content: UNITED STATES
                         SECURITIES AND EXCHANGE COMMISSION
                               Washington, D.C. 20549
  
  
                                      FORM 10-Q
  
  (mark one)
                [X] Quarterly Report Pursuant to Section 13 or 15(d)
                       of the Securities Exchange Act of 1934
                      For Quarterly Period Ended March 31, 2002
  
                                         or
  
                [ ] Transition Report Pursuant to Section 13 or 15(d)
                       of the Securities Exchange Act of 1934
                 For Transition Period from __________ to __________
  
                             Commission File No. 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) 644-1170
                (Registrant's telephone number, including area code)
  
                                   Not Applicable
                (Former name, former address and former fiscal year,
                           if changed since last report)
  
  Indicate by check mark whether the registrant (1) has filed all reports required
  to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
  the preceding 12 months (or for such shorter period that the registrant was
  required to file such reports), and (2) has been subject to such filing
  requirements for the past 90 days.
  
                              Yes  X  No ___
                                  ---
  
  Indicate the number of shares outstanding of each of the issuer's classes of
  common stock, as of the latest practicable date.
  
  Common shares US$.0005 par value            70,287,972
  Class                                       Outstanding at March 31, 2002
  
  
  <PAGE>
  
  
                                      XOMA LTD.
  
                                  TABLE OF CONTENTS
  
  
                                                                              Page
  
  PART I   FINANCIAL INFORMATION
  
     Item 1     Condensed Consolidated Financial Statements (unaudited)
  
                Condensed Consolidated Balance Sheets as of March 31, 2002 and
                December 31, 2001................................................1
  
                Condensed Consolidated Statements of Operations for the Three
                Months Ended March 31, 2002 and 2001.............................2
  
                Condensed Consolidated Statements of Cash Flows for the Three
                Months Ended March 31, 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............................................9
  
     Item 3     Quantitative and Qualitative Disclosures About Market Risk .....10
  
  PART II  OTHER INFORMATION
  
     Item 1     Legal Proceedings...............................................12
  
     Item 2     Changes in Securities and Use of Proceeds.......................13
  
     Items 3, 4 and 5 are either inapplicable or nonexistent and
     therefore are omitted from this report
  
     Item 6    Exhibits and Reports on Form 8-K.................................13
  
     Signatures ................................................................14
  
  
                                        -i-
  <PAGE>
  
  
  
  <TABLE>
  <CAPTION>
                                      XOMA LTD.
  
                        CONDENSED CONSOLIDATED BALANCE SHEETS
                                   (In thousands)
  
  
                                                                                    March 31,          December 31,
                                                                                       2002               2001
                                                                                   (Unaudited)           (Note 1)
                                                                                   --------------      --------------
  Assets:
  <S>                                                                                    <C>                <C>
       Cash and cash equivalents                                                         $ 58,183           $ 67,320
       Short-term investments                                                                 320                320
       Related party receivables                                                              423                418
       Receivables                                                                          6,227              1,662
       Inventory                                                                            1,306              1,299
       Prepaid expenses and other                                                             189                249
                                                                                   --------------      --------------
           Total current assets                                                            66,648             71,268
       Property and equipment, net                                                         17,123             14,645
       Deposits and other                                                                     201                194
                                                                                   --------------      --------------
                                                                                         $ 83,972           $ 86,107
                                                                                   ==============      ==============
  Liabilities and Shareholders' Equity:
       Accounts payable                                                                  $  6,340           $  3,520
       Accrued liabilities                                                                  4,759              4,422
       Capital lease obligations-- current                                                    673                673
       Deferred revenue-- current                                                           4,084              5,017
       Convertible subordinated note-- current                                              5,041              5,013
                                                                                   --------------      --------------
           Total current liabilities                                                       20,897             18,645
       Capital lease obligations-- long term                                                1,232              1,393
       Deferred revenue-- long term                                                         1,100              1,470
       Convertible subordinated notes-- long term                                          52,241             50,980
                                                                                   --------------      --------------
           Total liabilities                                                               75,470             72,488
  Shareholders' equity                                                                      8,502             13,619
                                                                                   --------------      --------------
                                                                                         $ 83,972           $ 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.
  
  
                                        -1-
  <PAGE>
  
  
  <TABLE>
  <CAPTION>
                                      XOMA LTD.
  
  
                   CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                   (Unaudited, in thousands except per share data)
  
  
                                                                                            Three Months Ended
                                                                                                  March 31,
                                                                                         ----------------------------
                                                                                           2002              2001
                                                                                         ---------      -------------
  Revenues:
  <S>                                                                                     <C>                <C>
      License and collaborative fees                                                      $ 6,313            $ 1,015
      Contract and other revenue                                                            2,909              1,841
                                                                                         ---------      -------------
                                                                                            9,222              2,856
                                                                                         ---------      -------------
  Operating Costs and Expenses:
      Research and development                                                              9,935              8,470
      Marketing, general and administrative                                                 4,849              1,610
                                                                                           14,784             10,080
                                                                                         ---------      -------------
  Loss from operations                                                                    (5,562)            (7,224)
  Other Income (Expense):
      Investment and other income                                                             272                459
      Interest and other expense                                                            (649)              (810)
                                                                                         ---------      -------------
  Net loss                                                                               $(5,939)           $(7,575)
                                                                                         =========      =============
  Basic and diluted net loss per share                                                   $ (0.08)           $ (0.11)
                                                                                         =========      =============
  Shares used in computing basic and diluted net loss per share                            70,229             66,134
                                                                                         ---------      -------------
  </TABLE>
  
  
       See accompanying notes to condensed consolidated financial statements.
  
