to $4,800 at the time of MorphoSys'
  election to pay the second installment in shares.
  
  Subsequent to the end of the quarter, the Company was notified by MorphoSys of
  its intention to exercise its option to pay the second installment 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). The administrative process in Germany that is required in order for these
  shares to be issued has not yet been completed. Since September 30, 2002, the
  per share closing price for MorphoSys shares has ranged from approximately $8.30
  to $16.17. Additionally, XOMA has applied for but not yet received an exemption
  from German withholding tax on the full license fee from MorphoSys. The Company
  has received an inquiry from the German federal tax authority questioning
  whether the Company is entitled to the exemption. Although the Company has
  responded to this inquiry, claiming it is entitled to the exemption, the German
  tax authority has not yet ruled on this issue. Were the German tax authorities
  to find that the claimed exemption from withholding does not apply, and were any
  appeals of that decision also to fail, the license fees due from MorphoSys would
  be subject to withholding at a rate of approximately 26% of the cash paid or the
  market value of the shares upon issuance, as the case may be. Subject to the
  risks discussed in this paragraph, the Company expects to receive the MorphoSys
  shares in the fourth quarter of 2002.
  
  The Company has not recorded a provision for these uncertainties related to
  either changes in the market value of the shares MorphoSys intends to issue or
  the German withholding tax. Both future market conditions for the MorphoSys
  shares and the final determination by the German authorities are difficult to
  predict and may vary significantly. Therefore, under the provisions of Statement
  of Financial Accounting Standards No. 5, Accounting for Contingencies, the
  Company has determined that the conditions related to the likelihood of the
  events both probable and reasonably estimable have not been met. If either of
  these uncertainties results in an unfavorable outcome for XOMA, the Company's
  financial position and results of operations would be adversely impacted.
  
  
                                        -8-
  <PAGE>
                                      XOMA Ltd.
  
          NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
  
                          (Unaudited, dollars in thousands)
  
  
  NOTE 4 - SUBSEQUENT EVENTS
  
  Subsequent to September 30, 2002, XOMA filed a Registration Statement on Form
  S-3 to register the resale by Millennium Pharmaceuticals, Inc. and an affiliate
  of up to 5,000,000 common shares that we may sell to Millennium under the terms
  of our investment agreement or that we may issue upon conversion of the
  convertible note held by Millennium. No such common shares may be resold by
  Millennium pursuant to such registration statement until such registration
  statement is declared effective by the Securities and Exchange Commission.
  Additionally, the convertible note for $5,000 held by Millennium was amended to
  extend the maturity date from November 26, 2002 to May 26, 2003.
  
  In October of 2002, XOMA and Dyax Corp. announced a cross-licensing agreement
  for antibody-related technologies. Under the agreement, XOMA will receive
  license and royalty payments from Dyax in addition to a Dyax antibody library
  and a license to Dyax's phage display patents known as the Ladner patents. Dyax
  receives a license to use XOMA's antibody expression technology for developing
  antibody products for itself and Dyax collaborators. Dyax also receives a
  license for the production of antibodies under the XOMA patents.
  
  
  
                                        -9-
  <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, 2002 were $4.2 million, a 27%
  increase compared with $3.3 million for the same period in 2001. The increase
  was primarily due to higher contract revenue from Baxter Healthcare Corporation
  and Onyx Pharmaceuticals, Inc. for development services. Revenues for the nine
  months ended September 30, 2002 increased 60% to $18.2 million compared to $11.4
  million for the same period in 2001. This increase was primarily due to
  increased license fees including our agreement with MorphoSys AG entered into in
  February of 2002, the recognition of revenue for certain license fees and other
  payments received in the current and prior periods from Baxter, Onyx and
  Genentech, Inc. and contract revenue from Baxter and Onyx.
  
  Research and development expenses for the three months and nine months ended
  September 30, 2002 increased to $9.7 million and $30.4 million, respectively, or
  by 18% and 16%, respectively, from $8.2 million and $26.1 million, respectively,
  for the comparable periods of 2001. Spending in 2002 reflected increased
  development costs associated with Raptiva(TM) (Efalizumab, formerly
  Xanelim(TM)), MLN01, CAB2 and ONYX-015. The increase was partially offset by
  savings on certain preclinical development programs that were discontinued
  during 2001.
  
  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 millions):
  
  <TABLE>
  <CAPTION>
  
                                              Three Months Ended                   Nine Months Ended
                                                 September 30,                       September 30,
                                         --------------------------            -------------------------
                                             2002             2001                2002            2001
                                         -----------     ----------            -----------    ----------
  <S>                                    <C>               <C>                 <C>             <C>
  Earlier stage programs                 $    3.0          $   2.9             $  12.4         $   11.7
  Later stage programs                        6.7              5.3                18.0             14.4
                                         -----------     ----------            -----------    ----------
  Total                                  $    9.7          $   8.2             $  30.4         $   26.1
                                         ===========     ==========            ===========    ==========
  
  </TABLE>
  
                                        -10-
  <PAGE>
  
  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 millions):
  
  <TABLE>
  <CAPTION>
  
                                           Three Months Ended                   Nine Months Ended
                                              September 30,                       September 30,
                                      ---------------------------          --------------------------
                                          2002             2001                2002            2001
                                      -----------      ----------          -----------     ----------
  <S>                                 <C>               <C>                 <C>             <C>
  Internal projects                   $    2.5          $   3.7             $  12.3         $   15.2
  Collaborative arrangements               7.2              4.5                18.1             10.9
                                      -----------      ----------          -----------     ----------
  Total                               $    9.7          $   8.2             $  30.4         $   26.1
                                      ===========      ==========          ===========     ==========
  
  </TABLE>
  
  For the nine months ended September 30, 2002 and 2001 one project accounted for
  21% and 18%, respectively, of our total research and development costs. No other
  single project was greater than 20% during these periods.
  
  Marketing, general and administrative expenses for the three months and nine
  months ended September 30, 2002 increased to $6.4 million and $15.1 million,
  respectively, or 220% and 165%, respectively, from $2.0 million and $5.7
  million, respectively, for the comparable periods in 2001. The most significant
  component of this increase was litigation expenses related to our litigation
  against Biosite Incorporated and certain shareholder litigation, which totaled
  approximately $3.3 million and $7.0 million in the respective three and nine
  month periods of 2002. The litigation matters to which these expenses related
  have been settled or otherwise resolved. The 2002 periods also include marketing
  expenses related to pre-launch activities for Raptiva(TM). These marketing
  expenses are expected to continue at similar or higher levels.
  
  Investment income for the three months and nine months ended September 30, 2002
  decreased to $0.2 million and $0.7 million, respectively, or 67% and 56%,
  respectively, compared to $0.6 million and $1.6 million for the same periods of
  2001 due to lower interest rates and lower average cash balances. Interest
  expense for the three months ended September 30, 2002 and 2001 was at the same
  level of $0.6 million. Interest expense for the nine months ended September 30,
  2002 decreased 23% to $1.7 million as compared to $2.2 million for the same
  period of 2001. This decrease reflected lower interest rates on a higher average
  outstanding balance of the convertible notes due to Genentech and Millennium.
  
  Liquidity and Capital Resources
  
  XOMA had $36.2 million in cash, cash equivalents and short-term investments at
  September 30, 2002 compared to $67.6 million at December 31, 2001. Working
  capital (current assets minus current liabilities) at September 30, 2002
  decreased to $25.0 million from $52.6 million at December 31, 2001. These
  decreases were primarily due to net operating losses and capital expenditures
  for facility expansions, including a third 2,750-liter fermentation suite.
  
  Net cash used in operations for the nine months ended September 30, 2002 was
  $27.5 million, compared with $17.1 million for the same period of 2001. This
  increase primarily reflected higher net operating losses as a result of higher
  marketing, general and administrative expenses.
  
  Net capital expenditures increased to $8.8 million for the nine months ended
  September 30, 2002 from $5.0 million for the same period of 2001. Current year
  spending included expenses related to the renovation and expansion of our
  manufacturing and warehouse facilities.
  
  Net cash provided by financing activities decreased to $4.9 million for the nine
  months ended September 30, 2002 from $51.4 million for the same period of 2001
  and $3.8 million from the exercise of warrants. The prior year period included
  net proceeds of $43.3 million from a common share equity financing completed in
  June 2001. In addition, for the nine months ended September 30, 2002, the
  Company received $4.0 million of debt financing from Genentech for the Company's
  share of Raptiva(TM) development costs compared to $2.7 million for the same
  period of
  
  
  
                                        -11-
  <PAGE>
  
  2001. Proceeds received from capital leases were $1.0 million for the nine
  months ended September 30, 2002 compared to $1.1 million for the same period in
  2001.
  
  For the full year 2002, the Company currently expects its net loss to be
  somewhat higher than in 2001, due to increased expenses on Raptiva(TM) and on
  the Millennium collaboration, expansion of the Company's development
  infrastructure and higher marketing, general and administrative expenses.
  
  Based on forecasted spending levels that reflect a reduction in legal expenses,
  currently anticipated revenues that include licensing revenues from Dyax
  announced in October of 2002, and debt financing provided by Genentech for
  XOMA's share of Raptiva(TM) development costs, the Company estimates it has
  sufficient cash resources to meet its operating needs through at least the
  middle of 2004. Any significant revenue shortfalls or increases in planned
  spending on internal programs could shorten this period. Any new licensing
  arrangements or collaborations, any financing from Millennium under the
  investment agreement between the companies, as reflected in our Registration
  Statement on Form S-3 filed on November 6, 2002, or any other new equity or
  other financing arrangements could extend this period. Genentech and XOMA
  announced in early April of 2002 that a pharmacokinetic study comparing
  XOMA-produced material and Genentech-produced material did not achieve a
  pre-defined statistical definition for comparability. An additional 556 patient
  Phase III efficacy study testing Genentech material has now been completed.
  Genentech had anticipated filing a Biologics License Application (BLA) for
  Raptiva(TM) in psoriasis by the end of 2002 pending discussions with the FDA.
  Following a subsequent meeting held with the FDA, the companies continue to
  anticipate that the BLA will be filed by the end of 2002.
  
  The timeliness of this submission, subsequent review by the FDA and progress or
  setbacks by potentially competing products may have an adverse effect on the
  Company's ability to raise new funding on acceptable terms. 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 is set forth below under the
  heading "Forward-Looking Statements And Cautionary Factors That May Affect
  Future Results."
  
  Subsequent to the end of the quarter, the Company was notified by MorphoSys of
  its intention to exercise its option to pay the second installment of the
  license fee owed to the Company under its license agreement with MorphoSys using
  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). The administrative process in Germany that is required in
  order for these shares to be issued has not yet been completed. Since September
  30, 2002, the per share closing price for MorphoSys shares has ranged from
  approximately $8.30 to $16.17. Additionally, XOMA has applied for but not yet
  received an exemption from German withholding tax on the full license fee from
  MorphoSys. The Company has received an inquiry from the German federal tax
  authority questioning whether the Company is entitled to the exemption. Although
  the Company has responded to this inquiry, claiming it is entitled to the
  exemption, the German tax authority has not yet ruled on this issue. Were the
  German tax authorities to find that the claimed exemption from withholding does
  not apply, and were any appeals of that decision also to fail, the license fees
  due from MorphoSys would be subject to withholding at a rate of approximately
  26% of the cash paid or the market value of the shares upon issuance, as the
  case may be. Subject to the risks discussed in this paragraph, the Company
  expects to receive the MorphoSys shares in the fourth quarter of 2002.
  
  The Company has not recorded a provision for these uncertainties related to
  either changes in the market value of the shares MorphoSys intends to issue or
  the German withholding tax. Both future market conditions for the MorphoSys
  shares and the final determination by the German authorities are difficult to
  predict and may vary significantly. Therefore, under the provisions of Statement
  of Financial Accounting Standards No. 5, Accounting for Contingencies, the
  Company has determined that the conditions related to the likelihood of the
  events both probable and reasonably estimable have not been met. If either of
  these uncertainties results in an unfavorable outcome for XOMA, the Company's
  financial position and results of operations would be adversely impacted.
  
  Critical Accounting Policies
  
  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.
  
  Revenue Recognition
  
  Revenue is recognized when the related costs are incurred and the four basic
  criteria of revenue recognition are met: (1) persuasive evidence of an
  arrangement exists; (2) delivery has occurred or services rendered; (3) the fee
  is fixed and determinable; and (4) collectibility is reasonably assured.
  Determination of criteria (3) and (4) are based on management's judgments
  regarding the nature of the fee charged for products or services delivered and
  the collectibility of those fees.
  
  License and Collaborative Fees
  
  Revenue from non-refundable license or technology access payments under license
  and collaborative agreements where the Company has a continuing obligation to
  perform is recognized as revenue over the period of the continuing performance
  obligation.
  
  
  
                                        -12-
  <PAGE>
  
  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 achieved.
  
  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.
  
