EMPLOYMENT AGREEMENT

     This Employment Agreement ("Agreement"), made and effective this 26th day
of March, 1999, by and between XOMA Ltd. ("XOMA" or the "Company"), a Bermuda
company with its principal office at 2910 Seventh Street, Berkeley, California,
and Patrick J. Scannon, M.D, Ph.D., ("Executive"), an individual residing at 176
Edgewood, San Francisco, California.

     WHEREAS, the Company wishes to enter into this Agreement to assure the
Company of the continued services of Executive; and

     WHEREAS, Executive is willing to enter into this Agreement and to serve in
the employ of the Company upon the terms and conditions hereinafter provided;

     NOW, THEREFORE, in consideration of the mutual covenants herein contained,
the parties hereto hereby agree as follows:

     1. Employment. The Company agrees to employ Executive, and Executive agrees
to enter the employ of the Company, for the period referred to in Section 3
hereof and upon the other terms and conditions herein provided.

     2. Position and Responsibilities. The Company agrees to employ Executive in
the position of Chief Scientific and Medical Officer, and Executive agrees to
serve as Chief Scientific and Medical Officer, for the term and on the
conditions hereinafter set forth. Executive agrees to perform such services not
inconsistent with his position as shall from time to time be assigned to him by
the Chairman of the Board, President and Chief Executive Officer of the Company
(the "Chairman").

     3. Term and Duties.

     (a) Term of Employment. This Agreement shall become effective and the term
of employment pursuant to this Agreement shall commence on March 26, 1999 and
will continue for one (1) year until March 25, 2000, when it will terminate
unless it is extended by mutual written consent of Executive and the Company or
unless Executive's employment is terminated by the Company or he resigns from
the Company's employ as described herein.

     (b) Duties. During the period of his employment hereunder Executive shall
serve the Company as its Chief Scientific and Medical Officer, and except for
illnesses, vacation periods and reasonable leaves of absence, Executive shall
devote all of his business time, attention, skill and efforts to the faithful
performance of his duties hereunder.

     So long as Executive is Chief Scientific and Medical Officer of the
Company, he will discharge all duties incidental



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<PAGE>

to such office and such further duties as may be reasonably assigned to him from
time to time by the Chairman.

     4. Compensation and Reimbursement of Expenses.

     (a) Compensation. For all services rendered by Executive as Chief
Scientific and Medical Officer during his employment under this Agreement, the
Company shall pay Executive as compensation a salary at a rate of not less than
$320,000 per annum. All taxes and governmentally required withholding shall be
deducted in conformity with applicable laws.

     (b) Loan. In further consideration of Executive's agreement to the terms
hereof, the Company has agreed to a one year extension of a loan previously
provided to Executive in the principal amount of $209,565.40 (the "Loan") on the
terms and subject to the conditions set forth herein. On the date on which
Executive and the Company agreed that the Loan was to be funded (the "Loan
Date"), Executive executed a promissory note in the form attached hereto as
Exhibit A evidencing the Loan and a pledge agreement in the form attached hereto
as Exhibit B granting to the Company a first priority security interest in all
of the outstanding Common Shares owned by Executive on the effective date of
this Agreement, whereupon the Company did lend to Executive the principal amount
of the Loan. The full amount of the Loan will be repaid by Executive as soon as
reasonably practicable and in any event no later than March 25, 2000, or on
demand following any earlier termination of or resignation by Executive.
Interest will accrue on the Loan at a rate per annum equal to the prime rate, as
published in The Wall Street Journal on the Loan Date, and will be payable as
and when the Loan is repaid.

     (c) Reimbursement of Expenses. The Company shall pay or reimburse Executive
for all reasonable travel and other expenses incurred by Executive in performing
his obligations under this Agreement in a manner consistent with past Company
practice. The Company further agrees to furnish Executive with such assistance
and accommodations as shall be suitable to the character of Executive's position
with the Company, adequate for the performance of his duties and consistent with
past Company practice.

     5. Participation in Benefit Plans. The payments provided in Section 4
hereof are in addition to benefits Executive is entitled to under any group
hospitalization, health, dental care, disability insurance, surety bond, death
benefit plan, travel and/or accident insurance, other allowance and/or executive
compensation plan, including, without limitation, any senior staff incentive
plan, capital accumulation and termination pay programs, restricted or
non-restricted share purchase plan, share option plan, retirement income or
pension plan or other present or future group employee benefit plan or program
of the Company for which key executives are or shall become eligible, and


                                       2
<PAGE>

Executive shall be eligible to receive during the period of his employment under
this Agreement, and during any subsequent period(s) for which he shall be
entitled to receive payment from the Company under paragraph 6(b) below, all
benefits and emoluments for which key executives are eligible under every such
plan or program to the extent permissible under the general terms and provisions
of such plans or programs and in accordance with the provisions thereof.