  
  
                                        -2-
  <PAGE>
  
  
  
  <TABLE>
  <CAPTION>
                                      XOMA LTD.
  
                   CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                              (Unaudited, in thousands)
  
  
                                                                                        Three Months Ended
                                                                                             March 31,
                                                                                      ------------------------
                                                                                         2002           2001
                                                                                      -----------   ----------
  Cash Flows From Operating Activities:
  <S>                                                                                 <C>            <C>
       Net cash provided by (used in) operating activities                            $ (6,405)      $ (4,788)
                                                                                      -----------   ----------
  Cash Flows From Investing Activities:
       Proceeds from sale of short-term investments                                          --             96
       Capital expenditures                                                             (2,852)          (963)
                                                                                      -----------   ----------
           Net cash provided by (used in) investing activities                          (2,852)          (867)
                                                                                      -----------   ----------
  Cash Flows From Financing Activities:
       Proceeds from issuance of common shares, net                                         281            618
       Proceeds related to convertible notes                                                 --          2,203
       Payments under capital leases                                                      (161)           (40)
                                                                                      -----------   ----------
           Net cash provided by (used in) financing activities                              120          2,781
                                                                                      -----------   ----------
  Net increase (decrease) in cash and cash equivalents                                  (9,137)        (2,874)
  Cash and cash equivalents at beginning of period                                       67,320         35,043
                                                                                      -----------   ----------
  Cash and cash equivalents at end of period                                            $58,183        $32,169
                                                                                      ===========   ==========
  </TABLE>
  
       See accompanying notes to condensed consolidated financial statements.
  
  
  
                                        -3-
  <PAGE>
  
  
  
                                      XOMA LTD.
  
                NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
                                     (Unaudited)
  
  
  1. 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.
  
  2. Basis of Presentation
  
       The interim information contained in this report is unaudited but, in
  management's opinion, includes all normal recurring adjustments necessary for a
  fair presentation of results for the periods presented. Interim results may not
  be indicative of results to be expected for the full year. The unaudited
  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.
  
  3. 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.
  
  4. Estimates
  
       The preparation of financial statements in conformity with generally
  accepted accounting principles requires management to make estimates and
  assumptions that affect the reported amounts of assets and liabilities and
  disclosure of contingent assets and liabilities, if any, at the date of the
  financial statements and the reported amounts of revenues and expenses during
  the reporting period. Actual results could differ materially from those
  estimates.
  
  5. 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 repurchase agreements which bear minimal risk. The Company has not
  experienced any significant credit
  
  
  
                                        -4-
  <PAGE>
  
  losses and does not generally require collateral on receivables. In the first
  quarter of 2002, three customers represented 54%, 28% and 16% of total revenues
  and as of March 31, 2002 billed and unbilled receivables totaled $4,000,000,
  $2,148,000 and $0 for these customers, respectively. In the first quarter of
  2001, two customers represented 49% and 48% of total revenues.
  
  6. Recent Accounting Pronouncements
  
       In July of 2001, the Financial Accounting Standards Board, or FASB, issued
  Statements 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 Statements 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 Statements 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 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
  
  
  
                                        -5-
  <PAGE>
  
  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 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.
  
  7. 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, up-front 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. Revenue from such payments that are not dependent on
  future performance by the Company under such agreements is recognized as revenue
  when the amount thereof is fixed and determinable and collectibility is
  reasonably assured.
  
       Milestone payments under collaborative arrangements are recognized as
  revenue upon achievement of the incentive milestone events, which represent the
  culmination of the earnings process because the Company has no future
  performance obligations related to the 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. Incentive milestone
  payments are triggered either by the results of our research efforts or by
  events external to the Company, such as regulatory approval to market a product
  or the achievement of specified sales levels by a marketing partner. Amounts
  received in advance are recorded as deferred revenue until the related milestone
  is achieved.
  
       Contract Revenue
  
  
  
                                        -6-
  <PAGE>
  
       Contract revenue for research and development involves the Company
  providing research, development or manufacturing services on a best efforts
  basis to collaborative partners. The Company recognizes revenue under these
  arrangements as the related research and development costs are incurred.
  
       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.
  
  8. License Agreement
  
       In February of 2002, XOMA and MorphoSys AG announced cross-licensing
  agreements for antibody-related technologies. Under the agreements, XOMA will
  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. Because there are no
  continuing performance obligations on the part of the Company under the
  MorphoSys agreement, the fixed and determinable portion of 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 is to be paid in two
  installments. The first was due and paid in the first quarter of 2002, and the
  second more significant portion is due in the foruth quarter of 2002.
  
  9. 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.
  