  Change in Accounting Principle
  
  The Company previously recognized non-refundable license fees as revenue when
  received and when all significant contractual obligations of the Company
  relating to the fees had been met. Effective January 1, 2000, the Company
  changed its method of accounting for non-refundable initial fees to recognize
  such fees over the period of continuing involvement by the Company such as the
  research and development period or the manufacturing period of the agreement, as
  applicable. The Company believes this accounting policy is preferable based on
  guidance provided in SEC Staff Accounting Bulletin No. 101, or SAB 101, "Revenue
  Recognition in Financial Statements." As of January 1, 2000, there was no
  cumulative effect of an accounting change as a result of the adoption of SAB 101
  and there was no pro forma effect of the adoption of SAB 101 in any period
  presented. In connection with the license and supply and development agreement
  with Baxter on January 25, 2000, the Company received $10.0 million as an
  initial, non-refundable fee. This initial fee was deferred and is being
  amortized over the period of continuing involvement, which period was estimated
  to be 36 months.
  
  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 2002, the estimated levels of its expenses and revenues for
  the balance of 2002, the sufficiency of its cash resources and the BLA filing
  time frame, as well as other statements related to the progress and timing of
  product development and present or future licensing or collaborative
  arrangements, 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 2002
  could be higher depending on revenues from licensees and collaborators, the size
  and timing of expenditures and whether there are unanticipated expenditures; 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; and the BLA filing could be delayed by unexpected safety or
  efficacy issues or additional time requirements for data analysis, BLA
  preparation, discussions with the FDA, enrollment in clinical studies,
  additional clinical studies or manufacturing process modifications. These and
  other risks, including those related to changes in the status of
  
  
  
                                        -13-
  <PAGE>
  
  existing collaborative relationships, availability of additional licensing or
  collaboration opportunities, the timing or results of pending and future
  clinical trials, the ability of collaborators and other partners to meet their
  obligations, market demand for products, actions by the Food and Drug
  Administration or the U.S. Patent and Trademark Office, uncertainties regarding
  the status of biotechnology patents, uncertainties as to the costs of protecting
  intellectual property and risks associated with our status as a Bermuda company
  are described in more detail in the remainder of this section.
  
  None Of Our Pharmaceutical Products Have Received Regulatory Approval; If Our
  Products Do Not Receive Regulatory Approval, Neither We Nor Our Third Party
  Collaborators Will Be Able To Manufacture And Market Them
  
  Even our most developed pharmaceutical product has yet to be submitted for
  licensure. We will be unable to manufacture and market our products without
  required regulatory approvals in the United States and other countries. The
  United States government and governments of other countries extensively regulate
  many aspects of our products, including:
  
       o    testing
  
       o    manufacturing
  
       o    promotion and marketing and
  
       o    exporting.
  
  In the United States, the Food and Drug Administration regulates pharmaceutical
  products under the Federal Food, Drug, and Cosmetic Act and other laws,
  including, in the case of biologics, the Public Health Service Act. At the
  present time, we believe that our products will be regulated by the FDA as
  biologics. The FDA recently announced that it is consolidating its
  responsibility for reviewing new pharmaceutical products into its Center for
  Drug Evaluation and Research, the body that currently reviews drug products,
  combining that operation with part of its biologics review operation, the Center
  for Biologics Evaluation and Research. Because implementation of this plan is
  not expected to begin until next year, we do not know when or how this change
  will affect us. State regulations may also affect our proposed products.
  
  The FDA has substantial discretion in both the product approval process and
  manufacturing facility approval process and, as a result of this discretion and
  uncertainties about outcomes of testing, we cannot predict at what point, or
  whether, the FDA will be satisfied with our or our collaborators' submissions or
  whether the FDA will raise questions which may be material and delay or preclude
  product approval or manufacturing facility approval. As we accumulate additional
  clinical data, we will submit it to the FDA, which may have a material impact on
  the FDA product approval process.
  
  Our potential products will require significant additional research and
  development, extensive preclinical studies and clinical trials and regulatory
  approval prior to any commercial sales. This process is lengthy, often taking a
  number of years, and expensive. As clinical results are frequently susceptible
  to varying interpretations that may delay, limit or prevent regulatory
  approvals, the length of time necessary to complete clinical trials and to
  submit an application for marketing approval for a final decision by a
  regulatory authority varies significantly. As a result, it is uncertain whether:
  
       o    our future filings will be delayed
  
       o    our studies will be successful
  
       o    we will be able to provided necessary additional data
  
       o    our future results will justify further development or
  
       o    we will ultimately achieve regulatory approval for any of these
            products.
  
  
  
                                        -14-
  <PAGE>
  
  For example,
  
       o    in 1996, we and Genentech began developing Raptiva(TM)(Efalizumab,
            formerly Xanelim(TM)) in patients with moderate-to-severe psoriasis.
            In April of 2002, we and Genentech announced that a pharmacokinetic
            study conducted on Raptiva(TM)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 Raptiva(TM), delaying the filing of a
            Biologics Licensing Application with the FDA for Raptiva(TM)beyond the
            previously-planned time frame of summer 2002. In September of 2002, we
            and Genentech announced the results of the additional Phase III study
            which achieved its primary efficacy endpoint. Although Genentech and
            we are working to file a BLA by the end of 2002, unexpected delays in
            the preparation of the BLA due to further data analysis, discussions
            with the FDA or similar matters may prevent us from doing so. We have
            also conducted a Phase I/II study of Raptiva(TM)in kidney transplant
            recipients. We do not know whether there will be follow-on studies,
            and if there are such follow-on studies we do not know whether any
            such studies will be sufficient for regulatory approval. We have also
            announced the initiation of enrollment in a Phase II clinical study of
            Raptiva(TM)in patients suffering from rheumatoid arthritis. We do not
            know whether or when any such testing will demonstrate product safety
            and efficacy in this patient population or result in regulatory
            approval.
  
       o    in December of 1992, we began human testing of our NEUPREX(R)product,
            a genetically-engineered fragment of a particular human protein, and
            have 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 principally of
            children 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. Because
            we have not generated any additional data or completed any further
            analysis, we do not know whether we will be able to supply such
            additional data. If we conduct an additional trial to provide the
            requested additional data, we will not know whether the results will
            be adequate for approval until the trial has been completed and the
            resulting data reviewed by the FDA. In September of 1999, we
            discontinued patient enrollment in our Phase III clinical trial
            testing NEUPREX(R)in trauma patients with severe blood loss because an
            independent data safety monitoring board told us that interim results
            from the trial did not support continuing the trial. Baxter has
            initiated a Phase II study with NEUPREX(R)in Crohn's disease patients.
            Enrollment in this study has now been completed, but because we do not
            know the results, we do not know whether the results will justify
            further development.
  
  Given that regulatory review is an interactive and continuous process, we
  maintain a policy of limiting announcements and comments upon the specific
  details of the ongoing regulatory review of our products, subject to our
  obligations under the securities laws, until definitive action is taken.
  
  Because All Of Our Products Are Still In Development, We Will Require
  Substantial Funds To Continue; We Cannot Be Certain That Funds Will Be Available
  And, If Not Available, We May Have To Take Actions Which Could Adversely Affect
  Your Investment
  
  If adequate funds are not available, we may have to dilute or otherwise
  adversely affect the rights of existing shareholders, curtail or cease
  operations or, in extreme circumstances, file for bankruptcy protection. We have
  spent, and we expect to continue to spend, substantial funds in connection with:
  
       o    research and development relating to our products and production
            technologies
  
       o    expansion of our production capabilities
  
       o    extensive human clinical trials and
  
       o    protection of our intellectual property.
  
  
  
                                        -15-
  <PAGE>
  
  Based on current spending levels and third party funding, we believe that we
  have enough cash to meet our currently anticipated needs for operating expenses,
  working capital, equipment acquisitions and current research projects through at
  least the middle of 2004. However, to the extent we experience changes in the
  timing or size of expenditures or unanticipated expenditures, or if our
  collaborators do not meet their obligations to us or anticipated revenues
  otherwise do not materialize, these funds may not be adequate for this period.
  As a result, we do not know whether:
  
       o    operations will generate meaningful funds
  
       o    additional agreements for product development funding can be reached
  
       o    strategic alliances can be negotiated or
  
       o    adequate additional financing will be available for us to finance our
            own development on acceptable terms, if at all.
  
  Cash balances and operating cash flow are influenced primarily by the timing and
  level of payments by our licensees and development partners, as well as by our
  operating costs.
  
  Because All Of Our Products Are Still In Development, We Have Sustained Losses
  In The Past And We Expect To Sustain Losses In The Future
  
  We have experienced significant losses and, as of September 30, 2002, we had an
  accumulated deficit of approximately U.S.$536.0 million.
  
  For the year ended December 31, 2001 and the nine months ended September 30,
  2002, we had a net loss of approximately U.S.$28.0 million, or U.S.$0.41 per
  common share (basic and diluted), and U.S.$28.3 million, or U.S.$.40 per common
  share (basic and diluted), respectively. We expect to incur additional losses in
  the future. For the full year 2002, we currently expect our net loss to be
  somewhat higher than in 2001, due to increased expenses on Raptiva(TM) and on
  the Millennium collaboration, the further expansion of our development
  infrastructure, and marketing, general and administrative expenses.
  
  Our ability to make profits is dependent in large part on obtaining regulatory
  approval for our products and entering into agreements for product development
  and commercialization, both of which are uncertain. Our ability to fund our
  ongoing operations is dependent on the foregoing factors and on our ability to
  secure additional funds. Because all of our products are still in development,
  we do not know whether we will ever make a profit or whether cash flow from
  future operations will be sufficient to meet our needs.
  
  If Third Party Collaborators Do Not Successfully Develop And Market Our
  Products, We May Not Be Able To Do So On Our Own
  
  Our financial resources and our marketing experience and expertise are limited.
  Consequently, we depend to a large extent upon securing the financial resources
  and marketing capabilities of third parties with whom we collaborate.
  
       o    In April of 1996, XOMA and Genentech entered into an agreement whereby
            XOMA agreed to co-develop Genentech's humanized monoclonal antibody
            product Raptiva(TM). In April of 1999, the companies extended and
            expanded the agreement.
  
       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.
  
       o    In January of 2001, we entered into a strategic process development
            and manufacturing alliance with Onyx Pharmaceuticals, Inc. pursuant to
            which we are scaling up production to commercial volume and will
            manufacture one of Onyx's cancer products.
  
  
  
                                        -16-
  <PAGE>
  
       o    In November of 2001, we entered into a collaboration with Millennium
            Pharmaceuticals, Inc. to develop two of Millennium's products for
            certain vascular inflammation indications.
  
  Because our collaborators are independent third parties, they may be subject to
  different risks than we are and have significant discretion in determining the
  efforts and resources they will apply, we do not know whether Genentech, Baxter,
  Onyx or Millennium will successfully develop or market any of the products we
  are collaborating on.
  
  Even when we have a collaboration relationship, other circumstances may prevent
  it from resulting in successful development of marketable products. For example,
  in June of 1999, we licensed certain genetically-engineered fragments of a
  particular human protein to Allergan Inc. to treat bacterial ophthalmic
  infections. In May of 2000, following successful product testing at Allergan, we
  expanded the collaboration. In November of 2000, Allergan advised us that for
  internal economic reasons they planned to discontinue development of ophthalmic
  anti-infective products derived from this protein.
  
  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 September 30, 2001 through September
  30, 2002, our share price has ranged from a high of U.S.$12.19 to a low of
  U.S.$3.00. On November 1, 2002 the last reported sale price of the common shares
  as reported on the Nasdaq National Market was U.S.$5.75 per share. Factors
  contributing to such volatility include, but are not limited to:
  
       o    results of preclinical studies and clinical trials,
  
       o    information relating to the safety or efficacy of our products,
  
       o    developments regarding regulatory filings,
  
       o    announcements of new collaborations,
  
       o    failure to enter into collaborations,
  
       o    developments in existing collaborations,
  
       o    our funding requirements and the terms of our financing arrangements,
  
       o    announcements of technological innovations or new indications for our
            therapeutic products,
  
       o    government regulations,
  
       o    developments in patent or other proprietary rights,
  
       o    the number of shares outstanding,
  
       o    the number of shares trading on an average trading day,
  
       o    announcements regarding other participants in the biotechnology and
            pharmaceutical industries, and
  
       o    market speculation regarding any of the foregoing.
  
  
  
                                        -17-
  <PAGE>
  
  Because Many Of The Companies We Do Business With Are Also In The Biotechnology
  Sector, The Volatility Of That Sector Can Affect Us Indirectly As Well As
  Directly
  
  The same factors that affect us directly because we are a biotechnology company
  can also adversely impact us indirectly by affecting the ability of our
  collaborators, partners and others we do business with to meet their obligations
  to us or our ability to realize the value of the consideration provided to us by
  these other companies. For example, in connection with our licensing transaction
  with MorphoSys AG, MorphoSys has announced that it has exercised its option to
  pay a portion of the license fee owed to us in the form of equity securities of
  MorphoSys, and the value of those shares is subject both to market risks
  affecting our ability to realize the value of those shares and more generally to
  the business and other risks to which the issuer of those shares is subject. The
  administrative process in Germany that is required in order for these shares to
  be issued has not yet been completed. Since September 30, 2002, the per share
  closing price for MorphoSys shares has ranged from approximately $8.30 to
  $16.17, which demonstrates the volatility of these shares in the current market.
  