     6. Payments to Executive Upon Termination of Employment.

     (a) Termination. Upon the occurrence of an event of termination (as
hereinafter defined) during the period of Executive's employment under this
Agreement, the provisions of this paragraph 6(a) and paragraph 6(b) shall apply.
As used in this Agreement, an "event of termination" shall mean and include any
one or more of the following:

               (i) The termination by the Company of Executive's employment
          hereunder for any reason other than pursuant to paragraph 6(c); or

               (ii) Executive's resignation from the Company's employ, upon not
          less than thirty (30) days' prior written notice.

     (b) Continuation of Salary and Other Benefits. Upon the occurrence of an
event of termination under paragraph 6(a), the Company (i) shall, subject to the
provisions of Section 7 below, pay Executive, or in the event of his subsequent
death, his beneficiary or beneficiaries of his estate, as the case may be, as
severance pay or liquidated damages, or both, semi-monthly for a period of
twelve (12) months following the event of termination (the "Severance Payment
Period"), a sum equal to his current salary in effect at the time of the event
of termination, but in no case less than $310,000 per annum, (ii) shall continue
to provide the other benefits referred to in Section 5 hereof until the end of
the Severance Payment Period or until Executive becomes employed elsewhere,
whichever is earlier, and (iii) shall continue to provide the benefits provided
for in paragraph 4(c) to the extent of expenses incurred but not reimbursed
prior to the event of termination. Such payments shall commence on the last day
of the next regular pay period following the date of the event of termination,
or, at the election of the Company, may be paid in one lump sum or in such other
installments as may be mutually agreed between the Company and Executive or, in
the event of his subsequent death, his beneficiary or beneficiaries or legal
representative, as the case may be.

     (c) Other Termination of Employment. Notwithstanding paragraphs 6(a) and
(b) or any other provision of this Agreement to the contrary, if on or after the
date of this Agreement and prior to the end of the term hereof:



                                       3
<PAGE>

               (i) Executive has been convicted of any crime or offense
          constituting a felony under applicable law, including, without
          limitation, any act of dishonesty such as embezzlement, theft or
          larceny;

               (ii) Executive shall act or refrain from acting in respect of any
          of the duties and responsibilities which have been assigned to him in
          accordance with this Agreement and shall fail to desist from such
          action or inaction within ten (10) days (or such longer period of
          time, not exceeding ninety (90) days, as Executive shall in good faith
          and the exercise of reasonable efforts require to desist from such
          action or inaction) after Executive's receipt of notice from the
          Company of such action or inaction and the Board of Directors
          determines that such action or inaction constituted gross negligence
          or a willful act of malfeasance or misfeasance of Executive in respect
          of such duties; or

               (iii) Executive shall breach any material term of this Agreement
          and shall fail to correct such breach within ten (10) days (or such
          longer period of time, not exceeding ninety (90) days, as Executive
          shall in good faith and the exercise of reasonable efforts require to
          cure such breach) after Executive's receipt of notice from the Company
          of such breach;

then, and in each such case, the Company shall have the right to give notice of
termination of Employee's services hereunder as of a date (not earlier than
fourteen (14) days from such notice) to be specified in such notice and this
Agreement (other than the provisions of Section 7 hereof) shall terminate on
such date.

     7. Post-Termination Obligations. All payments and benefits to Executive
under this Agreement shall be subject to Executive's compliance with the
following provisions during the term of his employment and for the Severance
Payment Period:

     (a) Confidential Information and Competitive Conduct. Executive shall not,
to the detriment of the Company, disclose or reveal to any unauthorized person
any trade secret or other confidential information relating to the Company or
its affiliates or to any businesses operated by them, and Executive confirms
that such information constitutes the exclusive property of the Company.
Executive shall not otherwise act or conduct himself to the material detriment
of the Company or its affiliates, or in a manner which is inimical or contrary
to the interests thereof, and shall not, directly or indirectly, engage in,
enter the employ of or render any service to any person, firm or business in
direct competition with any part of the business being conducted by the Company;
provided, however, that Executive's ownership less than five percent (5%) of the
outstanding stock of a corporation shall not be itself be deemed to constitute
such competition. Executive recognizes that the



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<PAGE>

possible restrictions on his activities which may occur as a result of his
performance of his obligations under this paragraph 7(a) are required for the
reasonable protection of the Company and its investments. For purposes hereof,
"direct competition" means the pursuit of one or more of the same therapeutic or
diagnostic indications utilizing a substantially similar scientific basis.