  10. 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 months ended March 31, 2002 and 2001 are as follows (in
  thousands):
  
  
                                        -7-
  <PAGE>
  
  
                                                       Three Months Ended
                                                           March 31,
                                                -------------------------------
                                                   2002                 2001
                                                -----------       -------------
          Net Loss                              $(5,939)              $(7,575)
          Unrealized gain on securities
            available-for-sale                       --                    --
                                                -----------       -------------
          Comprehensive loss                    $(5,939)              $(7,575)
                                                ===========       =============
  
  11. Net Loss Per Common Share
  
       Basic and diluted net loss per share is based on the weighted average
  number of common shares outstanding during the period in accordance with SFAS
  No. 128. Common share equivalents were not included because they are
  antidilutive in all periods presented.
  
  12. Inventories
  
       Inventories are stated at the lower of standard cost (which approximates
  first-in, first-out cost) or market. Inventories, which relate principally to
  the Company's agreement with Baxter Healthcare Corporation, consist of the
  following (in thousands):
  
                                        March 31,            December 31,
                                           2002                  2001
                                        ------------         ------------
          Raw materials                 $    202              $    195
          Finished goods                   1,104                 1,104
                                        ------------         ------------
                                        $  1,306              $  1,299
                                        ============         ============
  
  13. Accrued Liabilities
  
       Accrued liabilities consist of the following (in thousands):
  
                                               March 31,            December 31,
                                                  2002                  2001
                                              ------------          -------------
          Accrued payroll costs                 $ 1,936               $ 2,347
          Accrued clinical trial costs              494                   445
          Other                                   2,329                 1,630
                                              ------------          -------------
                                                $ 4,759               $ 4,422
                                              ============          =============
  
  
                                        -8-
  <PAGE>
  
  
  
                       MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                    FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  
  
  Results of Operations:
  
       Revenues in the first quarter of 2002 increased to $9.2 million, from $2.9
  million in the first quarter of 2001. Licensing revenue, increased to $6.3
  million in the first quarter of 2002 from $1.0 million in first quarter of 2001,
  primarily reflecting a fee from our agreement with MorphoSys AG, entered into in
  the first quarter of 2002. Because there are no continuing performance
  obligations on the part of the Company under the MorphoSys agreement, the fixed
  and determinable portion of the license fee provided for in that agreement was
  recognized as revenue in the first quarter of 2002. (See Note 7 to Consolidated
  Condensed Financial Statements, "Revenue Recognition.") Under the terms of the
  agreement, the license fee is to be paid in two installments. The first was due
  and paid in the first quarter of 2002, and the second more significant portion
  is due in the foruth quarter of 2002. Contract revenue increased to $2.9 million
  in the first quarter of 2002 from $1.8 million in the first quarter of 2001.
  This increase was primarily the result of higher service revenues from our
  agreement with Onyx Pharmaceuticals, Inc.
  
       Research and development expenses increased to $9.9 million in the first
  quarter of 2002 from $8.5 million in the comparable prior year period. Spending
  in 2002 reflected increased development costs associated with Xanelim(TM),
  LDP01, CAB2 and ONYX-015. This was partially offset by reduced spending on
  Mycoprex and Genimune development programs, which were discontinued during 2001.
  
       Marketing, general and administrative expenses increased to $4.8 million in
  the first quarter of 2002 from $1.6 million in the same period of 2001. This
  increase is primarily due to legal expenses related to litigation with Biosite
  Incorporated and certain securities claims and to expenses related to the
  MorphoSys cross-licensing arrangement. Spending in 2002 also included XOMA's
  share of commercial development expenses related to activities in preparation
  for a potential future product launch of Xanelim(TM).
  
       Interest income of $0.3 million in the first quarter of 2002 compared to
  $0.5 million for the same period of 2001 was lower due to lower interest rates
  offset by higher average cash balances. Interest expense of $0.6 million in the
  first quarter of 2002, compared to $0.8 million for the same period of 2001,
  reflected lower interest rates on a higher average outstanding balance of the
  convertible subordinated notes due to Genentech, Inc. and Millennium
  Pharmaceuticals, Inc.
  
  Liquidity and Capital Resources:
  
       XOMA ended the quarter with $58.5 million in cash, cash equivalents and
  short-term investments, compared with $67.6 million at December 31, 2001. Net
  cash used in operations in the first quarter of 2002 was $6.4 million, compared
  with net cash used in operations of $4.8 million in the same period of 2001. In
  comparing the two periods, the 2002 period bene-
  
  
  
                                        -9-
  <PAGE>
  
  fited from a lower net loss and increased accounts payable, but this was more
  than offset by increased accounts receivable and decreased deferred revenue. The
  increase in accounts receivable in the 2002 quarter was due primarily to the
  licensing fee from our arrangement with MorphoSys.
  
       Capital expenditures increased to $2.9 million in the first quarter of 2002
  from $1.0 million for the same period of 2001. Current year spending included
  expenditures related to capacity expansion of our Berkeley manufacturing
  facility.
  
       For the full year 2002, the Company currently expects its net loss to be
  somewhat higher than in 2001, due to increased expenses on Xanelim(TM) and on
  the Millennium collaboration, and the further expansion of the Company's
  development infrastructure. In addition, in early April 2002, the Company
  announced the initiation of testing of Xanelim(TM) for moderate-to-severe
  rheumatoid arthritis.
  