  If Any Of Our Products Receives Regulatory Approval, We May Not Be Able To
  Increase Existing Or Acquire New Manufacturing Capacity Sufficient To Meet
  Market Demand
  
  Because we have never commercially introduced any pharmaceutical products and
  none of our products have received regulatory approval, we do not know whether
  the capacity of our existing manufacturing facilities can be increased to
  produce sufficient quantities of our products to meet market demand. Also, if we
  need additional manufacturing facilities to meet market demand, we cannot
  predict that we will successfully obtain those facilities because we do not know
  whether they will be available on acceptable terms. In addition, any
  manufacturing facilities acquired or used to meet market demand must meet the
  FDA's quality assurance guidelines.
  
  Because We Do Not And Cannot Currently Market Any Of Our Products For Commercial
  Sale, We Do Not Know Whether There Will Be A Viable Market For Our Products
  
  Even if we receive regulatory approval for our products and we or our third
  party collaborators successfully manufacture them, our products may not be
  accepted in the marketplace. For example, physicians and/or patients may not
  accept a product for a particular indication because it has been biologically
  derived (and not discovered and developed by more traditional means) if no
  biologically-derived products are currently in widespread use in that
  indication, as is currently the case with psoriasis. Consequently, we do not
  know if physicians or patients will adopt or use our products for their approved
  indications.
  
  If Our And Our Partners' Patent Protection For Our Principal Products And
  Processes Is Not Enforceable, We Will 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
  
  
  
                                        -18-
  <PAGE>
  
       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 60 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.
  
  Protecting Our Intellectual Property Can Be Costly And Exposes Us To Risks Of
  Counterclaims Against Us
  
  We may be required to engage in litigation or other proceedings to protect our
  intellectual property. The cost to us of this litigation, even if resolved in
  our favor, could be substantial. Such litigation could also divert management's
  attention and resources. In addition, if this litigation is resolved against us,
  our patents may be declared invalid, and we could be held liable for significant
  damages. In addition, if the litigation included a claim of infringement by us
  of another party's patent that was resolved against us, we or our collaborators
  may be enjoined from developing, manufacturing, selling or importing products,
  processes or services without a license from the other party.
  
  Other Companies May Render Some Or All Of Our Products Noncompetitive Or
  Obsolete
  
  Developments by others may render our products or technologies obsolete or
  uncompetitive. Technologies developed and utilized by the biotechnology and
  pharmaceutical industries are continuously and substantially changing.
  Competition in the areas of genetically-engineered DNA-based and antibody-based
  technologies is intense and expected to increase in the future as a number of
  established biotechnology firms and large chemical and pharmaceutical companies
  advance in these fields. Many of these competitors may be able to develop
  products and processes competitive with or superior to our own for many reasons,
  including that they may have:
  
       o    significantly greater financial resources
  
       o    larger research and development and marketing staffs
  
       o    larger production facilities
  
       o    entered into arrangements with, or acquired, biotechnology companies
            to enhance their capabilities or
  
       o    extensive experience in preclinical testing and human clinical trials.
  
  
  
                                        -19-
  <PAGE>
  
  These factors may enable others to develop products and processes competitive
  with or superior to our own. 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
  commercial value of their work and may become more aggressive in seeking patent
  protection and licensing arrangements.
  
  Without limiting the foregoing, we are aware that:
  
       o    Biogen Inc. has announced that its Amevive(R) product achieved
            positive results in Phase III clinical trials in patients with
            moderate-to-severe plaque psoriasis, that the FDA and the EMEA have
            officially accepted Biogen's filings for approval of Amevive(R) in
            psoriasis, that a FDA advisory panel voted to recommend approval of
            Amevive(R) for the treatment of moderate-to-severe chronic plaque
            psoriasis and that the FDA has committed to complete the review of its
            Amevive(R) application by the end of the first quarter of 2003;
  
       o    Centocor Inc., a unit of Johnson & Johnson, has tested its rheumatoid
            arthritis and Crohn's disease drug in psoriasis, and it has been
            announced that the drug has shown clinical benefit;
  
       o    it has been announced that Immunex Corp. (recently acquired by Amgen
            Inc.) has tested its rheumatoid arthritis and psoriatic arthritis drug
            in psoriasis with positive results;
  
       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 the FDA approved its investigational new
            drug filing for HuMax-CD4 for psoriasis and the initiation of a Phase
            II study; and
  
       o    other companies, including Medarex, Inc., are developing monoclonal
            antibody or other products for treatment of inflammatory skin
            disorders.
  
  Currently, there are several companies with marketed biologics that are approved
  for treating patients with rheumatoid arthritis:
  
       o    Immunex Corp. markets Enbrel,
  
       o    Amgen Inc. gained FDA approval for Kineret and
  
       o    Centocor Inc. is approved to market Remicade to rheumatoid arthritis
            patients.
  
  In addition to approved products, a number of companies are developing drugs
  with a biologic mechanism of action for the treatment of rheumatoid arthritis.
  These companies include Cambridge Antibody Technology Group plc, Biogen Inc.,
  Celltech Group plc and others.
  
  A number of companies are developing monoclonal antibodies targeting cancers,
  which may prove more effective than ONYX-015 or the ING-1 antibody.
  
  It is possible that one or more other companies may be developing one or more
  products based on the same human protein as our NEUPREX(R) product, and these
  product(s) may prove to be more effective than NEUPREX(R) or receive regulatory
  approval prior to NEUPREX(R) or any BPI-derived ophthalmic product developed by
  XOMA.
  
  As We Do More Business Internationally, We Will Be Subject To Additional
  Political, Economic and Regulatory Uncertainties
  
  We may not be able to successfully operate in any foreign market. We believe
  that, because the pharmaceutical industry is global in nature, international
  activities will be a significant part of our future business activities and
  that, when and if we are able to generate income, a substantial portion of that
  income will be derived from product sales
  
  
  
                                        -20-
  <PAGE>
  
  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
  
       o    political or economic instability
  
       o    trade restrictions
  
       o    changes in tariffs
  
       o    restrictions on repatriating profits
  
       o    withholding and other taxation and
  
       o    difficulties in staffing and managing international operations.
  
  For example, we have applied for but not yet received an exemption from German
  withholding tax on the full license fee owed to us by MorphoSys in connection
  with our previously announced cross-licensing agreements. We have received an
  inquiry from the German federal tax authority questioning whether we are
  entitled to the exemption. Although we have responded to this inquiry, claiming
  we are entitled to the exemption, the German tax authority has not yet ruled on
  this issue. Were the German tax authority to find that the claimed exemption
  from withholding does not apply, and were any appeals of that decision also to
  fail, the license fees due from MorphoSys would be subject to withholding at a
  rate of approximately 26% of the cash paid or the value of the shares upon
  issuance, as the case may be.
  
  
  Also, our financial results could be significantly affected by factors such as
  fluctuations in currency exchange rates or weak economic conditions in the
  foreign markets in which we or our collaborators seek to operate.
  
  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 Chief Scientific and Medical Officer and Senior Vice
  President; Clarence L. Dellio, our Senior Vice President, Operations; 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.
  
  Because We Engage In Human Testing, We Are Exposed To An Increased Risk Of
  Product Liability Claims
  
  The testing and marketing of medical products entails an inherent risk of
  allegations of product liability. We believe that we currently have adequate
  levels of insurance for our clinical trials; however, in the event of one or
  more large, unforeseen awards, such levels may not provide adequate coverage. We
  will seek to obtain additional insurance, if needed, if and when our products
  are commercialized; however, because we do not know when this will occur, we do
  not know whether adequate insurance coverage will be available or be available
  at acceptable costs. A significant
  
  
  
                                        -21-
  <PAGE>
  
  product liability claim for which we were not covered by insurance would have to
  be paid from cash or other assets. To the extent we have sufficient insurance
  coverage, such a claim would result in higher subsequent insurance rates.
  
  We May Be Subject To Increased Risks Because We Are A Bermuda Company
  
  Alleged abuses by certain companies that have changed their legal domicile from
  jurisdictions within the United States to Bermuda have created an environment
  where, notwithstanding that we changed our legal domicile in a transaction that
  was approved by our shareholders and fully taxable to our company under U.S.
  law, we may be exposed to various prejudicial actions, including:
  
       o    "blacklisting" of our common shares by certain pension funds
  
       o    legislation restricting certain types of transactions and
  
       o    punitive tax legislation.
  
  We do not know whether any of these things will happen, but if implemented one
  or more of them may have an adverse impact on our future operations or our share
  price.
  
  If You Were To Obtain A Judgment Against Us, It May Be Difficult To Enforce
  Against Us Because We Are A Foreign Entity
  
  We are a Bermuda company. All or a substantial portion of our assets may be
  located outside the United States. As a result, it may be difficult for
  shareholders and others to enforce in United States courts judgments obtained
  against us. We have irrevocably agreed that we may be served with process with
  respect to actions based on offers and sales of securities made 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
  
  Our shareholder rights agreement 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.
  
  
  
                                        -22-
  <PAGE>
  
  These provisions of our shareholders rights agreement and our bye-laws, alone or
  in combination with each other, may discourage transactions involving actual or
  potential changes of control, including transactions that otherwise could
  involve payment of a premium over prevailing market prices to holders of common
  shares, could limit the ability of shareholders to approve transactions that
  they may deem to be in their best interests and could make it considerably more
  difficult for a potential acquiror to replace management.
  
  Item 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
  Interest Rate Risk. The Company's exposure to market rate risk due to changes in
  interest rates relates primarily to the Company's investment portfolio. The
  Company does not use derivative financial instruments in its investment
  portfolio. By policy, the Company places its investments with high quality debt
  security issuers, limits the amount of credit exposure to any one issuer, limits
  duration by restricting the term and holds investments to maturity except under
  rare circumstances. The Company classifies its cash equivalents as fixed rate if
  the rate of return on an instrument remains fixed over its term. As of September
  30, 2002, all the Company's cash equivalents are classified as fixed rate.
  
  The Company also has a long-term convertible note due to Genentech in 2005.
  Interest on this note of LIBOR plus 1% is reset at the end of June and December
  each year and is therefore variable.
  
  The table below presents the amounts and related weighted interest rates of the
  Company's cash equivalents and long-term convertible note at September 30, 2002:
  
  <TABLE>
  <CAPTION>
  
                                                                           Fair Value          Average Interest
                                                    Maturity             (in thousands)              Rate
                                                 ---------------       ------------------      ----------------
  
  <S>                                                 <C>                  <C>                       <C>
  Cash equivalents, fixed rate                        Daily                $  35,861                 1.90%
  Long-term convertible note, variable rate           2005                 $  58,305                 2.96%
  
  </TABLE>
  
  Other Market Risk. At September 30, 2002, 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
  our 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,
  within 90 days of the filing date of 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.
  
  There have been no significant changes in our internal controls or in other
  factors that could significantly affect these controls subsequent to the date of
  the evaluation referenced above.
  
  
  
                                        -23-
  <PAGE>
  
  PART II - OTHER INFORMATION
  
  OTHER INFORMATION
  
  Item 1.  LEGAL PROCEEDINGS
  
  On September 13, 2002, all claims and counterclaims in XOMA's litigation with
  Biosite Incorporated were dismissed with prejudice pursuant to a settlement
  agreement between the parties. Other terms of the settlement included a
  royalty-free license to XOMA to practice certain Biosite patents, assignment to
  XOMA of Biosite's antibody expression technology that was announced earlier this
  year, a royalty-free license to Biosite to utilize XOMA's bacterial cell
  expression technology, an agreement pursuant to which XOMA may receive
  expression libraries for up to an agreed number of targets it presents to
  Biosite, termination of the existing license to Biosite from XOMA for the LBP
  diagnostic assay and an exchange of releases.
  
  Item 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS
  
  The Company continues to use the net proceeds from its June 2001 registered
  offering of common shares for general corporate purposes, including leasehold
  improvements, equipment acquisitions, current research and development projects,
  the development of new products or technologies, general working capital and
  operating expenses. Pending application of the net proceeds as described above,
  the Company has invested the remaining net proceeds of the offering in
  short-term, investment-grade, interest-bearing securities.
  
  Item 3.  DEFAULTS UPON SENIOR SECURITIES
  
  None
  
  Item 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
  None
  
  Item 5.  OTHER INFORMATION
  
  None
  
  Item 6.  EXHIBITS & REPORTS ON FORM 8-K
  
       (a) Exhibits:
  
            Amendment No. 1 to Convertible Subordinated Promissory Note dated
       November 5, 2002 (incorporated by reference to Exhibit 10.3A to the
       Company's Registration Statement on Form S-3 (No. 333-101035), filed
       November 6, 2002).
  
       (b) Reports on Form 8-K:
  
            None
  
  
  
  
                                        -24-
  <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 14, 2002        By:  /s/ JOHN L. CASTELLO
                                         --------------------
                                         John L. Castello
                                         Chairman of the Board, President and
                                         Chief Executive Officer
  
  Date:    November 14, 2002        By:  /s/ PETER B. DAVIS
                                         ------------------
                                         Peter B. Davis
                                         Vice President, Finance and
                                         Chief Financial Officer
  
  
  
  
                                        -25-
  <PAGE>
  
  
  
                     CERTIFICATION ACCOMPANYING PERIODIC REPORT
  
  Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C.ss.1350)
  
  Each of the undersigned officers of XOMA Ltd. (the "Company") hereby certify
  that (1) the Quarterly Report of the Company on Form 10-Q for the period ended
  September 30, 2002 (the "Report") fully complies with the requirements of
  Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and (2) the
  information contained in the Report fairly presents, in all material respects,
  the financial condition and the results of operations of the Company.
  