     (b) Failure of Executive to Comply. If, for any reason other than death or
disability, Executive shall, without written consent of the Company, fail to
comply with the provisions of paragraph 7(a) above, his rights to any future
payments or other benefits hereunder shall terminate, and the Company's
obligations to make such payments and provide such benefits shall cease.

     (c) Remedies. Executive agrees that monetary damages would not be adequate
compensation for any loss incurred by the Company by reason of a breach of the
provisions of this Section 7 and hereby agrees to waive the defense in any
action for specific performance that a remedy at law would be adequate.

     8. Effect of Prior Agreements. This Agreement contains the entire
understanding between the parties hereto and supersedes any prior employment
agreements between the Company and Executive.

     9. General Provisions.

     (a) Binding Agreement. This Agreement shall be binding upon, and inure to
the benefit of, Executive and the Company and their respective permitted
successors and assigns.

     (b) Legal Expenses. In the event that Executive incurs legal expenses in
contesting any provision of this Agreement and such contest results in a
determination that the Company has breached any of its obligations hereunder,
Executive shall be reimbursed by the Company for such legal expenses.

     10. Successors and Assigns.

     (a) Assignment by the Company. This Agreement shall be binding upon and
inure to the benefit of the successors and assigns of the Company and, unless
clearly inapplicable, reference herein to the Company shall be deemed to include
its successors and assigns.

     (b) Assignment by Executive. Executive may not assign this Agreement in
whole or in part.

     11. Modification and Waiver.

     (a) Amendment of Agreement. This Agreement may not be modified or amended
except by an instrument in writing signed by the parties hereto.



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<PAGE>

     (b) Waiver. No term or condition of this Agreement shall be deemed to have
been waived except by written instrument of the party charged with such waiver.
No such written waiver shall be deemed a continuing waiver unless specifically
stated therein, and each such waiver shall operate only as to the specific term
or condition waived.

     12. Severability. In the event any provision of this Agreement or any part
hereof is held invalid, such invalidity shall not affect any remaining part of
such provision or any other provision. If any court construes any provision of
this Agreement to be illegal, void or unenforceable because of the duration or
the area or matter covered thereby, such court shall reduce the duration, area
or matter of such provision, and, in its reduced form, such provision shall then
be enforceable and shall be enforced.

     13. Governing Law. This Agreement has been executed and delivered in the
State of California, and its validity interpretation, performance, and
enforcement shall be governed by the laws of said State.

     IN WITNESS WHEREOF, XOMA has caused this Agreement to be executed by its
duly authorized officer, and Executive has signed this Agreement, all as of the
day and year first above written.

                            XOMA Ltd.


                           /s/Christopher J. Margolin
                           --------------------------------------
                           Christopher J. Margolin
                           Vice President, General Counsel
                           and Secretary


                            /s/ Patrick J. Scannon
                            ----------------------
                            Patrick J. Scannon, M.D., Ph.D.




                                       6
<PAGE>


                                 PROMISSORY NOTE


$209,565.40                                               Berkeley, California
-----------
                                                           April 1, 1999

     FOR VALUE RECEIVED, the undersigned (the "Obligor") hereby unconditionally
promises to pay to the order of XOMA Ltd., a Bermuda company (the "Obligee"),
the principal sum of TWO HUNDRED NINE THOUSAND FIVE HUNDRED SIXTY-FIVE AND
40/100 DOLLARS ($209,565.40) (the "Principal Amount") together with interest
from the date hereof at a rate per annum of six percent (6%) on the earlier of
(a) five (5) days after the demand of the Obligee if the Obligor ceases to be
employed by the Obligee or (b) the 31ST day of March, 2000. Said principal sum,
and/or any accrued interest, may be prepaid in whole or in part without premium
or penalty.

