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SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

FORM 20-F

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2002

SILICOM LTD.
(Exact name of Registrant as specified in its charter and translation of
Registrants name into English)

Israel(Jurisdiction of incorporation or organization)

8 Hanagar Street, Kfar Sava 44000,
Israel(Address of principal executive offices)

Securities registered or
to be registered pursuant to Section 12(b) of the Act:

|Title of each class |  | Name of each exchange on which
  registered
|------------------- |  | -------------------------------------------
|                    |  |                                            
|N/A                 |  | N/A                                        

Securities registered or to be registered pursuant to
Section 12(g) of the Act:

Ordinary Shares, nominal value 0.01
New Israeli Shekels per share(Title of Class)

Securities for which
there is a reporting obligation pursuant to Section 15(d) of the Act:

None(Title of Class)

Indicate
the number of outstanding shares of each of the issuers classes of capital or
common stock as of the close of the period covered by the annual report:

4,125,300

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:

Yesþ     Noo

Indicate
by check mark which financial statement item the registrant has elected to
follow:

Item 17oItem 18þ

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This annual report on Form 20-F includes certain
forward-looking statements within the meaning of Section 21E of the
Securities Exchange Act of 1934.  The
use of the words projects, expects, may, plans or intends, or words
of similar import, identifies a statement as forward-looking.  There can be no assurance, however, that
actual results will not differ materially from our expectations or projections.  Factors that could cause actual results to
differ from our expectations or projections include the risks and uncertainties
relating to our business described in this report at Item 3 titled Risk
Factors.Any
forward-looking statements contained in this annual report speak only as of the
date of this report, and we caution investors and potential investors not to
place undue reliance on these statements. We undertake no obligation to update
or revise any forward-looking statements. All subsequent written or oral
forward-looking statements attributable to us or persons acting on our behalf
are expressly qualified in their entirety by the Risk Factors.

Item 1.
        IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

Not
Applicable.

Item 2. OFFER
STATISTICS AND EXPECTED TIMETABLE

Not
Applicable

Item
3.  KEY INFORMATIONSelected
Financial Data

The
following selected financial data has been derived from our audited
consolidated financial statements for the periods, which have been prepared in
accordance with U.S.  GAAP and were
audited by Somekh Chaikin, a member firm of KPMG International. The financial
data set forth below should be read in conjunction with our consolidated
financial statements and the notes thereto, which are set forth in Item 18 
Financial Statements and are incorporated by reference, and the other
financial information appearing elsewhere in this annual report.

1

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CONSOLIDATED STATEMENTS OF OPERATIONS DATA:

