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      Xoma Response Letter - 04/10/06

    XOMA
      Ltd.

    2910
      Seventh Street

    Berkeley,
      California 94710

    VIA
      FACSIMILE AND EDGAR

    April
      10,
      2006

    Mr.
      Jim
      B. Rosenberg

    Senior
      Assistant Chief Accountant

    Securities
      and Exchange Commission

    Division
      of Corporate Finance

    100
      F
      Street, N.E.

    Mail
      Stop
      6010

    Washington,
      D.C. 20549

    Re:
      XOMA Ltd. (the “Company”)

      Form 10-K for the fiscal year ended December 31, 2005 (the “2005 Form
      10-K”)

      Filed March 8, 2006

      File No. 000-14710

    Dear
      Mr.
      Rosenberg:

    This
      letter will respond to your letter dated March 28, 2006 to John L. Castello,
      Chairman of the Board, President and Chief Executive Officer of the Company,
      regarding the staff’s comment relating to the 2005 Form 10-K. This letter sets
      forth the staff’s comment as set forth in your letter, followed by the Company’s
      response.

    Comment:

    Notes
      to Consolidated Financial Statements, page F-7

    1.
      Business and Summary of Critical Accounting Policies, page
      F-7

    Critical
      Accounting Policies, page F-8

    Contract
      Revenue, page F-9

    1.
      Please
      tell us why it is appropriate to recognize revenue on certain contracts using
      the percentage of completion method, as footnote 1 of SOP 81-1 states that
      SOP
      81-1 is not intended to apply to service transactions. In addition, please
      tell
      us why it is appropriate to recognize revenue as you progress towards, as
      opposed to upon completion of, the deliverables and milestones that your policy
      suggests are established in the contracts. In so doing, please tell us how
      the
      input measures used in that method are reasonable surrogates for the output
      measures established in the contracts and how your recognition complies with
      SAB
      104.

    Response:

    The
      particular contract at issue is one that XOMA entered into with the
      National Institute of Allergy and Infectious Diseases (NIAID), part of the
      National Institutes of Health,
      to
      produce three botulinum neurotoxin monoclonal antibodies designed to protect
      U.S. citizens against the harmful effects of biological agents used in
      bioterrorism. Under the 18-month
      agreement, XOMA is developing therapeutic
      products
      using
      proprietary antibody expression systems to produce anti-type A-botulinum
      neurotoxin monoclonal antibodies including a Master Cell Bank, Manufacturer’s
      Working Cell Bank and other designated deliverables detailed in Article C.1.
      -
      Statement of Work of the contract. The contract is available on EDGAR as Exhibit
      10.53 to the Company’s Annual Report on Form 10-K for the fiscal year ended
      December 31, 2004.

    Payments
      under the contract are not dependent upon achievement of “milestones” or
      specific deliverables but are based on agreed progress toward elements defined
      in the Statement of Work. The progress is agreed with NIAID based on monthly
      technical progress reports. We recognize revenue under this contract based
      on
      the proportional performance method, not the percentage of completion method.
      In
      response to the Staff’s comment, the Company will revise its future disclosure
      to clarify the revenue recognition method we are using for this contract.

    We
      have
      concluded that due to the nature of this contract
      the
      proportional performance method of revenue recognition is appropriate based
      on
      the following:

            ·

              XOMA
                is performing a service to NIAID’s
                specifications.

            ·

              The
                contract is a legally enforceable
                agreement.

            ·

              Performance
                extends over a long period.

            ·

              XOMA’s
                right to receive payment depends on agreed progress in accordance
                with the
                agreement.

            ·

              The
                contract services include development and manufacture of cGMP bulk
                drug
                substance for up to three human or human-compatible
                monoclonal
                antibodies (starting
                with material provided by NIAID).

    We
      determined that recognizing revenue using proportional performance or output
      based methodology was the most appropriate versus a cost based methodology
      implied by the percentage of completion methodology. The expected output
was
      the
      most appropriate basis because it is a reasonable dependable estimate of the
      revenue applicable to various contract elements. Output performance,
      as
      defined in the Statement of Work,
      is
      reviewed and discussed with NIAID on a monthly basis.

    We
      have
      reviewed this arrangement with respect to guidance from SAB 104 and determined
      that:
      persuasive evidence of an arrangement does exist as evidenced by the contract
      with NIAID;
      delivery
      has
      occurred and services have been rendered as evidenced by monthly technical
      progress updates discussed and agreed with NIAID;

    the
      price
      is fixed and determinable as evidenced by the contract fixed price of $15
      million;
      and
      collectibility is reasonably assured as evidenced by
      past
      receipt
      of regular payments
      and
      given
      that the customer is an agency of the US government.

    Based
      on
      the foregoing, we believe recognition of revenue under this contract using
      the
proportional
      performance method to be appropriate.

    *
      *           *

    In
      addition, the Company acknowledges that:

            ·

              the
                Company is responsible for the adequacy and accuracy of the disclosure
                in
                the filing;

            ·

              staff
                comments or changes to disclosure in response to staff comments do
                not
                foreclose the Commission from taking any action with respect to the
                filing; and

            ·

              the
                Company may not assert staff comments as a defense in any proceeding
                initiated by the Commission or any person under the federal securities
                laws of the United States.

    If
      you
      have any further questions, please do not hesitate to contact me at (510)
      204-7234. Thank you for your time and attention.

    Very
      truly yours,

    /s/
      J.
      DAVID BOYLE II

    J.
      David
      Boyle II

    Vice
      President, Finance and Chief Financial Officer

    cc:
      James
      Peklenk

    Oscar
      M.
      Young

    John
      L.
      Castello

    Christopher
      J. Margolin

    Candileigh
      Monzo

    Geoffrey
      E. Liebmann