       Based on current spending levels, currently anticipated revenues, and debt
  financing provided by Genentech for XOMA's share of Xanelim(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 licensing arrangements or collaborations, or favorable market
  conditions supporting taking advantage of financing commitments from Millennium
  under the collaborative agreement between the companies, or otherwise entering
  into new equity or other financing arrangements, could extend this period.
  Genentech and XOMA announced in early April 2002 that a pharmacokinetic study
  comparing XOMA-produced material and Genentech-produced material did not achieve
  a pre-defined statistical definition for comparability. Enrollment in an
  additional 500-patient efficacy study designed to confirm clinical comparability
  of the XOMA and Genentech material is now complete. Subject to the successful
  outcome of this study and agreement with the FDA, the companies anticipate
  filing an application for marketing approval by year-end 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 plans and its ability to raise new funding on acceptable
  terms. For a further discussion of the risks related to our business and their
  effects on our cash flow and ability to raise new funding on acceptable terms,
  see "Forward-Looking Statements And Cautionary Factors That May Affect Future
  Results" included in the Company's most recent annual report on Form 10-K, as
  updated by the disclosure found throughout this quarterly report on Form 10-Q.
  
  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 expo-
  
  
  
                                        -10-
  <PAGE>
  
  sure to any one issuer, limits duration by restricting the term and holds
  investments to maturity except under rare circumstances. The Company classifies
  its cash equivalents as fixed rate if the rate of return on an instrument
  remains fixed over its term. As of March 31, 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.
  
       Other Market Risk. At March 31, 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%.
  
  Forward-Looking Statements:
  
       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 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 efficiency issues or additional time
  requirements for data analysis, BLA preparation, discussions with the FDA,
  additional clinical studies or manufacturing process modifications. These and
  other risks, including those related to changes in the status of the 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, and uncertainties
  regarding the status of biotechnology patents, are discussed in the Company's
  most recent annual report on Form 10-K and in other SEC filings.
  
  
  
  
                                        -11-
  <PAGE>
  
  
  
                             PART II - OTHER INFORMATION
  
  
  Item 1    Legal Proceedings. On January 7, 2002, the United States District
            Court for the Northern District of California, San Francisco Division,
            denied Biosite Incorporated's motion to sever the patent issues in
            XOMA's ongoing case against Biosite from the license issues and to
            address the license issues first. In February of 2002, Biosite
            announced that it has begun implementing an antibody expression
            technology intended to allow it to operate its business without using
            XOMA's patents and that it is launching a licensing program. On or
            about March 5, 2002, Biosite filed an amended answer to add additional
            defenses that certain of the patents at issue are invalid, that
            certain alleged inequitable conduct on the part of the XOMA entities
            renders certain of the patents unenforceable and that alleged patent
            misuse renders the patents at issue unenforceable. Discovery has
            commenced as to all claims, defenses and counterclaims and is
            continuing.
  
            In March of 2002, a federal court dismissed each of the three federal
            securities class action lawsuits filed last year against XOMA,
            Genentech and certain of their officers. After further investigating
            the issues, plaintiffs' counsel had filed with the Court a Stipulation
            and Proposed Order of Voluntary Dismissal in all three actions.
            Thereafter, the Court entered an order dismissing each of the lawsuits
            without prejudice. No consideration was exchanged, and neither
            plaintiffs nor their counsel received any compensation or
            reimbursement of expenses.
  
            In January 2002, a Complaint, which pleads many of the allegations
            that had been made in the class action lawsuits referenced above, was
            filed in the California Superior Court in San Diego County against
            XOMA, Genentech and certain unidentified "John Doe" defendants. The
            plaintiff purports to assert claims under the California Unfair
            Competition Act, seeking injunctive relief and other equitable
            remedies in connection with the defendants' alleged misrepresentations
            and omissions concerning the anticipated timetable for the filing of
            the XanelimTM BLA. On March 14, 2002, XOMA filed a demurrer and a
            motion to strike the Complaint. Thereafter, Genentech filed its own
            demurrer and joined in XOMA's motion to strike the Complaint. In May
            2002, the plaintiff responded to the demurrers and motion to strike by
            filing an Amended Complaint, which tracks in material respects the
            allegations contained in the plaintiff's original Complaint, but
            expands the time period at issue to include the April 5, 2002 press
            release issued by Genentech and XOMA. It is anticipated that, by
            agreement among the parties, the deadline by which XOMA must respond
            to the Amended Complaint will be extended.
  
  
  
                                        -12-
  <PAGE>
  
  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 and Reports on Form 8-K.
  
            a)  Exhibits:
  
  <TABLE>
  <CAPTION>
  <S>               <C>
            Exhibit 10.39A Amendment No. 1 to the Process Development and Manufacturing
                           Agreement by and between XOMA (US) LLC and Onyx
                           Pharmaceuticals, Inc., dated as of April 15, 2002 (with
                           certain confidential information omitted, which omitted
                           information is the subject of a confidential treatment
                           request and has been filed separately with the Securities
                           and Exchange Commission).
  </TABLE>
  
            b)  Reports on Form 8-K:  None.
  
  
  
  
                                        -13-
  <PAGE>
  
  
  
                                      XOMA Ltd.
  
                                     SIGNATURES
  
  
       Pursuant to the requirements of the Securities Exchange Act of 1934, the
  registrant has duly caused this report to be signed on its behalf by the
  undersigned, thereunto duly authorized.
  
