Silicom Ltd. and its Consolidated Subsidiary
Notes to the Condensed Unaudited Interim Consolidated Financial Statements
(U.S.$ in thousands)

Note 1 – General

A. Description of Business

Silicom Ltd. (“Silicom”, “the Company”) was incorporated under the laws of Israel and commenced operations in 1987. Silicom is engaged in designing, manufacturing, marketing and supporting server networking solutions for manufacturers of security appliances, storage systems, internet traffic management systems, and other manufacturers providing a variety of server-based systems (“Server Networking Products”). Silicom also offers a broad range of customizable PC Cards, PCI cards and USB products.

B. Basis of Presentation

The accompanying condensed unaudited interim consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States for interim financial information [and contain all adjustments (consisting only of normal recurring adjustments) which, in the opinion of management, are necessary to present fairly the financial information included therein]. It is suggested that these financial statements be read in conjunction with the audited consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 20-F for the year ended December 31, 2004. Results for the interim period presented are not necessarily indicative of the results to be expected for the full year.

Note 2 – Significant Accounting Policies

A. Use of Estimates

The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

Note 3 – Inventories

Note 4 – Stock Compensation Plans

The Company applies the intrinsic value-based method of accounting prescribed by Accounting Principles Board (“APB”) Opinion No. 25 “Accounting for Stock Issued to Employees”, and related interpretations including FASB Interpretation No.44 “Accounting for certain transactions involving stock compensation an interpretation of APB Opinion No. 25" issued in March 2000, to account for its fixed plan stock options. Under this method, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price.

The Company applies SFAS No. 123 with respect to options issued to persons other than employees. SFAS No. 123, “Accounting for Stock-Based Compensation,” established accounting and disclosure requirements using a fair value-based method of accounting for stock-based employee compensation plans. As allowed by SFAS No. 123, the Company has elected to continue to apply the intrinsic value-based method of accounting for grants to employees as described above, and has adopted the disclosure requirements of SFAS No. 123.

Pro forma information regarding net income and earnings per share is required by SFAS 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of this statement. Pro forma information is as follows:

Note 5 – Subsequent Events

During December 2005, Silicom obtained approval to list its shares on the Tel Aviv Stock Exchange (TASE). Trading on the TASE commenced on December 27, 2005. Silicom’s shares continue to be listed on the Nasdaq and Silicom continues to be subject to all rules and regulations of Nasdaq and the U.S. Securities and Exchange Commission (SEC).

On January 3, 2006 the company filed a draft prospectus with the Israeli Securities Authority and the Tel Aviv Stock Exchange in connection with a contemplated underwritten offering to the public in Israel of Ordinary Shares or of a combination of Ordinary Shares and options convertible into Ordinary Shares. The offering would be made by Silicom only, and not by any selling shareholder. If the offering is completed, Silicom currently intends to raise up to a maximum amount of approximately $10 million from the offering, depending on market conditions. No final decision on an offering has been made and any offering is subject to the final approval of Silicom’s Board of Directors and to the publishing of a final prospectus with the approval of the Israeli Securities Authority.

The securities have not been registered under the U.S. Securities Act of 1933, as amended, and may not be offered or sold in the United States or to U.S. persons unless the securities are registered under the Act, or an exemption from the registration requirements of the Act is available.