Year Ended December31In US$ Thousands

|                                                                                                                    |  | 2002 |        | 2001 |  | 2000 |        | 1999 |  | 1998
|------------------------------------------------------------------------------------------------------------------- |  | ---- | ------ | ---- |  | ---- | ------ | ---- |  | ----
|                                                                                                                    |  |      |        |      |  |      |        |      |  |     
|Sales                                                                                                               |  | $    | 2,726  |      |  | $    | 4,530  |      |  | $   
|Cost of sales                                                                                                       |  |      | 2,091  |      |  |      | 3,635  |      |  |     
|                                                                                                                    |  |      |        |      |  |      |        |      |  |     
|Gross profit                                                                                                        |  |      | 635    |      |  |      | 895    |      |  |     
|                                                                                                                    |  |      |        |      |  |      |        |      |  |     
|R&D costs, gross                                                                                                    |  |      | 1,523  |      |  |      | 1,333  |      |  |     
|(Less) government
  royalty-bearing
  participations                                                                |  |      | 15     |      |  |      | (469   | )    |  |     
|                                                                                                                    |  |      |        |      |  |      |        |      |  |     
|                                                                                                                    |  |      |        |      |  |      |        |      |  |     
|R&D costs, net                                                                                                      |  |      | 1,538  |      |  |      | 864    |      |  |     
|Selling, marketing,
  general and
  administrative expenses                                                         |  |      | 1,734  |      |  |      | 1,738  |      |  |     
|                                                                                                                    |  |      |        |      |  |      |        |      |  |     
|Total operating
  expenses                                                                                          |  |      | 3,272  |      |  |      | 2,602  |      |  |     
|                                                                                                                    |  |      |        |      |  |      |        |      |  |     
|Operating income (loss)                                                                                             |  |      | (2,637 | )    |  |      | (1,707 | )    |  |     
|Other expenses                                                                                                      |  |      | -      |      |  |      | -      |      |  |     
|Financial income, net                                                                                               |  |      | 152    |      |  |      | 254    |      |  |     
|                                                                                                                    |  |      |        |      |  |      |        |      |  |     
|Income (loss) before
  taxes on income                                                                              |  |      | (2,485 | )    |  |      | (1,453 | )    |  |     
|Taxes on income                                                                                                     |  |      | -      |      |  |      | 33     |      |  |     
|                                                                                                                    |  |      |        |      |  |      |        |      |  |     
|Net income (loss)(1)                                                                                                |  |      | (2,485 | )    |  |      | (1,486 | )    |  |     
|                                                                                                                    |  |      |        |      |  |      |        |      |  |     
|Earnings (loss) per
  share                                                                                         |  |      |        |      |  |      |        |      |  |     
|Basic earnings (loss)
  per ordinary share                                                                          |  | $    | (0.60  | )    |  | $    | (0.36  | )    |  | $   
|                                                                                                                    |  |      |        |      |  |      |        |      |  |     
|Weighted average
  number of ordinary
  shares used to compute
  basic earnings (loss)
  per share (in thousands)   |  |      | 4,110  |      |  |      | 4,110  |      |  |     
|                                                                                                                    |  |      |        |      |  |      |        |      |  |     
|Diluted earnings (loss)
  per ordinary share                                                                        |  | $    | (0.60  | )    |  | $    | (0.36  | )    |  | $   
|                                                                                                                    |  |      |        |      |  |      |        |      |  |     
|Weighted average
  number of ordinary
  shares used to compute
  diluted earnings (loss)
  per share (in thousands) |  |      | 4,110  |      |  |      | 4,110  |      |  |     
|                                                                                                                    |  |      |        |      |  |      |        |      |  |     

2

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Net income is after deduction of taxes on income,
which has been reduced by virtue of tax benefits to which the Company is
entitled in its capacity as an Approved Enterprise under Israeli law.  As such, the Company was not required to pay
full income tax for a period of up to seven years ending in 1997 and also for
ten years ending in 2006. See Note 9B to the Financial Statements and Item
10.  Additional Information -  Taxation.

|                                    |  | 2002      |       | 2001 |           | 2000 |       | 1999      |  | 1998
|----------------------------------- |  | --------- | ----- | ---- | --------- | ---- | ----- | --------- |  | ----
|                                    |  |           |       |      |           |      |       |           |  |     
|Consolidated Balance Sheets
  Data: |  |           |       |      |           |      |       |           |  |     
|Working capital                     |  | $         | 5,686 |      |           | $    | 5,583 |           |  | $   
|Total assets                        |  | $         | 7,404 |      |           | $    | 9,658 |           |  | $   
|Short-term debt                     |  | $         | 976   |      |           | $    | 760   |           |  | $   
|Long-term debt                      |  | $         | 743   |      |           | $    | 728   |           |  | $   
|Shareholders equity                |  | $         | 5,685 |      |           | $    | 8,170 |           |  | $   
|Number of shares outstanding        |  | 4,125,300 |       |      | 4,125,300 |      |       | 4,125,300 |  |     



Risk
Factors

This
annual report and statements that we may make from time to time may contain
forward-looking information.  There can
be no assurance that actual results will not differ materially from our expectations,
statements or projections.  Factors that
could cause actual results to differ from our expectations, statements or
projections include the risks and uncertainties relating to our business
described below.

The
loss or ineffectiveness of our original equipment manufacturers may have a
temporary material adverse effect on our operations and financial results.

Our sales and marketing
strategy is to develop and maintain strategic relationships with leading
original equipment manufacturers (OEMs), installers and integrators in the
computer industry, which sell our Connectivity Products under their own private
labels or integrate our products into their systems. These OEMs are not within
our control, are not obligated to purchase our products, and may represent
other lines of products.  A reduction in
their sales efforts or discontinuance of sales of our products by our OEMs
could lead to reduced sales and could materially adversely affect our operating
results. In 2002, one OEM, which was our major customer, was responsible for
the vast majority of our sales of Ethernet/Fast Ethernet PC Card products. (see
footnote 12 to the consolidated financial statements).  The termination or loss of this OEM, or of
several OEMs at approximately the same time, might have a temporary material
adverse effect.