                               XOMA LTD.
  
  
  Date:    May 15, 2002        By:      /s/ JOHN L. CASTELLO
                                        ------------------------------------------
                                        John L. Castello
                                        Chairman of the Board, President and
                                        Chief Executive Officer
  
  
  
  Date:    May 15, 2002        By:      /s/ PETER B. DAVIS
                                        ------------------------------------------
                                        Peter B. Davis
                                        Vice President, Finance and
                                        Chief Financial Officer
  
  
  
                                        -14-
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text: UNITED STATES
                         SECURITIES AND EXCHANGE COMMISSION
                               Washington, D.C. 20549
  
                                      FORM 10-Q
  
  (mark one)
                [X] Quarterly Report Pursuant to Section 13 or 15(d)
                       of the Securities Exchange Act of 1934
                      For Quarterly Period Ended March 31, 2002
  
                                         or
  
                [ ] Transition Report Pursuant to Section 13 or 15(d)
                       of the Securities Exchange Act of 1934
                 For Transition Period from __________ to __________
  
                             Commission File No. 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) 644-1170
                (Registrant's telephone number, including area code)
  
                                   Not Applicable
                (Former name, former address and former fiscal year,
                           if changed since last report)
  
  Indicate by check mark whether the registrant (1) has filed all reports required
  to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
  the preceding 12 months (or for such shorter period that the registrant was
  required to file such reports), and (2) has been subject to such filing
  requirements for the past 90 days.
  
                              Yes  X  No ___
                                  ---
  
  Indicate the number of shares outstanding of each of the issuer's classes of
  common stock, as of the latest practicable date.
  
  Common shares US$.0005 par value            70,287,972
  Class                                       Outstanding at March 31, 2002
  XOMA LTD.
  
                                  TABLE OF CONTENTS
  
                                                                              Page
  
  PART I   FINANCIAL INFORMATION
  
     Item 1     Condensed Consolidated Financial Statements (unaudited)
  
                Condensed Consolidated Balance Sheets as of March 31, 2002 and
                December 31, 2001................................................1
  
                Condensed Consolidated Statements of Operations for the Three
                Months Ended March 31, 2002 and 2001.............................2
  
                Condensed Consolidated Statements of Cash Flows for the Three
                Months Ended March 31, 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............................................9
  
     Item 3     Quantitative and Qualitative Disclosures About Market Risk .....10
  
  PART II  OTHER INFORMATION
  
     Item 1     Legal Proceedings...............................................12
  
     Item 2     Changes in Securities and Use of Proceeds.......................13
  
     Items 3, 4 and 5 are either inapplicable or nonexistent and
     therefore are omitted from this report
  
     Item 6    Exhibits and Reports on Form 8-K.................................13
  
     Signatures ................................................................14
  
                                        -i-
  XOMA LTD.
  
                        CONDENSED CONSOLIDATED BALANCE SHEETS
                                   (In thousands)
  
                                                                                    March 31,          December 31,
                                                                                       2002               2001
                                                                                   (Unaudited)           (Note 1)
                                                                                   --------------      --------------
  Assets:
  Cash and cash equivalents                                                         $ 58,183           $ 67,320
       Short-term investments                                                                 320                320
       Related party receivables                                                              423                418
       Receivables                                                                          6,227              1,662
       Inventory                                                                            1,306              1,299
       Prepaid expenses and other                                                             189                249
                                                                                   --------------      --------------
           Total current assets                                                            66,648             71,268
       Property and equipment, net                                                         17,123             14,645
       Deposits and other                                                                     201                194
                                                                                   --------------      --------------
                                                                                         $ 83,972           $ 86,107
                                                                                   ==============      ==============
  Liabilities and Shareholders' Equity:
       Accounts payable                                                                  $  6,340           $  3,520
       Accrued liabilities                                                                  4,759              4,422
       Capital lease obligations-- current                                                    673                673
       Deferred revenue-- current                                                           4,084              5,017
       Convertible subordinated note-- current                                              5,041              5,013
                                                                                   --------------      --------------
           Total current liabilities                                                       20,897             18,645
       Capital lease obligations-- long term                                                1,232              1,393
       Deferred revenue-- long term                                                         1,100              1,470
       Convertible subordinated notes-- long term                                          52,241             50,980
                                                                                   --------------      --------------
           Total liabilities                                                               75,470             72,488
  Shareholders' equity                                                                      8,502             13,619
                                                                                   --------------      --------------
                                                                                         $ 83,972           $ 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.
  
                                        -1-
  XOMA LTD.
  
                   CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                   (Unaudited, in thousands except per share data)
  
                                                                                            Three Months Ended
                                                                                                  March 31,
                                                                                         ----------------------------
                                                                                           2002              2001
                                                                                         ---------      -------------
  Revenues:
  License and collaborative fees                                                      $ 6,313            $ 1,015
      Contract and other revenue                                                            2,909              1,841
                                                                                         ---------      -------------
                                                                                            9,222              2,856
                                                                                         ---------      -------------
  Operating Costs and Expenses:
      Research and development                                                              9,935              8,470
      Marketing, general and administrative                                                 4,849              1,610
                                                                                           14,784             10,080
                                                                                         ---------      -------------
  Loss from operations                                                                    (5,562)            (7,224)
  Other Income (Expense):
      Investment and other income                                                             272                459
      Interest and other expense                                                            (649)              (810)
                                                                                         ---------      -------------
  Net loss                                                                               $(5,939)           $(7,575)
                                                                                         =========      =============
  Basic and diluted net loss per share                                                   $ (0.08)           $ (0.11)
                                                                                         =========      =============
  Shares used in computing basic and diluted net loss per share                            70,229             66,134
                                                                                         ---------      -------------
  See accompanying notes to condensed consolidated financial statements.
  