                                      XOMA Ltd.
  
  Date:    November 14, 2002          By:  /s/ JOHN L. CASTELLO
                                           --------------------
                                           John L. Castello
                                           Chairman of the Board, President and
                                           Chief Executive Officer
  
  Date:    November 14, 2002          By:  /s/ PETER B. DAVIS
                                           ------------------
                                           Peter B. Davis
                                           Vice President, Finance and
                                           Chief Financial Officer
  
  
  
  
                                        -26-
  <PAGE>
  
  
  
                                   CERTIFICATIONS
  
  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 quarterly 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 quarterly report;
  
  3.   Based on my knowledge, the financial statements, and other financial
       information included in this quarterly 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
       quarterly 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-14 and 15d-14) for the registrant and we have:
  
       a)   designed such disclosure controls and procedures 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 quarterly
            report is being prepared;
  
       b)   evaluated the effectiveness of the registrant's disclosure controls
            and procedures as of a date within 90 days prior to the filing date of
            this quarterly report (the "Evaluation Date"); and
  
       c)   presented in this quarterly report our conclusions about the
            effectiveness of the disclosure controls and procedures based on our
            evaluation as of the Evaluation Date;
  
  5.   The registrant's other certifying officers and I have disclosed, based on
       our most recent evaluation, to the registrant's auditors and the audit
       committee of the registrant's board of directors (or persons performing the
       equivalent function):
  
       a)   all significant deficiencies in the design or operation of internal
            controls which could adversely affect the registrant's ability to
            record, process, summarize and report financial data and have
            identified for the registrant's auditors any material weaknesses in
            internal controls; and
  
       b)   any fraud, whether or not material, that involves management or other
            employees who have a significant role in the registrant's internal
            controls; and
  
  6.   The Registrant's other certifying officers and I have indicated in this
       quarterly report whether or not there were significant changes in internal
       controls or in other factors that could significantly affect internal
       controls subsequent to the date of our most recent evaluation, including
       any corrective actions with regard to significant deficiencies and material
       weaknesses.
  
  Date:    November 14, 2002             By:  /s/ JOHN L. CASTELLO
                                              --------------------
                                              John L. Castello
                                              Chairman of the Board, President and
                                              Chief Executive Officer
  
  
  
  
                                        -27-
  <PAGE>
  
  
  
  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 quarterly 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 quarterly report;
  
  3.   Based on my knowledge, the financial statements, and other financial
       information included in this quarterly 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
       quarterly 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-14 and 15d-14) for the registrant and we have:
  
       a)   designed such disclosure controls and procedures 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 quarterly
            report is being prepared;
  
       b)   evaluated the effectiveness of the registrant's disclosure controls
            and procedures as of a date within 90 days prior to the filing date of
            this quarterly report (the "Evaluation Date"); and
  
       c)   presented in this quarterly report our conclusions about the
            effectiveness of the disclosure controls and procedures based on our
            evaluation as of the Evaluation Date;
  
  5.   The registrant's other certifying officers and I have disclosed, based on
       our most recent evaluation, to the registrant's auditors and the audit
       committee of the registrant's board of directors (or persons performing the
       equivalent function):
  
       a)   all significant deficiencies in the design or operation of internal
            controls which could adversely affect the registrant's ability to
            record, process, summarize and report financial data and have
            identified for the registrant's auditors any material weaknesses in
            internal controls; and
  
       b)   any fraud, whether or not material, that involves management or other
            employees who have a significant role in the registrant's internal
            controls; and
  
  6.   The registrant's other certifying officers and I have indicated in this
       quarterly report whether or not there were significant changes in internal
       controls or in other factors that could significantly affect internal
       controls subsequent to the date of our most recent evaluation, including
       any corrective actions with regard to significant deficiencies and material
       weaknesses.
  
  Date:    November 14, 2002       By:  /s/ PETER B. DAVIS
                                        ------------------
                                        Peter B. Davis
                                        Vice President, Finance and
                                        Chief Financial Officer
  
  
  
  
                                        -28-
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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, 2002
  
                             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 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        70,341,504
  Class                                    Outstanding at November 1, 2002
  
  ================================================================================
  XOMA Ltd.
  
                                      FORM 10-Q
  
                                  TABLE OF CONTENTS
  
                                                                              Page
  
  PART I   FINANCIAL INFORMATION.................................................1
  
           Item 1.  Condensed Consolidated Financial Statements (unaudited)......1
  
                    Condensed Consolidated Balance Sheets as of September 30,
                    2002 and December 31, 2001...................................1
  
                    Condensed Consolidated Statements of Operations for the
                    Three and Nine Months Ended September 30, 2002 and 2001......2
  
                    Condensed Consolidated Statements of Cash Flows for the
                    Nine Months Ended September 30, 2002 and 2001................3
  
                    Notes to Condensed Consolidated Financial Statements.........4
  
           Item 2.  Management's Discussion and Analysis of Financial Condition
                    and Results of Operations...................................10
  
           Item 3.  Quantitative and Qualitative Disclosures About Market
                    Risk........................................................23
  
           Item 4.  Controls and Procedures.....................................23
  
  PART II        OTHER INFORMATION..............................................24
  
           Item 1.  Legal Proceedings...........................................24
  
           Item 2.  Changes in Securities and Use of Proceeds...................24
  
           Items 3, 4 and 5 are either inapplicable or nonexistent and therefore
                    are omitted from this report................................24
  
           Item 6.  Exhibits & Reports on Form 8-K..............................24
  
  Signatures....................................................................25
  
  Certifications................................................................26
  
                                        -i-
  PART I - FINANCIAL INFORMATION
  
  Item 1.  CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
  XOMA Ltd.
  
                        CONDENSED CONSOLIDATED BALANCE SHEETS
  
                                   (In thousands)
  
                                                             September 30, 2002   December 31, 2001
                                                                (Unaudited)           (Note 1)
                                                             ------------------   -----------------
                                               ASSETS
  Current Assets:
  Cash and cash equivalents                                $    35,861          $   67,320
       Short-term investments                                           332                 320
       Receivables                                                    6,124               1,662
       Related party receivables                                        394                 418
       Inventory                                                      1,306               1,299
       Prepaid expenses and other                                       733                 249
                                                                -----------          ----------
           Total current assets                                      44,750              71,268
  Property and equipment, net                                        22,095              14,645
  Deposits and other                                                    172                 194
                                                                -----------          ----------
           Total Assets                                         $    67,017          $   86,107
                                                                ===========          ==========
  
                     LIABILITIES & SHAREHOLDERS' EQUITY (Net Capital Deficiency)
  Current Liabilities:
       Accounts payable                                         $     3,885          $    3,520
       Accrued liabilities                                            6,999               4,422
       Capital lease obligations - current                              943                 673
       Deferred revenue - current                                     2,812               5,017
       Convertible note - current                                     5,112               5,013
                                                                -----------          ----------
           Total current liabilities                                 19,751              18,645
  Capital lease obligations - long-term                               1,496               1,393
  Deferred revenue - long-term                                        1,165               1,470
  Convertible notes - long-term                                      58,305              50,980
                                                                -----------          ----------
           Total Liabilities                                         80,717              72,488
  Shareholders' Equity (Net Capital Deficiency)                     (13,700)             13,619
                                                                -----------          ----------
           Total Liabilities & Shareholders' Equity             $    67,017          $   86,107
                                                                ===========          ==========
  Note 1 - Amounts derived from the Company's audited financial statements
  appearing in the Annual Report on Form 10-K for the year ended December 31, 2001
  as filed with the Securities and Exchange Commission.
  
       See accompanying notes to condensed consolidated financial statements.
  XOMA Ltd.
  
                   CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
  
                   (Unaudited, in thousands except per share data)
  
                                                      Three Months Ended           Nine Months Ended
                                                        September 30,                September 30,
                                                      ------------------           ------------------
  
                                                      2002          2001          2002          2001
                                                   -----------   ----------    ----------    ----------
  Revenues:
  License and collaborative fees                $    1,423    $    1,316    $    9,076    $    3,381
     Contract and other revenue                         2,810         1,969         9,103         7,972
                                                   -----------   ----------    ----------    ----------
        Total revenues                                  4,233         3,285        18,179        11,353
                                                   -----------   ----------    ----------    ----------
  
  Operating Costs and Expenses:
     Research and development                           9,701         8,162        30,395        26,097
     Marketing, general and administrative              6,416         2,002        15,114         5,707
                                                   -----------   ----------    ----------    ----------
        Total operating costs and expenses             16,117        10,164        45,509        31,804
                                                   -----------   ----------    ----------    ----------
           Loss from operations                       (11,884)       (6,879)      (27,330)      (20,451)
  
  Other Income (Expense):
     Investment and other income                          194           611           698         1,590
     Interest and other expense                          (572)         (551)       (1,714)       (2,181)
                                                   -----------   ----------    ----------    ----------
           Net Loss                                $  (12,262)   $   (6,819)   $  (28,346)   $  (21,042)
                                                   ===========   ==========    ==========    ==========
  
  Basic and diluted net loss per share             $    (0.17)   $    (0.10)   $    (0.40)   $    (0.31)
                                                   ===========   ==========    ==========    ==========
  
  Shares used in computing basic and diluted
  net loss per share                                   70,330        70,008        70,291        67,502
                                                   ===========   ==========    ==========    ==========
  See accompanying notes to condensed consolidated financial statements.
  
                                        -2-
  XOMA Ltd.
  
                   CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
  
                              (Unaudited, in thousands)
  
                                                                                           Nine Months Ended
                                                                                             September 30,
                                                                                  ---------------------------------
                                                                                       2002                 2001
                                                                                  -------------      --------------
  Cash Flows from Operating Activities:
  Net loss                                                                     $   (28,346)        $   (21,042)
       Adjustments to reconcile net loss to net cash used in
         operating activities:
       Depreciation and amortization                                                    1,332                  877
       Shares contributed to 401(k) and management incentive plans                        541                  477
       Increase in convertible notes to a collaborative partner for
         cost allocation                                                                2,050                1,438
       Accrued interest on convertible notes                                            1,354                1,993
       (Gain) on investments                                                               --                  (21)
       (Gain) loss on disposal/retirement of property and equipment                         1                  (85)
  Change in assets and liabilities:
       Receivables and related party receivables                                       (4,438)                (898)
       Inventory                                                                           (7)                (714)
       Prepaid expenses and other                                                        (484)                  25
       Deposits and other assets                                                           22                   --
       Accounts payable                                                                   365                 (335)
       Accrued liabilities                                                              2,577                   (4)
       Deferred revenue                                                                (2,510)               1,236
                                                                                  -------------      --------------
           Net cash used in operating activities                                      (27,543)             (17,053)
                                                                                  -------------      --------------
  Cash Flows from Investing Activities:
       Proceeds from sale of short-term investments                                        --                  253
       Purchase of property and equipment, net of sales proceeds                       (8,783)              (4,993)
                                                                                  -------------      --------------
           Net cash used in investing activities                                       (8,783)              (4,740)
                                                                                  -------------      --------------
  Cash Flows from Financing Activities:
       Proceeds from sale and leaseback transactions                                    1,000                1,070
       Principal payments under capital lease obligations                                (627)                (188)
       Proceeds from issuance of convertible note                                       4,020                2,677
       Proceeds from issuance of shares and warrants                                      474               47,868
                                                                                  -------------      --------------
           Net cash provided by financing activities                                    4,867               51,427
                                                                                  -------------      --------------
  Net increase (decrease) in cash and cash equivalents                                (31,459)              29,634
  Cash and cash equivalents at beginning of year                                       67,320               35,043
                                                                                  -------------      --------------
  Cash and cash equivalents at end of period                                      $    35,861          $    64,677
                                                                                  =============      ==============
  See accompanying notes to condensed consolidated financial statements.
  
                                        -3-
  XOMA Ltd.
  
          NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
  
                          (Unaudited, dollars in thousands)
  
  NOTE 1 - OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
  
  Business
  
  XOMA Ltd. ("XOMA" or the "Company"), a Bermuda company, is a biopharmaceutical
  company that develops and manufactures products to treat cancer, immunologic and
  inflammatory disorders, and infectious diseases. The Company's products are
  presently in various stages of development and all are subject to regulatory
  approval before the Company or its collaborators can commercially introduce any
  products. There can be no assurance that any of the products under development
  by the Company will be developed successfully, obtain the requisite regulatory
  approval or be successfully manufactured or marketed.
  
  Basis of Presentation
  
  The interim information contained in this report is unaudited but, in
  management's opinion, includes all normal recurring adjustments necessary for a
  fair presentation of results for the periods presented. Interim results may not
  be indicative of results to be expected for the full year or future periods. The
  condensed consolidated balance sheet as of December 31, 2001 has been derived
  from the audited consolidated financial statements included in the Company's
  2001 Annual Report on Form 10-K. The unaudited condensed consolidated financial
  statements should be read in conjunction with the Company's audited consolidated
  financial statements for the year ended December 31, 2001 included in its Annual
  Report on Form 10-K.
  