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We depend on our distributors.

The distribution industry
has been characterized by rapid change. 
While alternative distribution channels have emerged, an increasing
number of companies  is competing for access
to these distribution channels.  In
addition, consolidations and financial difficulties of distributors occur in
the distribution industry. Many of the same risks which apply to the use of
OEMs also apply to distributors:  they
are not under our control, are not obligated to purchase our products, and may
represent other lines of products.

The
market for our products changes rapidly and demand for new products is
difficult to predict.

The market for our
products is characterized by rapidly changing technology, short product-life
cycles and evolving industry standards. 
We intend to make substantial investments in product and technology
development and to continue to participate in the development of industry standards.  Notwithstanding these efforts, we cannot not
assure you that we will be successful in selecting, developing, manufacturing
and marketing enhanced and new products in a timely manner.

We may
experience difficulty in developing new, commercially successful products and
acceptable release times.

Since we commenced
operations, we have conducted extensive research, development and engineering
activities.  Our efforts emphasize the
development of new products, cost reduction of current products, and the enhancement
of existing products, generally in response to rapidly changing customer
preferences, technologies and industry standards.  We cannot assure you that any of our development efforts will
result in commercially successful products, that such products will be released
in a timely manner or that we will be able to respond effectively to
technological changes or new product announcements by others.

Loss of
our sources for certain key components could harm our operations.

Although we generally use
standard parts and components for our products, certain key components used in
our products are currently available from only one source, and others are
available from a limited number of sources. We believe that we maintain a
sufficient inventory of these components to protect against delays in
deliveries.  However, we cannot assure
you that we will not experience delays in the supply of critical components in
the future or that we will have a sufficient inventory of critical components
at such time to produce products at full capacity. In the event that we are not
able to purchase key components of our products from our limited sources, we
may need to redesign certain products. 
We cannot assure you that we will have the adequate resources for such a
redesign or that such a redesign will be successful.

4

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The market for our products is
highly competitive.

The data communications
industry, and in particular the market for connectivity products, described
below, is highly competitive.  We face
extreme competition from numerous companies, most of which are more
established, benefit from greater market recognition (especially in the United
States) and have greater financial, production and marketing resources than we
do. We cannot assure you that our present or contemplated products will
continue to be distinguishable from those of our competitors or that the
marketplace will find our products preferable to those of our competitors.  Furthermore, there can be no assurance that
competitive pressures will not result in price reductions that could materially
adversely affect our business and financial condition and the results of our
operations.

Certain
competitors may be better positioned than we are.

With respect to certain
products we market, we face competition from large, multi-national corporations.  Major competitors in the traditional
connectivity solutions for portable computers area include 3Com Corporation,
International Business Machines Corp. (IBM), and Accton Technologies. Our
primary competitor in this area, with product lines very similar to ours, is
Xircom, Inc., which was purchased by Intel but continues to compete under this
name.  In the broadband internet access
area, our major competition comes from a few Taiwanese-based companies. In
addition, there are a number of companies who offer  broadband products which eliminate the need for certain of our
products.

Our
success depends on the protection of our intellectual property rights.

Our success and ability
to compete depend to a significant degree on our proprietary technology.  The measures we have taken to protect our
proprietary technology afford only limited protection, and, accordingly, we
cannot assure you that such steps will be adequate to prevent misappropriation
of our technology or the independent development of similar technologies by
others.  Despite our efforts,
unauthorized parties may attempt to copy aspects of our products and develop
similar hardware or software or to obtain and use information that we regard as
proprietary.

5

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We may not be able to prevent others
from claiming that we have infringed their proprietary rights.