                                        -2-
  XOMA LTD.
  
                   CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                              (Unaudited, in thousands)
  
                                                                                        Three Months Ended
                                                                                             March 31,
                                                                                      ------------------------
                                                                                         2002           2001
                                                                                      -----------   ----------
  Cash Flows From Operating Activities:
  Net cash provided by (used in) operating activities                            $ (6,405)      $ (4,788)
                                                                                      -----------   ----------
  Cash Flows From Investing Activities:
       Proceeds from sale of short-term investments                                          --             96
       Capital expenditures                                                             (2,852)          (963)
                                                                                      -----------   ----------
           Net cash provided by (used in) investing activities                          (2,852)          (867)
                                                                                      -----------   ----------
  Cash Flows From Financing Activities:
       Proceeds from issuance of common shares, net                                         281            618
       Proceeds related to convertible notes                                                 --          2,203
       Payments under capital leases                                                      (161)           (40)
                                                                                      -----------   ----------
           Net cash provided by (used in) financing activities                              120          2,781
                                                                                      -----------   ----------
  Net increase (decrease) in cash and cash equivalents                                  (9,137)        (2,874)
  Cash and cash equivalents at beginning of period                                       67,320         35,043
                                                                                      -----------   ----------
  Cash and cash equivalents at end of period                                            $58,183        $32,169
                                                                                      ===========   ==========
  See accompanying notes to condensed consolidated financial statements.
  
                                        -3-
  XOMA LTD.
  
                NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
                                     (Unaudited)
  
  1. 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.
  
  2. Basis of Presentation
  
       The interim information contained in this report is unaudited but, in
  management's opinion, includes all normal recurring adjustments necessary for a
  fair presentation of results for the periods presented. Interim results may not
  be indicative of results to be expected for the full year. The unaudited
  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.
  
  3. 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.
  
  4. Estimates
  
       The preparation of financial statements in conformity with generally
  accepted accounting principles requires management to make estimates and
  assumptions that affect the reported amounts of assets and liabilities and
  disclosure of contingent assets and liabilities, if any, at the date of the
  financial statements and the reported amounts of revenues and expenses during
  the reporting period. Actual results could differ materially from those
  estimates.
  
  5. 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 repurchase agreements which bear minimal risk. The Company has not
  experienced any significant credit
  
                                        -4-
  losses and does not generally require collateral on receivables. In the first
  quarter of 2002, three customers represented 54%, 28% and 16% of total revenues
  and as of March 31, 2002 billed and unbilled receivables totaled $4,000,000,
  $2,148,000 and $0 for these customers, respectively. In the first quarter of
  2001, two customers represented 49% and 48% of total revenues.
  
  6. Recent Accounting Pronouncements
  
       In July of 2001, the Financial Accounting Standards Board, or FASB, issued
  Statements 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 Statements 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 Statements 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 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
  
                                        -5-
  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 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.
  
  7. 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, up-front 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. Revenue from such payments that are not dependent on
  future performance by the Company under such agreements is recognized as revenue
  when the amount thereof is fixed and determinable and collectibility is
  reasonably assured.
  
       Milestone payments under collaborative arrangements are recognized as
  revenue upon achievement of the incentive milestone events, which represent the
  culmination of the earnings process because the Company has no future
  performance obligations related to the 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. Incentive milestone
  payments are triggered either by the results of our research efforts or by
  events external to the Company, such as regulatory approval to market a product
  or the achievement of specified sales levels by a marketing partner. Amounts
  received in advance are recorded as deferred revenue until the related milestone
  is achieved.
  
       Contract Revenue
  
                                        -6-
  Contract revenue for research and development involves the Company
  providing research, development or manufacturing services on a best efforts
  basis to collaborative partners. The Company recognizes revenue under these
  arrangements as the related research and development costs are incurred.
  
       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.
  
  8. License Agreement
  
       In February of 2002, XOMA and MorphoSys AG announced cross-licensing
  agreements for antibody-related technologies. Under the agreements, XOMA will
  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. Because there are no
  continuing performance obligations on the part of the Company under the
  MorphoSys agreement, the fixed and determinable portion of 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 is to be paid in two
  installments. The first was due and paid in the first quarter of 2002, and the
  second more significant portion is due in the foruth quarter of 2002.
  
  9. 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.
  
  10. 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 months ended March 31, 2002 and 2001 are as follows (in
  thousands):
  
                                        -7-
  Three Months Ended
                                                           March 31,
                                                -------------------------------
                                                   2002                 2001
                                                -----------       -------------
          Net Loss                              $(5,939)              $(7,575)
          Unrealized gain on securities
            available-for-sale                       --                    --
                                                -----------       -------------
          Comprehensive loss                    $(5,939)              $(7,575)
                                                ===========       =============
  
  11. Net Loss Per Common Share
  
       Basic and diluted net loss per share is based on the weighted average
  number of common shares outstanding during the period in accordance with SFAS
  No. 128. Common share equivalents were not included because they are
  antidilutive in all periods presented.
  