     1. It is hereby understood and agreed that if default be made in the
payment of the Principal Amount or of interest accrued and unpaid thereon, then
the Obligee may exercise any remedies available at law or in equity, including,
but not limited to, foreclosure upon the shares of Obligee's common stock which
have hereupon been pledged by the Obligor to the Obligee as security for the
Obligor's obligations hereunder pursuant to a Pledge Agreement, but shall not be
obligated to proceed first against such collateral and may proceed directly on
this Promissory Note. In the event of any such default, the Obligee shall be
entitled also to all costs of collection, including the reasonable fees of an
attorney. In the event the Obligee proceeds against the collateral and the
proceeds of the collateral are inadequate to pay any amounts due on this
Promissory Note, the Obligor shall remain liable for any deficiency. In
addition, and without limitation of any other provision of this Paragraph, in
the event of any default described above, the Obligor authorizes and requests
the Obligee to deduct and withhold from compensation otherwise payable by the
Obligee to the Obligor an amount equal to the defaulted payment of the Principal
Amount and/or of interest accrued and unpaid thereon; provided however, that the
Obligee may not so deduct more than fifty (50) percent of any payment of
compensation otherwise due the Obligor.

     2. If application shall be made for the appointment of a receiver, trustee
or liquidator of the Obligor or any of his property, or if the Obligor shall
make a general assignment for the benefit of creditors, be adjudicated a
bankrupt or file a voluntary petition in bankruptcy or seek reorganization of
any arrangement with creditors, the Obligee may declare this Promissory Note to
be due and payable, whereupon this Promissory Note shall forthwith become due
and payable without presentment, demand, protest, or notice of protest, notice
of dishonor, notice of nonpayment or any other notice of any kind, all of which
are hereby expressly waived.

     3. No delay or omission on the part of the Obligee in exercising any right
hereunder shall operate as a waiver of such

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<PAGE>


right or of any other right, nor shall any delay, omission or waiver on any one
occasion be deemed a bar to or waiver of the same or any other right on any
future occasion.

     4. If any provision of this Promissory Note should be found to be invalid
or unenforceable, all other provisions shall nevertheless remain in full force
and effect. This Promissory Note and any of its terms may be changed, waived or
terminated only by a written instrument signed by the party against which
enforcement of that change, waiver or termination is sought. The rights and
obligations of the parties hereunder shall be governed by and interpreted and
enforced in accordance with the substantive laws of the State of California,
without giving effect to principles of conflicts of law.

     WITNESS the due execution hereof as of the date first above written.



                                  /s/Patrick J. Scannon
                                  ---------------------
                                  Patrick J. Scannon, M.D., Ph.D.



                                       2
<PAGE>


                                    EXHIBIT B

                                PLEDGE AGREEMENT

     PLEDGE AGREEMENT dated April 15, 1993, between Patrick J. Scannon, M.D.,
Ph.D. (the "Pledgor"), and XOMA Corporation, a Delaware corporation (the
"Pledgee").

     WHEREAS, the Pledgor is the owner of 69,993 shares (the "Pledged Shares")
of Common Stock, par value $0.0005 per share, issued by the Pledgee; and

     WHEREAS, the Pledgee has agreed to loan the Pledgee $290,539.46 in
connection with the certain liabilities related to the Pledged Shares (the
"Loan"), and the Pledgor has simultaneously with the execution of this Agreement
executed a Promissory Note (the "Note") evidencing such indebtedness;

     NOW THEREFORE, in consideration of the premises and in order to induce the
Pledgee to make the Loan, the Pledgor hereby agrees with the Pledgee as follows:

     SECTION 1. Pledge. The Pledgor hereby pledges to the Pledgee, and grants to
the Pledgee a security interest in, the Pledged Shares and any and all proceeds
therefrom.

     SECTION 2. Security for Obligations. This Agreement secures the payment of
all obligations of the Pledgor to the Pledgee now or hereafter existing pursuant
to the Loan and the Note, whether for principal, interest, fees, expenses or
otherwise (all such obligations of the Pledgor being the "Obligations").

     SECTION 3. Delivery of Pledged Shares. All certificates or instruments
representing or evidencing the Pledged Shares shall be delivered to and held by
or on behalf of the Pledgee pursuant hereto and shall be in suitable form for
transfer by delivery, or shall be accompanied by duly executed instruments of
transfer or assignment in blank, all in forms and substance satisfactory to the
Pledgee. In addition, the Pledgee shall have the right at any time to exchange
certificates or instruments representing or evidencing Pledged Shares for
certificates or instruments of smaller or larger denominations.

     SECTION 4. Representations and Warranties. The Pledgor represents and
warrants as follows:

     (a) The Pledgor is the legal and beneficial owner of the Pledged Shares
free and clear of any lien, security interest, option or other charge or
encumbrance except for the security interest created by this Agreement.