We cannot assure you that
one or more parties will not assert infringement claims against us.  The cost of responding to claims could be
significant, regardless of whether the claims have merit.  Significant and protracted litigation may
be necessary to protect our intellectual property rights, to determine the
scope of the proprietary rights of others or to defend against claims of
infringement, regardless of whether the claims have merit.  In the event that any infringement claim is
brought against us and infringement is proven, we could be required to
discontinue the use of the relevant technology, to cease the manufacture, use
and sale of infringing products, to incur significant litigation damages, costs
and expenses, to develop non-infringing technology or to obtain licenses to the
alleged infringing technology and to pay royalties to use such licenses.  There can be no assurance that we would be
able to develop any such alternative technologies or obtain any such licenses
on terms commercially acceptable to us. Any infringement claim or other
litigation against us could seriously harm our business, operating results and
financial condition.  While there are no lawsuits or other claims
currently pending against us regarding the infringement of patents or
intellectual property rights of others, we have been a party to such claims in
the past and may be party to such claims in the future.  A prior claim against us has been resolved
through a license agreement, the terms of which have not had a material effect
on our business. See Item 4. 
Information on the Company - Intellectual Property Rights And Software
Protection.

We are
dependent on key personnel.

Our success has been, and
will be, dependent to a large degree on our ability to retain the services of
key personnel and to attract additional qualified personnel in the future.  Competition for such personnel is
intense.  There can be no assurance that
we will be able to attract, assimilate or retain key personnel in the future
and our failure to do so would have a material adverse affect on our business,
financial condition and results of operations.

Exchange
rate fluctuations and international risks could increase the cost of our
operations.

Substantially all of our
international sales are denominated in U.S. dollars and may be subject to
government controls and other risks, including, in some cases, export licenses,
federal restrictions on export, currency fluctuations, political instability,
trade restrictions, and changes in tariffs and freight rates.  We believe that the rate of inflation in
Israel has had a minor effect on our business to date.  However, our dollar costs in Israel will
increase if inflation in Israel exceeds the devaluation of the New Israeli
Shekel (NIS) against the dollar or if the timing of such devaluation lags
behind inflation in Israel.  See Item
5.  Operating and Financial Review and
Prospects - Impact of Inflation and Devaluation on Results of Operations,
Liabilities and Assets.

6

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If we are characterized as a passive
foreign investment company for U.S. federal income tax purposes, our U.S.
shareholders will suffer adverse tax consequences.

Generally, if for any
taxable year 75% or more of our gross income is passive income, or at least 50%
of our assets are held for the production of, or produce, passive income, we
may be characterized as a passive foreign investment company (PFIC) for U.S.
federal income tax purposes. If we are characterized as a PFIC, our U.S.
shareholders may suffer adverse tax consequences, including having gains
realized on the sale of our shares taxed at ordinary income rates, rather than
the capital gain rate. The determination that we are a passive foreign
investment company could also have an adverse effect on the price and
marketability of our shares. (See Item 10. 
Additional Information  Taxation  Passive Foreign Investment
Companies.)

The trading volume of our shares
has been low in the past and may be low in the future, resulting in lower than
expected market prices for our shares.

Our shares have been
traded at low volumes in the past and may be traded at low volumes in the
future for reasons related or unrelated to our performance.  This low trading volume may result in market
prices for our ordinary shares that are below their value and you may not be
able to resell your shares for more than you paid for them.

Israeli
courts might not enforce judgments rendered outside of Israel.

We are incorporated in
Israel. Most of our executive officers and all of the directors are
non-residents of the United States, and a substantial portion of our assets and
the assets of these persons are located outside the United States. Therefore,
it may be difficult to enforce a judgment obtained in the United States against
us or any such persons.  It may also be
difficult to enforce civil liabilities under U.S. federal securities laws in
original actions instituted in Israel. 
If a foreign judgment is enforced by an Israeli court, it generally will
be payable in New Israeli Shekels, which can then be converted into foreign
currency at the rate of exchange of such foreign currency on the date of
payment. Pending collection, the amount of the judgment of an Israeli court
stated in New Israeli Shekels (without any linkage to a foreign currency)
ordinarily will be linked to the Israeli consumer price index plus interest at
the annual statutory rate prevailing at such time.  Judgment creditors bear the risk of unfavorable exchange rates.

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The
political environment and hostilities in Israel could harm our business.