  12. Inventories
  
       Inventories are stated at the lower of standard cost (which approximates
  first-in, first-out cost) or market. Inventories, which relate principally to
  the Company's agreement with Baxter Healthcare Corporation, consist of the
  following (in thousands):
  
                                        March 31,            December 31,
                                           2002                  2001
                                        ------------         ------------
          Raw materials                 $    202              $    195
          Finished goods                   1,104                 1,104
                                        ------------         ------------
                                        $  1,306              $  1,299
                                        ============         ============
  
  13. Accrued Liabilities
  
       Accrued liabilities consist of the following (in thousands):
  
                                               March 31,            December 31,
                                                  2002                  2001
                                              ------------          -------------
          Accrued payroll costs                 $ 1,936               $ 2,347
          Accrued clinical trial costs              494                   445
          Other                                   2,329                 1,630
                                              ------------          -------------
                                                $ 4,759               $ 4,422
                                              ============          =============
  
                                        -8-
  MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                    FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  
  Results of Operations:
  
       Revenues in the first quarter of 2002 increased to $9.2 million, from $2.9
  million in the first quarter of 2001. Licensing revenue, increased to $6.3
  million in the first quarter of 2002 from $1.0 million in first quarter of 2001,
  primarily reflecting a fee from our agreement with MorphoSys AG, entered into in
  the first quarter of 2002. Because there are no continuing performance
  obligations on the part of the Company under the MorphoSys agreement, the fixed
  and determinable portion of the license fee provided for in that agreement was
  recognized as revenue in the first quarter of 2002. (See Note 7 to Consolidated
  Condensed Financial Statements, "Revenue Recognition.") Under the terms of the
  agreement, the license fee is to be paid in two installments. The first was due
  and paid in the first quarter of 2002, and the second more significant portion
  is due in the foruth quarter of 2002. Contract revenue increased to $2.9 million
  in the first quarter of 2002 from $1.8 million in the first quarter of 2001.
  This increase was primarily the result of higher service revenues from our
  agreement with Onyx Pharmaceuticals, Inc.
  
       Research and development expenses increased to $9.9 million in the first
  quarter of 2002 from $8.5 million in the comparable prior year period. Spending
  in 2002 reflected increased development costs associated with Xanelim(TM),
  LDP01, CAB2 and ONYX-015. This was partially offset by reduced spending on
  Mycoprex and Genimune development programs, which were discontinued during 2001.
  
       Marketing, general and administrative expenses increased to $4.8 million in
  the first quarter of 2002 from $1.6 million in the same period of 2001. This
  increase is primarily due to legal expenses related to litigation with Biosite
  Incorporated and certain securities claims and to expenses related to the
  MorphoSys cross-licensing arrangement. Spending in 2002 also included XOMA's
  share of commercial development expenses related to activities in preparation
  for a potential future product launch of Xanelim(TM).
  
       Interest income of $0.3 million in the first quarter of 2002 compared to
  $0.5 million for the same period of 2001 was lower due to lower interest rates
  offset by higher average cash balances. Interest expense of $0.6 million in the
  first quarter of 2002, compared to $0.8 million for the same period of 2001,
  reflected lower interest rates on a higher average outstanding balance of the
  convertible subordinated notes due to Genentech, Inc. and Millennium
  Pharmaceuticals, Inc.
  
  Liquidity and Capital Resources:
  
       XOMA ended the quarter with $58.5 million in cash, cash equivalents and
  short-term investments, compared with $67.6 million at December 31, 2001. Net
  cash used in operations in the first quarter of 2002 was $6.4 million, compared
  with net cash used in operations of $4.8 million in the same period of 2001. In
  comparing the two periods, the 2002 period bene-
  
                                        -9-
  fited from a lower net loss and increased accounts payable, but this was more
  than offset by increased accounts receivable and decreased deferred revenue. The
  increase in accounts receivable in the 2002 quarter was due primarily to the
  licensing fee from our arrangement with MorphoSys.
  
       Capital expenditures increased to $2.9 million in the first quarter of 2002
  from $1.0 million for the same period of 2001. Current year spending included
  expenditures related to capacity expansion of our Berkeley manufacturing
  facility.
  
       For the full year 2002, the Company currently expects its net loss to be
  somewhat higher than in 2001, due to increased expenses on Xanelim(TM) and on
  the Millennium collaboration, and the further expansion of the Company's
  development infrastructure. In addition, in early April 2002, the Company
  announced the initiation of testing of Xanelim(TM) for moderate-to-severe
  rheumatoid arthritis.
  