  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, 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. For the nine months ended September 30, 2001, two
  customers represented 51% and 46% of total revenues.
  
                                        -4-
  XOMA Ltd.
  
          NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
  
                          (Unaudited, dollars in thousands)
  
  Recent Accounting Pronouncements
  
  In July of 2001, the Financial Accounting Standards Board, or FASB, issued
  Statement of Financial Accounting Standards No. 141, or SFAS 141, "Business
  Combinations." SFAS 141 eliminates the pooling-of-interests method of accounting
  for business combinations except for qualifying business combinations that were
  initiated prior to July 1, 2001. In addition, SFAS 141 further clarifies the
  criteria to recognize intangible assets separately from goodwill. Specifically,
  SFAS 141 requires that an intangible asset may be separately recognized only if
  such an asset meets the contractual-legal criterion or the separability
  criterion. The requirements of SFAS 141 are effective for any business
  combination accounted for by the purchase method that is completed after June
  30, 2001 (i.e., the acquisition date is July 1, 2001 or after). The adoption of
  SFAS 141 on January 1, 2002 had no material impact on the Company's financial
  position or results of operations.
  
  In July of 2001, the FASB issued Statement of Financial Accounting Standards No.
  142, or SFAS 142, "Goodwill and Other Intangible Assets." Under SFAS 142,
  goodwill and indefinite lived intangible assets are no longer amortized but are
  reviewed annually (or more frequently if impairment indicators arise) for
  impairment. For intangible assets with indefinite useful lives, the impairment
  review will involve a comparison of fair value to carrying value, with any
  excess of carrying value over fair value being recorded as an impairment loss.
  For goodwill, the impairment test shall be a two-step process, consisting of a
  comparison of the fair value of a reporting unit with its carrying amount,
  including the goodwill allocated to each reporting unit. If the carrying amount
  is in excess of the fair value, the implied fair value of the reporting unit
  goodwill is compared to the carrying amount of the reporting unit goodwill. Any
  excess of the carrying value of the reporting unit goodwill over the implied
  fair value of the reporting unit goodwill will be recorded as an impairment
  loss. Separable intangible assets that are deemed to have a finite life will
  continue to be amortized over their useful lives (but with no maximum life).
  Intangible assets with finite useful lives will continue to be reviewed for
  impairment in accordance with Statement of Financial Accounting Standards No.
  121, or SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for
  Long-Lived Assets to Be Disposed Of." The amortization provisions of SFAS 142
  apply to goodwill and intangible assets acquired after June 30, 2001. The
  adoption of SFAS 142 on January 1, 2002 had no material impact on the Company's
  financial position or results of operations.
  
  In August of 2001, the FASB issued Statement of Financial Accounting Standards
  No. 143, or SFAS 143, "Accounting for Asset Retirement Obligations." SFAS 143
  addresses financial accounting and reporting for obligations associated with the
  retirement of tangible long-lived assets and the associated retirement costs.
  The adoption of SFAS 143 on January 1, 2002 had no material impact on the
  Company's financial position or results of operations.
  
  In October of 2001, the FASB issued Statement of Financial Accounting Standards
  No. 144, or SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived
  Assets," which supersedes SFAS 121, "Accounting for the Impairment of Long-Lived
  Assets and for Long-Lived Assets to be Disposed of." SFAS 144 addresses
  financial accounting and reporting for the impairment of long-lived assets and
  for long-lived assets to be disposed of. However, SFAS 144 retains the
  fundamental provisions of SFAS 121 for: (1) recognition and measurement of the
  impairment of long-lived assets to be held and used; and (2) measurement of
  long-lived assets to be disposed of by sale. SFAS 144 is effective for fiscal
  years beginning after December 15, 2001. The adoption of SFAS 144 on January 1,
  2002 had no material effect on the Company's financial position or results of
  operations.
  
  In April of 2002, the FASB issued Statement of Financial Accounting Standards
  No. 145, or SFAS 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment
  of FASB Statement No. 13, and Technical Corrections," which
  
                                        -5-
  XOMA Ltd.
  
          NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
  
                          (Unaudited, dollars in thousands)
  
  provides guidance on the classification of gains and losses from the
  extinguishment of debt and on the accounting for certain specified lease
  transactions. The provisions of SFAS 145 which relate to the rescission of
  Statement 4 are applicable in fiscal years beginning after May 15, 2002. The
  remaining provisions of SFAS 145 are effective for financial statements issued
  on or after May 15, 2002. The Company does not expect the adoption of SFAS 145
  will have a material impact on its financial position or results of operations.
  
  In July of 2002, the FASB issued Statement of Financial Accounting Standards No.
  146, or SFAS 146, "Accounting for Costs Associated with Exit or Disposal
  Activities." SFAS 146 requires that a liability for costs associated with an
  exit or disposal activity be recognized and measured initially at fair value
  only when the liability is incurred. SFAS 146 addresses costs associated with
  restructuring activities that are currently accounted for under Emerging Issues
  Task Force ("EITF") Issue No. 94-3, "Liability Recognition for Certain Employee
  Termination Benefits and Other Costs to Exit an Activity (Including Certain
  Costs Incurred in a Restructuring)." The scope of SFAS 146 also covers
  termination benefits that employees who are involuntarily terminated receive
  under the terms of a one-time benefit arrangement, costs related to terminating
  a contract that is not a capital lease and costs to consolidate facilities. SFAS
  146 is effective for exit or disposal activities that are initiated after
  December 31, 2002. The Company does not expect the adoption of SFAS 146 to have
  a material impact on its financial position or results of operations.
  
  Revenue Recognition
  
  Revenue is recognized when the related costs are incurred and the four basic
  criteria of revenue recognition are met: (1) persuasive evidence of an
  arrangement exists; (2) delivery has occurred or services rendered; (3) the fee
  is fixed and determinable; and (4) collectibility is reasonably assured.
  Determination of criteria (3) and (4) are based on management's judgments
  regarding the nature of the fee charged for products or services delivered and
  the collectibility of those fees.
  
  License and Collaborative Fees
  
  Revenue from non-refundable license or technology access payments under license
  and collaborative agreements where the Company has a continuing obligation to
  perform is recognized as revenue over the period of the continuing performance
  obligation.
  
  Milestone payments under collaborative arrangements are recognized as revenue
  upon 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 achieved.
  
  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.
  
                                        -6-
  XOMA Ltd.
  
          NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
  
                          (Unaudited, dollars in thousands)
  
  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
  
  The Company expenses research and development costs as incurred. 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. The Company's research
  and development expenses include costs incurred to provide services to third
  parties under terms of various collaborative arrangements.
  
  Comprehensive Income (Loss)
  
  Unrealized gains or losses on the Company's available-for-sale securities are
  included in other comprehensive income (loss). Comprehensive loss and its
  components for the three and nine months ended September 30, 2002 and 2001 are
  as follows:
  Three Months Ended                    Nine Months Ended
                                             September 30,                        September 30,
                                      --------------------------         -----------------------------
                                         2002            2001               2002               2001
                                      ----------      ----------         -----------       -----------
  Net loss                            $ (12,262)      $  (6,819)         $ (28,346)         $ (21,042)
  Unrealized gain (loss) on
  securities available-for-sale              12            (17)                 12                (17)
                                      ----------      ----------         -----------       -----------
  Comprehensive loss                  $ (12,250)      $  (6,836)         $ (28,334)         $ (21,059)
                                      ==========      ==========         ===========       ===========
  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 the FASB's Statement of
  Financial Accounting Standards 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 each of the periods ended
  September 30:
  
                                              Nine months ended September 30,
                                             ---------------------------------
                                                 2002                   2001
                                             ------------       --------------
                                                       (in thousands)
  Options for shares                              4,661                 4,201
  Warrants for shares                               700                   700
  Convertible notes and related interest         10,577                 4,789
  
                                        -7-
  XOMA Ltd.
  
          NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
  
                          (Unaudited, dollars in thousands)
  
  NOTE 2 - BALANCE SHEET COMPONENTS
  
  Inventories
  
  Inventories are stated at the lower of standard cost (which approximates
  first-in, first-out cost) or market. Inventories, which relate principally to
  the Company's agreement with Baxter Healthcare Corporation, consist of the
  following:
  
                                  September 30               December 31,
                                      2002                       2001
                               -----------------        ---------------------
  Raw minerals                 $             202        $                 195
  Finished goods                           1,104                        1,104
                               -----------------        ---------------------
  Total                        $           1,306        $               1,299
                               =================        =====================
  
  Accrued Liabilities
  
  Accrued liabilities consist of the following:
  
                                          September 30,             December 31,
                                               2002                     2001
                                      ------------------       ------------------
  Accrued payroll expenses            $            2,765       $           2,347
  Accrued clinical trial expenses                    494                     445
  Accrued legal fees                               2,825                     505
  Other                                              915                   1,125
                                      ------------------       ------------------
  Total                               $            6,999       $           4,422
                                      ==================       ==================
  
  NOTE 3 - LICENSE AGREEMENT
  
  In February of 2002, XOMA and MorphoSys AG announced cross-licensing agreements
  for antibody-related technologies. Under the agreements, XOMA is entitled to
  receive license payments from MorphoSys in addition to a license to use the
  MorphoSys HuCAL(R) GOLD antibody library for its target discovery and research
  programs. MorphoSys and its partners receive a license to use the XOMA antibody
  expression technology for developing antibody products using MorphoSys' phage
  display-based HuCAL(R) antibody library. MorphoSys also receives a license for
  the production of antibodies under the XOMA patents. The term of this license
  agreement commenced in February of 2002 and remains in effect until the
  expiration of the last patent within the XOMA patent rights provided under the
  terms of the agreement. Because there are no continuing performance obligations
  on the part of the Company under the MorphoSys agreement, the license fee
  provided for in that agreement was recognized as revenue in the first quarter of
  2002. Under the terms of the agreement, the license fee was to be paid in two
  installments. The first was due and paid in the first quarter of 2002, and the
  second portion, which was recognized as revenue in the first quarter of 2002 in
  the amount of $4,000, is due in the fourth quarter of 2002. At MorphoSys'
  option, the second installment could be paid in either cash in the amount of
  $4,000 or with MorphoSys shares equivalent to $4,800 at the time of MorphoSys'
  election to pay the second installment in shares.
  
  Subsequent to the end of the quarter, the Company was notified by MorphoSys of
  its intention to exercise its option to pay the second installment 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). The administrative process in Germany that is required in order for these
  shares to be issued has not yet been completed. Since September 30, 2002, the
  per share closing price for MorphoSys shares has ranged from approximately $8.30
  to $16.17. Additionally, XOMA has applied for but not yet received an exemption
  from German withholding tax on the full license fee from MorphoSys. The Company
  has received an inquiry from the German federal tax authority questioning
  whether the Company is entitled to the exemption. Although the Company has
  responded to this inquiry, claiming it is entitled to the exemption, the German
  tax authority has not yet ruled on this issue. Were the German tax authorities
  to find that the claimed exemption from withholding does not apply, and were any
  appeals of that decision also to fail, the license fees due from MorphoSys would
  be subject to withholding at a rate of approximately 26% of the cash paid or the
  market value of the shares upon issuance, as the case may be. Subject to the
  risks discussed in this paragraph, the Company expects to receive the MorphoSys
  shares in the fourth quarter of 2002.
  
  The Company has not recorded a provision for these uncertainties related to
  either changes in the market value of the shares MorphoSys intends to issue or
  the German withholding tax. Both future market conditions for the MorphoSys
  shares and the final determination by the German authorities are difficult to
  predict and may vary significantly. Therefore, under the provisions of Statement
  of Financial Accounting Standards No. 5, Accounting for Contingencies, the
  Company has determined that the conditions related to the likelihood of the
  events both probable and reasonably estimable have not been met. If either of
  these uncertainties results in an unfavorable outcome for XOMA, the Company's
  financial position and results of operations would be adversely impacted.
  
                                        -8-
  XOMA Ltd.
  
          NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
  
                          (Unaudited, dollars in thousands)
  
  NOTE 4 - SUBSEQUENT EVENTS
  
  Subsequent to September 30, 2002, XOMA filed a Registration Statement on Form
  S-3 to register the resale by Millennium Pharmaceuticals, Inc. and an affiliate
  of up to 5,000,000 common shares that we may sell to Millennium under the terms
  of our investment agreement or that we may issue upon conversion of the
  convertible note held by Millennium. No such common shares may be resold by
  Millennium pursuant to such registration statement until such registration
  statement is declared effective by the Securities and Exchange Commission.
  Additionally, the convertible note for $5,000 held by Millennium was amended to
  extend the maturity date from November 26, 2002 to May 26, 2003.
  
  In October of 2002, XOMA and Dyax Corp. announced a cross-licensing agreement
  for antibody-related technologies. Under the agreement, XOMA will receive
  license and royalty payments from Dyax in addition to a Dyax antibody library
  and a license to Dyax's phage display patents known as the Ladner patents. Dyax
  receives a license to use XOMA's antibody expression technology for developing
  antibody products for itself and Dyax collaborators. Dyax also receives a
  license for the production of antibodies under the XOMA patents.
  