     (b) The pledge of the Pledged Shares pursuant to this Agreement creates a
valid and perfected first priority security interest in the Pledged Shares,
securing the payment of the Obligations.

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<PAGE>


     SECTION 5. Further Assurances. The Pledgor agrees that at any time and from
time to time, at the expense of the Pledgor the Pledgor will promptly execute
and deliver all further instruments and documents, and take all further action,
that may be necessary or appropriate, or that the Pledgee may reasonably
request, in order to perfect and protect any security interest granted or
purported to be g ranted hereby or to enable the Pledgee to exercise and enforce
its rights and remedies hereunder with respect to any Pledged Shares.

     SECTION 6. Voting Rights; Dividends; Etc. (a) So long as no default exists
under the Note:

               (i) The Pledgor shall be entitled to exercise any and all voting
          and other consensual rights pertaining to the Pledged Shares.

               (ii) The Pledgor shall be entitled to receive and retain any and
          all dividends in respect of the Pledged Shares, provided, however,
          that any and all dividends paid or payable other than in cash in
          respect of, and instruments and other property received, receivable or
          otherwise distributed in respect of, or in exchange for, any Pledged
          Shares, and any and all dividends and other distributions paid or
          payable in cash in respect of any Pledged Collateral in connection
          with a partial or total liquidation or dissolution or in connection
          with a reduction of capital, capital surplus or paid-in-surplus shall
          be delivered to the Pledgee to hold as collateral as if such were
          Pledged Shares (such Collateral, together with the Pledged Shares, the
          "Pledged Collateral") and shall, if received by the Pledgor, be
          received in trust for the benefit of the Pledgee, be segregated from
          the other property or funds of the Pledgor, and be forthwith delivered
          to the Pledgee as Pledged Collateral in the same for as so received
          (with any necessary indorsement).

                  (b) Upon the occurrence of a default under the Note, all
         rights of the Pledgor to exercise the voting and other consensual
         rights which it would otherwise be entitled to exercise pursuant to
         Section y(a)(i) and to receive the dividends which it would otherwise
         be authorized to receive and retain pursuant to Section (a)(ii) shall
         cease, and all such rights shall thereupon become vested in the Pledgee
         who shall thereupon have the sole right to exercise such voting and
         other consensual rights and to receive and hold as Pledged collateral
         such dividends, and all dividends which are received by the Pledgor
         contrary to the provisions of this Section (b) shall be received in
         trust for the benefit of the Pledgee, shall be segregated from other
         funds of the Pledgor and shall be forthwith paid over the Agent as
         Pledged Collateral in the same form as so received with any necessary
         indorsement).

     SECTION 7. Pledgee Appointed Attorney-in-Fact. The Pledgor hereby
irrevocably appoints the Pledgee the Pledgor's attorney-in-fact, with full
authority in the place

                                       2
<PAGE>


and stead of the Pledgor and in the name of the Pledgor or otherwise, from time
to time in the Pledgee's discretion, to take any action and to execute any
instrument which the Pledgee may deem necessary or advisable to accomplish the
purposes of this Agreement, including, without limitation, to receive, indorse
and collect all instruments made payable to the Pledgor representing any
dividend or other distribution in respect of the Pledge Shares and to give full
discharge for the same, when and to the extent permitted by this Agreement.

     SECTION 8. Pledgee May Perform. If the Pledgor fails to perform any
agreement contained herein, the Pledgee may itself perform, or cause performance
of, such agreement, and the expenses of the Pledgee incurred in connection
therewith shall be payable by the Pledgor under Section 11.

     SECTION 9. Reasonable Care. The Pledgee shall be deemed to have exercised
reasonable care in the custody and preservation of the Pledged Collateral in its
possession if such Pledged Collateral is accorded treatment substantially
equivalent to that which the Pledgee accords its own property, it being
understood that the Pledgee shall not have responsibility for taking any
necessary steps to preserve rights against any parties with respect to any of
the Pledged Collateral.