       Based on current spending levels, currently anticipated revenues, and debt
  financing provided by Genentech for XOMA's share of Xanelim(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 licensing arrangements or collaborations, or favorable market
  conditions supporting taking advantage of financing commitments from Millennium
  under the collaborative agreement between the companies, or otherwise entering
  into new equity or other financing arrangements, could extend this period.
  Genentech and XOMA announced in early April 2002 that a pharmacokinetic study
  comparing XOMA-produced material and Genentech-produced material did not achieve
  a pre-defined statistical definition for comparability. Enrollment in an
  additional 500-patient efficacy study designed to confirm clinical comparability
  of the XOMA and Genentech material is now complete. Subject to the successful
  outcome of this study and agreement with the FDA, the companies anticipate
  filing an application for marketing approval by year-end 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 plans and its ability to raise new funding on acceptable
  terms. For a further discussion of the risks related to our business and their
  effects on our cash flow and ability to raise new funding on acceptable terms,
  see "Forward-Looking Statements And Cautionary Factors That May Affect Future
  Results" included in the Company's most recent annual report on Form 10-K, as
  updated by the disclosure found throughout this quarterly report on Form 10-Q.
  
  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 expo-
  
                                        -10-
  sure to any one issuer, limits duration by restricting the term and holds
  investments to maturity except under rare circumstances. The Company classifies
  its cash equivalents as fixed rate if the rate of return on an instrument
  remains fixed over its term. As of March 31, 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.
  
       Other Market Risk. At March 31, 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%.
  
  Forward-Looking Statements:
  
       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 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 efficiency issues or additional time
  requirements for data analysis, BLA preparation, discussions with the FDA,
  additional clinical studies or manufacturing process modifications. These and
  other risks, including those related to changes in the status of the 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, and uncertainties
  regarding the status of biotechnology patents, are discussed in the Company's
  most recent annual report on Form 10-K and in other SEC filings.
  
                                        -11-
  PART II - OTHER INFORMATION
  
  Item 1    Legal Proceedings. On January 7, 2002, the United States District
            Court for the Northern District of California, San Francisco Division,
            denied Biosite Incorporated's motion to sever the patent issues in
            XOMA's ongoing case against Biosite from the license issues and to
            address the license issues first. In February of 2002, Biosite
            announced that it has begun implementing an antibody expression
            technology intended to allow it to operate its business without using
            XOMA's patents and that it is launching a licensing program. On or
            about March 5, 2002, Biosite filed an amended answer to add additional
            defenses that certain of the patents at issue are invalid, that
            certain alleged inequitable conduct on the part of the XOMA entities
            renders certain of the patents unenforceable and that alleged patent
            misuse renders the patents at issue unenforceable. Discovery has
            commenced as to all claims, defenses and counterclaims and is
            continuing.
  
            In March of 2002, a federal court dismissed each of the three federal
            securities class action lawsuits filed last year against XOMA,
            Genentech and certain of their officers. After further investigating
            the issues, plaintiffs' counsel had filed with the Court a Stipulation
            and Proposed Order of Voluntary Dismissal in all three actions.
            Thereafter, the Court entered an order dismissing each of the lawsuits
            without prejudice. No consideration was exchanged, and neither
            plaintiffs nor their counsel received any compensation or
            reimbursement of expenses.
  
            In January 2002, a Complaint, which pleads many of the allegations
            that had been made in the class action lawsuits referenced above, was
            filed in the California Superior Court in San Diego County against
            XOMA, Genentech and certain unidentified "John Doe" defendants. The
            plaintiff purports to assert claims under the California Unfair
            Competition Act, seeking injunctive relief and other equitable
            remedies in connection with the defendants' alleged misrepresentations
            and omissions concerning the anticipated timetable for the filing of
            the XanelimTM BLA. On March 14, 2002, XOMA filed a demurrer and a
            motion to strike the Complaint. Thereafter, Genentech filed its own
            demurrer and joined in XOMA's motion to strike the Complaint. In May
            2002, the plaintiff responded to the demurrers and motion to strike by
            filing an Amended Complaint, which tracks in material respects the
            allegations contained in the plaintiff's original Complaint, but
            expands the time period at issue to include the April 5, 2002 press
            release issued by Genentech and XOMA. It is anticipated that, by
            agreement among the parties, the deadline by which XOMA must respond
            to the Amended Complaint will be extended.
  
                                        -12-
  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 and Reports on Form 8-K.
  
            a)  Exhibits:
  Exhibit 10.39A Amendment No. 1 to the Process Development and Manufacturing
                           Agreement by and between XOMA (US) LLC and Onyx
                           Pharmaceuticals, Inc., dated as of April 15, 2002 (with
                           certain confidential information omitted, which omitted
                           information is the subject of a confidential treatment
                           request and has been filed separately with the Securities
                           and Exchange Commission).
  b)  Reports on Form 8-K:  None.
  
                                        -13-
  XOMA Ltd.
  
                                     SIGNATURES
  
       Pursuant to the requirements of the Securities Exchange Act of 1934, the
  registrant has duly caused this report to be signed on its behalf by the
  undersigned, thereunto duly authorized.
  
                               XOMA LTD.
  
  Date:    May 15, 2002        By:      /s/ JOHN L. CASTELLO
                                        ------------------------------------------
                                        John L. Castello
                                        Chairman of the Board, President and
                                        Chief Executive Officer
  
  Date:    May 15, 2002        By:      /s/ PETER B. DAVIS
                                        ------------------------------------------
                                        Peter B. Davis
                                        Vice President, Finance and
                                        Chief Financial Officer
  
                                        -14-