                                        -9-
  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, 2002 were $4.2 million, a 27%
  increase compared with $3.3 million for the same period in 2001. The increase
  was primarily due to higher contract revenue from Baxter Healthcare Corporation
  and Onyx Pharmaceuticals, Inc. for development services. Revenues for the nine
  months ended September 30, 2002 increased 60% to $18.2 million compared to $11.4
  million for the same period in 2001. This increase was primarily due to
  increased license fees including our agreement with MorphoSys AG entered into in
  February of 2002, the recognition of revenue for certain license fees and other
  payments received in the current and prior periods from Baxter, Onyx and
  Genentech, Inc. and contract revenue from Baxter and Onyx.
  
  Research and development expenses for the three months and nine months ended
  September 30, 2002 increased to $9.7 million and $30.4 million, respectively, or
  by 18% and 16%, respectively, from $8.2 million and $26.1 million, respectively,
  for the comparable periods of 2001. Spending in 2002 reflected increased
  development costs associated with Raptiva(TM) (Efalizumab, formerly
  Xanelim(TM)), MLN01, CAB2 and ONYX-015. The increase was partially offset by
  savings on certain preclinical development programs that were discontinued
  during 2001.
  
  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 millions):
  Three Months Ended                   Nine Months Ended
                                                 September 30,                       September 30,
                                         --------------------------            -------------------------
                                             2002             2001                2002            2001
                                         -----------     ----------            -----------    ----------
  Earlier stage programs                 $    3.0          $   2.9             $  12.4         $   11.7
  Later stage programs                        6.7              5.3                18.0             14.4
                                         -----------     ----------            -----------    ----------
  Total                                  $    9.7          $   8.2             $  30.4         $   26.1
                                         ===========     ==========            ===========    ==========
  -10-
  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 millions):
  Three Months Ended                   Nine Months Ended
                                              September 30,                       September 30,
                                      ---------------------------          --------------------------
                                          2002             2001                2002            2001
                                      -----------      ----------          -----------     ----------
  Internal projects                   $    2.5          $   3.7             $  12.3         $   15.2
  Collaborative arrangements               7.2              4.5                18.1             10.9
                                      -----------      ----------          -----------     ----------
  Total                               $    9.7          $   8.2             $  30.4         $   26.1
                                      ===========      ==========          ===========     ==========
  For the nine months ended September 30, 2002 and 2001 one project accounted for
  21% and 18%, respectively, of our total research and development costs. No other
  single project was greater than 20% during these periods.
  
  Marketing, general and administrative expenses for the three months and nine
  months ended September 30, 2002 increased to $6.4 million and $15.1 million,
  respectively, or 220% and 165%, respectively, from $2.0 million and $5.7
  million, respectively, for the comparable periods in 2001. The most significant
  component of this increase was litigation expenses related to our litigation
  against Biosite Incorporated and certain shareholder litigation, which totaled
  approximately $3.3 million and $7.0 million in the respective three and nine
  month periods of 2002. The litigation matters to which these expenses related
  have been settled or otherwise resolved. The 2002 periods also include marketing
  expenses related to pre-launch activities for Raptiva(TM). These marketing
  expenses are expected to continue at similar or higher levels.
  
  Investment income for the three months and nine months ended September 30, 2002
  decreased to $0.2 million and $0.7 million, respectively, or 67% and 56%,
  respectively, compared to $0.6 million and $1.6 million for the same periods of
  2001 due to lower interest rates and lower average cash balances. Interest
  expense for the three months ended September 30, 2002 and 2001 was at the same
  level of $0.6 million. Interest expense for the nine months ended September 30,
  2002 decreased 23% to $1.7 million as compared to $2.2 million for the same
  period of 2001. This decrease reflected lower interest rates on a higher average
  outstanding balance of the convertible notes due to Genentech and Millennium.
  
  Liquidity and Capital Resources
  
  XOMA had $36.2 million in cash, cash equivalents and short-term investments at
  September 30, 2002 compared to $67.6 million at December 31, 2001. Working
  capital (current assets minus current liabilities) at September 30, 2002
  decreased to $25.0 million from $52.6 million at December 31, 2001. These
  decreases were primarily due to net operating losses and capital expenditures
  for facility expansions, including a third 2,750-liter fermentation suite.
  
  Net cash used in operations for the nine months ended September 30, 2002 was
  $27.5 million, compared with $17.1 million for the same period of 2001. This
  increase primarily reflected higher net operating losses as a result of higher
  marketing, general and administrative expenses.
  
  Net capital expenditures increased to $8.8 million for the nine months ended
  September 30, 2002 from $5.0 million for the same period of 2001. Current year
  spending included expenses related to the renovation and expansion of our
  manufacturing and warehouse facilities.
  
  Net cash provided by financing activities decreased to $4.9 million for the nine
  months ended September 30, 2002 from $51.4 million for the same period of 2001
  and $3.8 million from the exercise of warrants. The prior year period included
  net proceeds of $43.3 million from a common share equity financing completed in
  June 2001. In addition, for the nine months ended September 30, 2002, the
  Company received $4.0 million of debt financing from Genentech for the Company's
  share of Raptiva(TM) development costs compared to $2.7 million for the same
  period of
  
                                        -11-
  2001. Proceeds received from capital leases were $1.0 million for the nine
  months ended September 30, 2002 compared to $1.1 million for the same period in
  2001.
  
  For the full year 2002, the Company currently expects its net loss to be
  somewhat higher than in 2001, due to increased expenses on Raptiva(TM) and on
  the Millennium collaboration, expansion of the Company's development
  infrastructure and higher marketing, general and administrative expenses.
  
  Based on forecasted spending levels that reflect a reduction in legal expenses,
  currently anticipated revenues that include licensing revenues from Dyax
  announced in October of 2002, and debt financing provided by Genentech for
  XOMA's share of Raptiva(TM) development costs, the Company estimates it has
  sufficient cash resources to meet its operating needs through at least the
  middle of 2004. Any significant revenue shortfalls or increases in planned
  spending on internal programs could shorten this period. Any new licensing
  arrangements or collaborations, any financing from Millennium under the
  investment agreement between the companies, as reflected in our Registration
  Statement on Form S-3 filed on November 6, 2002, or any other new equity or
  other financing arrangements could extend this period. Genentech and XOMA
  announced in early April of 2002 that a pharmacokinetic study comparing
  XOMA-produced material and Genentech-produced material did not achieve a
  pre-defined statistical definition for comparability. An additional 556 patient
  Phase III efficacy study testing Genentech material has now been completed.
  Genentech had anticipated filing a Biologics License Application (BLA) for
  Raptiva(TM) in psoriasis by the end of 2002 pending discussions with the FDA.
  Following a subsequent meeting held with the FDA, the companies continue to
  anticipate that the BLA will be filed by the end of 2002.
  
  The timeliness of this submission, subsequent review by the FDA and progress or
  setbacks by potentially competing products may have an adverse effect on the
  Company's ability to raise new funding on acceptable terms. 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 is set forth below under the
  heading "Forward-Looking Statements And Cautionary Factors That May Affect
  Future Results."
  
  Subsequent to the end of the quarter, the Company was notified by MorphoSys of
  its intention to exercise its option to pay the second installment of the
  license fee owed to the Company under its license agreement with MorphoSys using
  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). The administrative process in Germany that is required in
  order for these shares to be issued has not yet been completed. Since September
  30, 2002, the per share closing price for MorphoSys shares has ranged from
  approximately $8.30 to $16.17. Additionally, XOMA has applied for but not yet
  received an exemption from German withholding tax on the full license fee from
  MorphoSys. The Company has received an inquiry from the German federal tax
  authority questioning whether the Company is entitled to the exemption. Although
  the Company has responded to this inquiry, claiming it is entitled to the
  exemption, the German tax authority has not yet ruled on this issue. Were the
  German tax authorities to find that the claimed exemption from withholding does
  not apply, and were any appeals of that decision also to fail, the license fees
  due from MorphoSys would be subject to withholding at a rate of approximately
  26% of the cash paid or the market value of the shares upon issuance, as the
  case may be. Subject to the risks discussed in this paragraph, the Company
  expects to receive the MorphoSys shares in the fourth quarter of 2002.
  
  The Company has not recorded a provision for these uncertainties related to
  either changes in the market value of the shares MorphoSys intends to issue or
  the German withholding tax. Both future market conditions for the MorphoSys
  shares and the final determination by the German authorities are difficult to
  predict and may vary significantly. Therefore, under the provisions of Statement
  of Financial Accounting Standards No. 5, Accounting for Contingencies, the
  Company has determined that the conditions related to the likelihood of the
  events both probable and reasonably estimable have not been met. If either of
  these uncertainties results in an unfavorable outcome for XOMA, the Company's
  financial position and results of operations would be adversely impacted.
  
  Critical Accounting Policies
  
  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.
  
  Revenue Recognition
  
  Revenue is recognized when the related costs are incurred and the four basic
  criteria of revenue recognition are met: (1) persuasive evidence of an
  arrangement exists; (2) delivery has occurred or services rendered; (3) the fee
  is fixed and determinable; and (4) collectibility is reasonably assured.
  Determination of criteria (3) and (4) are based on management's judgments
  regarding the nature of the fee charged for products or services delivered and
  the collectibility of those fees.
  
  License and Collaborative Fees
  
  Revenue from non-refundable license or technology access payments under license
  and collaborative agreements where the Company has a continuing obligation to
  perform is recognized as revenue over the period of the continuing performance
  obligation.
  
                                        -12-
  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 achieved.
  
  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.
  
  Change in Accounting Principle
  
  The Company previously recognized non-refundable license fees as revenue when
  received and when all significant contractual obligations of the Company
  relating to the fees had been met. Effective January 1, 2000, the Company
  changed its method of accounting for non-refundable initial fees to recognize
  such fees over the period of continuing involvement by the Company such as the
  research and development period or the manufacturing period of the agreement, as
  applicable. The Company believes this accounting policy is preferable based on
  guidance provided in SEC Staff Accounting Bulletin No. 101, or SAB 101, "Revenue
  Recognition in Financial Statements." As of January 1, 2000, there was no
  cumulative effect of an accounting change as a result of the adoption of SAB 101
  and there was no pro forma effect of the adoption of SAB 101 in any period
  presented. In connection with the license and supply and development agreement
  with Baxter on January 25, 2000, the Company received $10.0 million as an
  initial, non-refundable fee. This initial fee was deferred and is being
  amortized over the period of continuing involvement, which period was estimated
  to be 36 months.
  
  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 2002, the estimated levels of its expenses and revenues for
  the balance of 2002, the sufficiency of its cash resources and the BLA filing
  time frame, as well as other statements related to the progress and timing of
  product development and present or future licensing or collaborative
  arrangements, 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 2002
  could be higher depending on revenues from licensees and collaborators, the size
  and timing of expenditures and whether there are unanticipated expenditures; 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; and the BLA filing could be delayed by unexpected safety or
  efficacy issues or additional time requirements for data analysis, BLA
  preparation, discussions with the FDA, enrollment in clinical studies,
  additional clinical studies or manufacturing process modifications. These and
  other risks, including those related to changes in the status of
  
                                        -13-
  existing collaborative relationships, availability of additional licensing or
  collaboration opportunities, the timing or results of pending and future
  clinical trials, the ability of collaborators and other partners to meet their
  obligations, market demand for products, actions by the Food and Drug
  Administration or the U.S. Patent and Trademark Office, uncertainties regarding
  the status of biotechnology patents, uncertainties as to the costs of protecting
  intellectual property and risks associated with our status as a Bermuda company
  are described in more detail in the remainder of this section.
  
  None Of Our Pharmaceutical Products Have Received Regulatory Approval; If Our
  Products Do Not Receive Regulatory Approval, Neither We Nor Our Third Party
  Collaborators Will Be Able To Manufacture And Market Them
  
  Even our most developed pharmaceutical product has yet to be submitted for
  licensure. We will be unable to manufacture and market our products without
  required regulatory approvals in the United States and other countries. The
  United States government and governments of other countries extensively regulate
  many aspects of our products, including:
  
       o    testing
  
       o    manufacturing
  
       o    promotion and marketing and
  
       o    exporting.
  
  In the United States, the Food and Drug Administration regulates pharmaceutical
  products under the Federal Food, Drug, and Cosmetic Act and other laws,
  including, in the case of biologics, the Public Health Service Act. At the
  present time, we believe that our products will be regulated by the FDA as
  biologics. The FDA recently announced that it is consolidating its
  responsibility for reviewing new pharmaceutical products into its Center for
  Drug Evaluation and Research, the body that currently reviews drug products,
  combining that operation with part of its biologics review operation, the Center
  for Biologics Evaluation and Research. Because implementation of this plan is
  not expected to begin until next year, we do not know when or how this change
  will affect us. State regulations may also affect our proposed products.
  
  The FDA has substantial discretion in both the product approval process and
  manufacturing facility approval process and, as a result of this discretion and
  uncertainties about outcomes of testing, we cannot predict at what point, or
  whether, the FDA will be satisfied with our or our collaborators' submissions or
  whether the FDA will raise questions which may be material and delay or preclude
  product approval or manufacturing facility approval. As we accumulate additional
  clinical data, we will submit it to the FDA, which may have a material impact on
  the FDA product approval process.
  