     SECTION 10. Remedies upon Default. If any default under the Note shall have
occurred:

               (a) The Pledgee may exercise in respect of the Pledged
          Collateral, in addition to other rights and remedies provided for
          herein or otherwise available to it, all the rights and remedies of a
          secured party on default under the Uniform Commercial Code (the
          "Code") in effect in the State of California at that time (in
          compliance with all applicable securities laws), and the Pledgee may
          also, without notice except as specified below, sell (in compliance
          with all applicable securities laws) the Pledged collateral or any
          part thereof in one or more parcels at public or private sale, at any
          exchange, broker's board, for cash, on credit or for future delivery,
          and at such price or prices and upon such other terms as the Pledgee
          may deem commercially reasonable. The Pledgor agrees that, to the
          extent notice of sale shall be required by law, at least ten days'
          notice to the Pledgor of the time and place of any public sale or the
          time after which any private sale is to be made shall constitute
          reasonable notification. The Pledgee shall not be obligated to make
          any sale of Pledged Collateral regardless of notice of sale having
          been given.

               (b) Any cash held by the Pledgee as Pledged Collateral and all
          cash proceeds received by the Pledgee in respect of any sale of,
          collection from, or other realization upon all or any part of the
          Pledged Collateral may, in

                                       3

<PAGE>


          the discretion of the Pledgee, be held by the Pledgee as collateral
          for, and/or then or at any time thereafter applied (after payment of
          any amounts payable to the Pledgee pursuant to Section 11) in whole or
          in part by the Pledgee against all or any part of the Obligations in
          such order as the Pledgee shall elect. Any surplus of such cash or
          cash proceeds held by the Pledgee and remaining after payment in full
          of all the Obligations shall be paid over the Pledgor or to whomsoever
          may be lawfully entitled to receive such surplus.

     SECTION 11. Expenses. The Pledgor will upon demand pay to the Pledgee the
amount of any and all reasonable expenses, including the fees and expenses of
its counsel and of any agents, which the Pledgee may incur in connection with
(i) the custody of, or the sale or other realization upon, any of the Pledged
collateral, (ii) the exercise or enforcement of any of the rights of the
Pledgee, or (iii) the failure by the Pledgor to perform or observe any of the
provisions hereof.

     SECTION 12. Security Interest Absolute. All rights of the Pledgee and
security interests hereunder, and all obligations of the Pledgor hereunder,
shall be absolute and unconditional.

     SECTION 13. Amendments, Etc. No amendment or waiver of any provision of
this Agreement nor consent to any departure by the Pledgor herefrom shall in any
event be effective unless the same shall be in writing and signed by the
Pledgee, and then such waiver or consent shall be effective only in the specific
instance and for the specific purpose for which given.

     SECTION 14. Addresses for Notices. Any notice or other communication to be
given or made to the Pledgee hereunder shall be sent or otherwise communicated
to the Pledgee at Xoma Corporation, Attention: Christopher Margolin, 1920
Seventh Street, Berkeley, California 94170, telecopy (510) 649-7571 or such
other address and/or for such other attention as may be notified to the Pledgor
in accordance with this Section. Any notice or other communication to be given
to the Pledgor hereunder shall be sent or otherwise communicated to the Pledgor
at 176 Edgewood, San Francisco, California 94117, or such other address and/or
for such other attention as may be notified to the Pledgee in accordance with
this Section. Any notice or other communication to be given or made pursuant to
this Agreement may be given or made personally or by registered first class mail
or by telecopier and shall be effective when actually received.

     SECTION 15. Continuing Security Interest; Assignments. This Agreement shall
create a continuing security interest in the Pledged Collateral and shall (I)
remain in full force and effect until payment in full of the Obligations and
(ii) inure, together with the rights and remedies of the Pledgee hereunder, to
the benefit of the Pledgee, and successors, transferees and assigns. Upon the
payment in full of the Obligations, the Pledgor shall be entitled to the return,
upon its request and at its expense, of such of the Pledged Collateral

                                       4
<PAGE>


as shall not have been sold or otherwise applied pursuant to the terms hereof.

     SECTION 16. Governing Law; Terms. This Agreement shall be governed by and
construed in accordance with the laws of the State of California, except as
required by mandatory provisions of law and except to the extent that the
validity or perfection of the security interest hereunder, or remedies
hereunder, in respect of any particular Pledged Collateral are governed by the
laws of a jurisdiction other than the State of California. Unless otherwise
defined herein, terms defined in Article 9 of the Uniform Commercial Code in the
State of California are used herein as therein defined.

     IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered by their respective officers thereunto duly
authorized, as of the date first above written.

                                  /s/Patrick J. Scannon
                                  ------------------------------
                                  PATRICK J. SCANNON, M.D., Ph.D.

                                  XOMA CORPORATION

                                  By /s/John L. Castello
                                  ------------------------------
                                  John L. Castello
                                  Chairman of the Board,
                                  President and Chief
                                  Executive Officer


                                       5