  Our potential products will require significant additional research and
  development, extensive preclinical studies and clinical trials and regulatory
  approval prior to any commercial sales. This process is lengthy, often taking a
  number of years, and expensive. As clinical results are frequently susceptible
  to varying interpretations that may delay, limit or prevent regulatory
  approvals, the length of time necessary to complete clinical trials and to
  submit an application for marketing approval for a final decision by a
  regulatory authority varies significantly. As a result, it is uncertain whether:
  
       o    our future filings will be delayed
  
       o    our studies will be successful
  
       o    we will be able to provided necessary additional data
  
       o    our future results will justify further development or
  
       o    we will ultimately achieve regulatory approval for any of these
            products.
  
                                        -14-
  For example,
  
       o    in 1996, we and Genentech began developing Raptiva(TM)(Efalizumab,
            formerly Xanelim(TM)) in patients with moderate-to-severe psoriasis.
            In April of 2002, we and Genentech announced that a pharmacokinetic
            study conducted on Raptiva(TM)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 Raptiva(TM), delaying the filing of a
            Biologics Licensing Application with the FDA for Raptiva(TM)beyond the
            previously-planned time frame of summer 2002. In September of 2002, we
            and Genentech announced the results of the additional Phase III study
            which achieved its primary efficacy endpoint. Although Genentech and
            we are working to file a BLA by the end of 2002, unexpected delays in
            the preparation of the BLA due to further data analysis, discussions
            with the FDA or similar matters may prevent us from doing so. We have
            also conducted a Phase I/II study of Raptiva(TM)in kidney transplant
            recipients. We do not know whether there will be follow-on studies,
            and if there are such follow-on studies we do not know whether any
            such studies will be sufficient for regulatory approval. We have also
            announced the initiation of enrollment in a Phase II clinical study of
            Raptiva(TM)in patients suffering from rheumatoid arthritis. We do not
            know whether or when any such testing will demonstrate product safety
            and efficacy in this patient population or result in regulatory
            approval.
  
       o    in December of 1992, we began human testing of our NEUPREX(R)product,
            a genetically-engineered fragment of a particular human protein, and
            have 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 principally of
            children 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. Because
            we have not generated any additional data or completed any further
            analysis, we do not know whether we will be able to supply such
            additional data. If we conduct an additional trial to provide the
            requested additional data, we will not know whether the results will
            be adequate for approval until the trial has been completed and the
            resulting data reviewed by the FDA. In September of 1999, we
            discontinued patient enrollment in our Phase III clinical trial
            testing NEUPREX(R)in trauma patients with severe blood loss because an
            independent data safety monitoring board told us that interim results
            from the trial did not support continuing the trial. Baxter has
            initiated a Phase II study with NEUPREX(R)in Crohn's disease patients.
            Enrollment in this study has now been completed, but because we do not
            know the results, we do not know whether the results will justify
            further development.
  
  Given that regulatory review is an interactive and continuous process, we
  maintain a policy of limiting announcements and comments upon the specific
  details of the ongoing regulatory review of our products, subject to our
  obligations under the securities laws, until definitive action is taken.
  
  Because All Of Our Products Are Still In Development, We Will Require
  Substantial Funds To Continue; We Cannot Be Certain That Funds Will Be Available
  And, If Not Available, We May Have To Take Actions Which Could Adversely Affect
  Your Investment
  
  If adequate funds are not available, we may have to dilute or otherwise
  adversely affect the rights of existing shareholders, curtail or cease
  operations or, in extreme circumstances, file for bankruptcy protection. We have
  spent, and we expect to continue to spend, substantial funds in connection with:
  
       o    research and development relating to our products and production
            technologies
  
       o    expansion of our production capabilities
  
       o    extensive human clinical trials and
  
       o    protection of our intellectual property.
  
                                        -15-
  Based on current spending levels and third party funding, we believe that we
  have enough cash to meet our currently anticipated needs for operating expenses,
  working capital, equipment acquisitions and current research projects through at
  least the middle of 2004. However, to the extent we experience changes in the
  timing or size of expenditures or unanticipated expenditures, or if our
  collaborators do not meet their obligations to us or anticipated revenues
  otherwise do not materialize, these funds may not be adequate for this period.
  As a result, we do not know whether:
  
       o    operations will generate meaningful funds
  
       o    additional agreements for product development funding can be reached
  
       o    strategic alliances can be negotiated or
  
       o    adequate additional financing will be available for us to finance our
            own development on acceptable terms, if at all.
  
  Cash balances and operating cash flow are influenced primarily by the timing and
  level of payments by our licensees and development partners, as well as by our
  operating costs.
  
  Because All Of Our Products Are Still In Development, We Have Sustained Losses
  In The Past And We Expect To Sustain Losses In The Future
  
  We have experienced significant losses and, as of September 30, 2002, we had an
  accumulated deficit of approximately U.S.$536.0 million.
  
  For the year ended December 31, 2001 and the nine months ended September 30,
  2002, we had a net loss of approximately U.S.$28.0 million, or U.S.$0.41 per
  common share (basic and diluted), and U.S.$28.3 million, or U.S.$.40 per common
  share (basic and diluted), respectively. We expect to incur additional losses in
  the future. For the full year 2002, we currently expect our net loss to be
  somewhat higher than in 2001, due to increased expenses on Raptiva(TM) and on
  the Millennium collaboration, the further expansion of our development
  infrastructure, and marketing, general and administrative expenses.
  
  Our ability to make profits is dependent in large part on obtaining regulatory
  approval for our products and entering into agreements for product development
  and commercialization, both of which are uncertain. Our ability to fund our
  ongoing operations is dependent on the foregoing factors and on our ability to
  secure additional funds. Because all of our products are still in development,
  we do not know whether we will ever make a profit or whether cash flow from
  future operations will be sufficient to meet our needs.
  
  If Third Party Collaborators Do Not Successfully Develop And Market Our
  Products, We May Not Be Able To Do So On Our Own
  
  Our financial resources and our marketing experience and expertise are limited.
  Consequently, we depend to a large extent upon securing the financial resources
  and marketing capabilities of third parties with whom we collaborate.
  
       o    In April of 1996, XOMA and Genentech entered into an agreement whereby
            XOMA agreed to co-develop Genentech's humanized monoclonal antibody
            product Raptiva(TM). In April of 1999, the companies extended and
            expanded the agreement.
  
       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.
  
       o    In January of 2001, we entered into a strategic process development
            and manufacturing alliance with Onyx Pharmaceuticals, Inc. pursuant to
            which we are scaling up production to commercial volume and will
            manufacture one of Onyx's cancer products.
  
                                        -16-
  o    In November of 2001, we entered into a collaboration with Millennium
            Pharmaceuticals, Inc. to develop two of Millennium's products for
            certain vascular inflammation indications.
  
  Because our collaborators are independent third parties, they may be subject to
  different risks than we are and have significant discretion in determining the
  efforts and resources they will apply, we do not know whether Genentech, Baxter,
  Onyx or Millennium will successfully develop or market any of the products we
  are collaborating on.
  
  Even when we have a collaboration relationship, other circumstances may prevent
  it from resulting in successful development of marketable products. For example,
  in June of 1999, we licensed certain genetically-engineered fragments of a
  particular human protein to Allergan Inc. to treat bacterial ophthalmic
  infections. In May of 2000, following successful product testing at Allergan, we
  expanded the collaboration. In November of 2000, Allergan advised us that for
  internal economic reasons they planned to discontinue development of ophthalmic
  anti-infective products derived from this protein.
  
  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 September 30, 2001 through September
  30, 2002, our share price has ranged from a high of U.S.$12.19 to a low of
  U.S.$3.00. On November 1, 2002 the last reported sale price of the common shares
  as reported on the Nasdaq National Market was U.S.$5.75 per share. Factors
  contributing to such volatility include, but are not limited to:
  
       o    results of preclinical studies and clinical trials,
  
       o    information relating to the safety or efficacy of our products,
  
       o    developments regarding regulatory filings,
  
       o    announcements of new collaborations,
  
       o    failure to enter into collaborations,
  
       o    developments in existing collaborations,
  
       o    our funding requirements and the terms of our financing arrangements,
  
       o    announcements of technological innovations or new indications for our
            therapeutic products,
  
       o    government regulations,
  
       o    developments in patent or other proprietary rights,
  
       o    the number of shares outstanding,
  
       o    the number of shares trading on an average trading day,
  
       o    announcements regarding other participants in the biotechnology and
            pharmaceutical industries, and
  
       o    market speculation regarding any of the foregoing.
  
                                        -17-
  Because Many Of The Companies We Do Business With Are Also In The Biotechnology
  Sector, The Volatility Of That Sector Can Affect Us Indirectly As Well As
  Directly
  
  The same factors that affect us directly because we are a biotechnology company
  can also adversely impact us indirectly by affecting the ability of our
  collaborators, partners and others we do business with to meet their obligations
  to us or our ability to realize the value of the consideration provided to us by
  these other companies. For example, in connection with our licensing transaction
  with MorphoSys AG, MorphoSys has announced that it has exercised its option to
  pay a portion of the license fee owed to us in the form of equity securities of
  MorphoSys, and the value of those shares is subject both to market risks
  affecting our ability to realize the value of those shares and more generally to
  the business and other risks to which the issuer of those shares is subject. The
  administrative process in Germany that is required in order for these shares to
  be issued has not yet been completed. Since September 30, 2002, the per share
  closing price for MorphoSys shares has ranged from approximately $8.30 to
  $16.17, which demonstrates the volatility of these shares in the current market.
  
  If Any Of Our Products Receives Regulatory Approval, We May Not Be Able To
  Increase Existing Or Acquire New Manufacturing Capacity Sufficient To Meet
  Market Demand
  
  Because we have never commercially introduced any pharmaceutical products and
  none of our products have received regulatory approval, we do not know whether
  the capacity of our existing manufacturing facilities can be increased to
  produce sufficient quantities of our products to meet market demand. Also, if we
  need additional manufacturing facilities to meet market demand, we cannot
  predict that we will successfully obtain those facilities because we do not know
  whether they will be available on acceptable terms. In addition, any
  manufacturing facilities acquired or used to meet market demand must meet the
  FDA's quality assurance guidelines.
  
  Because We Do Not And Cannot Currently Market Any Of Our Products For Commercial
  Sale, We Do Not Know Whether There Will Be A Viable Market For Our Products
  
  Even if we receive regulatory approval for our products and we or our third
  party collaborators successfully manufacture them, our products may not be
  accepted in the marketplace. For example, physicians and/or patients may not
  accept a product for a particular indication because it has been biologically
  derived (and not discovered and developed by more traditional means) if no
  biologically-derived products are currently in widespread use in that
  indication, as is currently the case with psoriasis. Consequently, we do not
  know if physicians or patients will adopt or use our products for their approved
  indications.
  
  If Our And Our Partners' Patent Protection For Our Principal Products And
  Processes Is Not Enforceable, We Will 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
  
                                        -18-
  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 60 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.
  
  Protecting Our Intellectual Property Can Be Costly And Exposes Us To Risks Of
  Counterclaims Against Us
  
  We may be required to engage in litigation or other proceedings to protect our
  intellectual property. The cost to us of this litigation, even if resolved in
  our favor, could be substantial. Such litigation could also divert management's
  attention and resources. In addition, if this litigation is resolved against us,
  our patents may be declared invalid, and we could be held liable for significant
  damages. In addition, if the litigation included a claim of infringement by us
  of another party's patent that was resolved against us, we or our collaborators
  may be enjoined from developing, manufacturing, selling or importing products,
  processes or services without a license from the other party.
  
  Other Companies May Render Some Or All Of Our Products Noncompetitive Or
  Obsolete
  
  Developments by others may render our products or technologies obsolete or
  uncompetitive. Technologies developed and utilized by the biotechnology and
  pharmaceutical industries are continuously and substantially changing.
  Competition in the areas of genetically-engineered DNA-based and antibody-based
  technologies is intense and expected to increase in the future as a number of
  established biotechnology firms and large chemical and pharmaceutical companies
  advance in these fields. Many of these competitors may be able to develop
  products and processes competitive with or superior to our own for many reasons,
  including that they may have:
  
       o    significantly greater financial resources
  
       o    larger research and development and marketing staffs
  
       o    larger production facilities
  
       o    entered into arrangements with, or acquired, biotechnology companies
            to enhance their capabilities or
  
       o    extensive experience in preclinical testing and human clinical trials.
  
                                        -19-
  These factors may enable others to develop products and processes competitive
  with or superior to our own. 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
  commercial value of their work and may become more aggressive in seeking patent
  protection and licensing arrangements.
  
  Without limiting the foregoing, we are aware that:
  
       o    Biogen Inc. has announced that its Amevive(R) product achieved
            positive results in Phase III clinical trials in patients with
            moderate-to-severe plaque psoriasis, that the FDA and the EMEA have
            officially accepted Biogen's filings for approval of Amevive(R) in
            psoriasis, that a FDA advisory panel voted to recommend approval of
            Amevive(R) for the treatment of moderate-to-severe chronic plaque
            psoriasis and that the FDA has committed to complete the review of its
            Amevive(R) application by the end of the first quarter of 2003;
  
       o    Centocor Inc., a unit of Johnson & Johnson, has tested its rheumatoid
            arthritis and Crohn's disease drug in psoriasis, and it has been
            announced that the drug has shown clinical benefit;
  
       o    it has been announced that Immunex Corp. (recently acquired by Amgen
            Inc.) has tested its rheumatoid arthritis and psoriatic arthritis drug
            in psoriasis with positive results;
  
       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 the FDA approved its investigational new
            drug filing for HuMax-CD4 for psoriasis and the initiation of a Phase
            II study; and
  
       o    other companies, including Medarex, Inc., are developing monoclonal
            antibody or other products for treatment of inflammatory skin
            disorders.
  
  Currently, there are several companies with marketed biologics that are approved
  for treating patients with rheumatoid arthritis:
  
       o    Immunex Corp. markets Enbrel,
  
       o    Amgen Inc. gained FDA approval for Kineret and
  
       o    Centocor Inc. is approved to market Remicade to rheumatoid arthritis
            patients.
  
  In addition to approved products, a number of companies are developing drugs
  with a biologic mechanism of action for the treatment of rheumatoid arthritis.
  These companies include Cambridge Antibody Technology Group plc, Biogen Inc.,
  Celltech Group plc and others.
  
  A number of companies are developing monoclonal antibodies targeting cancers,
  which may prove more effective than ONYX-015 or the ING-1 antibody.
  
  It is possible that one or more other companies may be developing one or more
  products based on the same human protein as our NEUPREX(R) product, and these
  product(s) may prove to be more effective than NEUPREX(R) or receive regulatory
  approval prior to NEUPREX(R) or any BPI-derived ophthalmic product developed by
  XOMA.
  
  As We Do More Business Internationally, We Will Be Subject To Additional
  Political, Economic and Regulatory Uncertainties
  
  We may not be able to successfully operate in any foreign market. We believe
  that, because the pharmaceutical industry is global in nature, international
  activities will be a significant part of our future business activities and
  that, when and if we are able to generate income, a substantial portion of that
  income will be derived from product sales
  
                                        -20-
  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
  
       o    political or economic instability
  
       o    trade restrictions
  
       o    changes in tariffs
  
       o    restrictions on repatriating profits
  
       o    withholding and other taxation and
  
       o    difficulties in staffing and managing international operations.
  
  For example, we have applied for but not yet received an exemption from German
  withholding tax on the full license fee owed to us by MorphoSys in connection
  with our previously announced cross-licensing agreements. We have received an
  inquiry from the German federal tax authority questioning whether we are
  entitled to the exemption. Although we have responded to this inquiry, claiming
  we are entitled to the exemption, the German tax authority has not yet ruled on
  this issue. Were the German tax authority to find that the claimed exemption
  from withholding does not apply, and were any appeals of that decision also to
  fail, the license fees due from MorphoSys would be subject to withholding at a
  rate of approximately 26% of the cash paid or the value of the shares upon
  issuance, as the case may be.
  
  Also, our financial results could be significantly affected by factors such as
  fluctuations in currency exchange rates or weak economic conditions in the
  foreign markets in which we or our collaborators seek to operate.
  
  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 Chief Scientific and Medical Officer and Senior Vice
  President; Clarence L. Dellio, our Senior Vice President, Operations; 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.
  
  Because We Engage In Human Testing, We Are Exposed To An Increased Risk Of
  Product Liability Claims
  
  The testing and marketing of medical products entails an inherent risk of
  allegations of product liability. We believe that we currently have adequate
  levels of insurance for our clinical trials; however, in the event of one or
  more large, unforeseen awards, such levels may not provide adequate coverage. We
  will seek to obtain additional insurance, if needed, if and when our products
  are commercialized; however, because we do not know when this will occur, we do
  not know whether adequate insurance coverage will be available or be available
  at acceptable costs. A significant
  
                                        -21-
  product liability claim for which we were not covered by insurance would have to
  be paid from cash or other assets. To the extent we have sufficient insurance
  coverage, such a claim would result in higher subsequent insurance rates.
  
  We May Be Subject To Increased Risks Because We Are A Bermuda Company
  
  Alleged abuses by certain companies that have changed their legal domicile from
  jurisdictions within the United States to Bermuda have created an environment
  where, notwithstanding that we changed our legal domicile in a transaction that
  was approved by our shareholders and fully taxable to our company under U.S.
  law, we may be exposed to various prejudicial actions, including:
  
       o    "blacklisting" of our common shares by certain pension funds
  
       o    legislation restricting certain types of transactions and
  
       o    punitive tax legislation.
  
  We do not know whether any of these things will happen, but if implemented one
  or more of them may have an adverse impact on our future operations or our share
  price.
  
  If You Were To Obtain A Judgment Against Us, It May Be Difficult To Enforce
  Against Us Because We Are A Foreign Entity
  
  We are a Bermuda company. All or a substantial portion of our assets may be
  located outside the United States. As a result, it may be difficult for
  shareholders and others to enforce in United States courts judgments obtained
  against us. We have irrevocably agreed that we may be served with process with
  respect to actions based on offers and sales of securities made 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
  
  Our shareholder rights agreement 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.
  
                                        -22-
  These provisions of our shareholders rights agreement and our bye-laws, alone or
  in combination with each other, may discourage transactions involving actual or
  potential changes of control, including transactions that otherwise could
  involve payment of a premium over prevailing market prices to holders of common
  shares, could limit the ability of shareholders to approve transactions that
  they may deem to be in their best interests and could make it considerably more
  difficult for a potential acquiror to replace management.
  
  Item 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
  Interest Rate Risk. The Company's exposure to market rate risk due to changes in
  interest rates relates primarily to the Company's investment portfolio. The
  Company does not use derivative financial instruments in its investment
  portfolio. By policy, the Company places its investments with high quality debt
  security issuers, limits the amount of credit exposure to any one issuer, limits
  duration by restricting the term and holds investments to maturity except under
  rare circumstances. The Company classifies its cash equivalents as fixed rate if
  the rate of return on an instrument remains fixed over its term. As of September
  30, 2002, all the Company's cash equivalents are classified as fixed rate.
  
  The Company also has a long-term convertible note due to Genentech in 2005.
  Interest on this note of LIBOR plus 1% is reset at the end of June and December
  each year and is therefore variable.
  
  The table below presents the amounts and related weighted interest rates of the
  Company's cash equivalents and long-term convertible note at September 30, 2002:
  Fair Value          Average Interest
                                                    Maturity             (in thousands)              Rate
                                                 ---------------       ------------------      ----------------
  Cash equivalents, fixed rate                        Daily                $  35,861                 1.90%
  Long-term convertible note, variable rate           2005                 $  58,305                 2.96%
  Other Market Risk. At September 30, 2002, 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
  our 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,
  within 90 days of the filing date of 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.
  
  There have been no significant changes in our internal controls or in other
  factors that could significantly affect these controls subsequent to the date of
  the evaluation referenced above.
  
                                        -23-
  PART II - OTHER INFORMATION
  
  OTHER INFORMATION
  
  Item 1.  LEGAL PROCEEDINGS
  
  On September 13, 2002, all claims and counterclaims in XOMA's litigation with
  Biosite Incorporated were dismissed with prejudice pursuant to a settlement
  agreement between the parties. Other terms of the settlement included a
  royalty-free license to XOMA to practice certain Biosite patents, assignment to
  XOMA of Biosite's antibody expression technology that was announced earlier this
  year, a royalty-free license to Biosite to utilize XOMA's bacterial cell
  expression technology, an agreement pursuant to which XOMA may receive
  expression libraries for up to an agreed number of targets it presents to
  Biosite, termination of the existing license to Biosite from XOMA for the LBP
  diagnostic assay and an exchange of releases.
  
  Item 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS
  
  The Company continues to use the net proceeds from its June 2001 registered
  offering of common shares for general corporate purposes, including leasehold
  improvements, equipment acquisitions, current research and development projects,
  the development of new products or technologies, general working capital and
  operating expenses. Pending application of the net proceeds as described above,
  the Company has invested the remaining net proceeds of the offering in
  short-term, investment-grade, interest-bearing securities.
  
  Item 3.  DEFAULTS UPON SENIOR SECURITIES
  
  None
  
  Item 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
  None
  
  Item 5.  OTHER INFORMATION
  
  None
  
  Item 6.  EXHIBITS & REPORTS ON FORM 8-K
  
       (a) Exhibits:
  
            Amendment No. 1 to Convertible Subordinated Promissory Note dated
       November 5, 2002 (incorporated by reference to Exhibit 10.3A to the
       Company's Registration Statement on Form S-3 (No. 333-101035), filed
       November 6, 2002).
  
       (b) Reports on Form 8-K:
  
            None
  
                                        -24-
  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 14, 2002        By:  /s/ JOHN L. CASTELLO
                                         --------------------
                                         John L. Castello
                                         Chairman of the Board, President and
                                         Chief Executive Officer
  
  Date:    November 14, 2002        By:  /s/ PETER B. DAVIS
                                         ------------------
                                         Peter B. Davis
                                         Vice President, Finance and
                                         Chief Financial Officer
  
                                        -25-
  CERTIFICATION ACCOMPANYING PERIODIC REPORT
  
  Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C.ss.1350)
  
  Each of the undersigned officers of XOMA Ltd. (the "Company") hereby certify
  that (1) the Quarterly Report of the Company on Form 10-Q for the period ended
  September 30, 2002 (the "Report") fully complies with the requirements of
  Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and (2) the
  information contained in the Report fairly presents, in all material respects,
  the financial condition and the results of operations of the Company.
  
                                      XOMA Ltd.
  
  Date:    November 14, 2002          By:  /s/ JOHN L. CASTELLO
                                           --------------------
                                           John L. Castello
                                           Chairman of the Board, President and
                                           Chief Executive Officer
  
  Date:    November 14, 2002          By:  /s/ PETER B. DAVIS
                                           ------------------
                                           Peter B. Davis
                                           Vice President, Finance and
                                           Chief Financial Officer
  
                                        -26-
  CERTIFICATIONS
  
  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 quarterly 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 quarterly report;
  
  3.   Based on my knowledge, the financial statements, and other financial
       information included in this quarterly 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
       quarterly 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-14 and 15d-14) for the registrant and we have:
  
       a)   designed such disclosure controls and procedures 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 quarterly
            report is being prepared;
  
       b)   evaluated the effectiveness of the registrant's disclosure controls
            and procedures as of a date within 90 days prior to the filing date of
            this quarterly report (the "Evaluation Date"); and
  
       c)   presented in this quarterly report our conclusions about the
            effectiveness of the disclosure controls and procedures based on our
            evaluation as of the Evaluation Date;
  
  5.   The registrant's other certifying officers and I have disclosed, based on
       our most recent evaluation, to the registrant's auditors and the audit
       committee of the registrant's board of directors (or persons performing the
       equivalent function):
  
       a)   all significant deficiencies in the design or operation of internal
            controls which could adversely affect the registrant's ability to
            record, process, summarize and report financial data and have
            identified for the registrant's auditors any material weaknesses in
            internal controls; and
  
       b)   any fraud, whether or not material, that involves management or other
            employees who have a significant role in the registrant's internal
            controls; and
  
  6.   The Registrant's other certifying officers and I have indicated in this
       quarterly report whether or not there were significant changes in internal
       controls or in other factors that could significantly affect internal
       controls subsequent to the date of our most recent evaluation, including
       any corrective actions with regard to significant deficiencies and material
       weaknesses.
  
  Date:    November 14, 2002             By:  /s/ JOHN L. CASTELLO
                                              --------------------
                                              John L. Castello
                                              Chairman of the Board, President and
                                              Chief Executive Officer
  
                                        -27-
  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 quarterly 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 quarterly report;
  
  3.   Based on my knowledge, the financial statements, and other financial
       information included in this quarterly 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
       quarterly 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-14 and 15d-14) for the registrant and we have:
  
       a)   designed such disclosure controls and procedures 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 quarterly
            report is being prepared;
  
       b)   evaluated the effectiveness of the registrant's disclosure controls
            and procedures as of a date within 90 days prior to the filing date of
            this quarterly report (the "Evaluation Date"); and
  
       c)   presented in this quarterly report our conclusions about the
            effectiveness of the disclosure controls and procedures based on our
            evaluation as of the Evaluation Date;
  
  5.   The registrant's other certifying officers and I have disclosed, based on
       our most recent evaluation, to the registrant's auditors and the audit
       committee of the registrant's board of directors (or persons performing the
       equivalent function):
  
       a)   all significant deficiencies in the design or operation of internal
            controls which could adversely affect the registrant's ability to
            record, process, summarize and report financial data and have
            identified for the registrant's auditors any material weaknesses in
            internal controls; and
  
       b)   any fraud, whether or not material, that involves management or other
            employees who have a significant role in the registrant's internal
            controls; and
  
  6.   The registrant's other certifying officers and I have indicated in this
       quarterly report whether or not there were significant changes in internal
       controls or in other factors that could significantly affect internal
       controls subsequent to the date of our most recent evaluation, including
       any corrective actions with regard to significant deficiencies and material
       weaknesses.
  
  Date:    November 14, 2002       By:  /s/ PETER B. DAVIS
                                        ------------------
                                        Peter B. Davis
                                        Vice President, Finance and
                                        Chief Financial Officer
  
                                        -28-