Since the establishment
of the State of Israel in 1948, a state of hostility has existed between Israel
and the Arab countries in the region. 
This state of hostility has varied in degree and intensity over time.
There has been a significant increase in violence since September 2000 which
has continued with varying levels of severity into 2001 and 2002, and
negotiations between Israel and Palestinian representatives has ceased.  Since late September 2000, there has been a
significant increase in hostilities and unrest as between Israel, the
Palestinian Authority and certain terrorist groups operating within the
Palestinian Authority.  While this
development has not had a material impact on our business,we cannot assure you that it will not
have such an effect in the future. The political and security
situation in Israel may result in certain parties with whom we have contracts
claiming that they are not obligated to perform their commitments under those
agreements pursuant to force majeure provisions.  Any hostilities involving Israel or the interruption or
curtailment of trade between Israel and its present trading partners could
adversely affect our operations and could make it more difficult for us to
raise capital. Furthermore, many of our facilities are located in Israel, which
is currently experiencing civil unrest, terrorist activity and military action.
Since we do not have a detailed disaster recovery plan that would allow us to
quickly resume business activity, we could experience serious
disruptions if acts associated with this conflict result in any serious damage
to our facilities. Our business interruption insurance may not adequately
compensate us for losses that may occur and any losses or damages incurred by
us could have a material adverse effect on our business. We cannot give
any assurance that security and political conditions will not have such an
effect in the future. Any future armed conflicts or political instability in
the region would likely negatively affect business conditions and harm our
results of operations

Furthermore, all non-exempt male adult permanent
residents of Israel under the age of 48 are obligated to perform military
reserve duty and may be called to active duty under emergency
circumstances.  Recently, there has been
a significant call up of military reservists, and it is possible that there
will be additional call-ups in the future. 
While we have operated effectively despite these conditions in the past,
we cannot assess what impact these conditions may have in the future,
particularly if emergency circumstances arise. Our operations could be
disrupted by the absence for a significant period of one or more of our
executive officers or key employees or a significant number of our other
employees due to military service. Any disruption in our operations would harm
our business.

Corporate
governance scandals and new legislation could increase the cost of our
operations.

As a result of recent
corporate governance scandals and the legislative and litigation environment
resulting from those scandals, the costs of being a public company in general
are expected to increase in the near future. New legislation, such as the
recently enacted Sarbanes-Oxley Act of 2002, will have the effect of increasing
the burdens and potential liabilities of being a public reporting company. This
and other proposed legislation may increase the fees of our professional
advisors and our insurance premiums.

8

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We are affected by volatility in the
securities markets.

Due to the recent
downturn in the world economy, the securities markets in general have recently
experienced volatility which has particularly affected the securities of many
high-technology companies, including companies that have a significant presence
in Israel.  This volatility has often
been unrelated to the operating performance of these companies.  They, and particularly those in the fields
of communications, software and Internet, may experience difficulties in
raising additional financing required to effectively operate and grow their
businesses.   Such failure and the
volatility of the securities markets in general may affect our financial results.

We have
been and may continue to be negatively affected by the aftermath of September
11 events.

On
September 11, 2001, the United States was subject to terrorist attacks at the
World Trade Center buildings in New York City and at the Pentagon in
Washington, D.C.  In response to these
terrorist attacks, a United States-led coalition of nations commenced a series
of retaliatory military strikes in Afghanistan upon strategic installations of
the Taliban regime. Another United States-led coalition also conducted a war in
Iraq which led to the end of Saddam Husseins regime.  These events have had, and we expect will continue in the
foreseeable future to have, an adverse effect on the global economy, and could
result in a disruption of our business or that of our customers.

We may be affected by the
outbreak of Severe Acute Respiratory Syndrome, known by the acronym SARS.

Severe
Acute Respiratory Syndrome, or SARS, is a respiratory illness that has recently
been reported in Asia, North America, and Europe.  Organizations such as the Centers for Disease Control have placed
travel advisories and travel alerts in effect in certain geographic areas of
the world.  SARS has not had any affect
on our business to date, and we do not expect that it will result in any
disruption of our business in the foreseeable future.  However, if it continues to spread aggressively, it could affect
our business or that of our customers in those geographic areas.

We are
affected by the worldwide downturn in industries based on technology.

The volatility in the
securities markets discussed above and its effect on high-technology companies
may have a ripple effect on our performance. 
Cable companies and internet providers have been hard hit by the
downturn, and some have already closed or are in the process of closing. While
these developments have not materially affected us in the past, we started to
feel the effects of the downturn beginning in 2001, and these effects have
continued in 2002.We can give no
assurance that our results will not be affected if any of the cable companies
or internet providers we work with consolidate, merger or initiate bankruptcy
or liquidation proceedings.  In
addition, the current state of this market causes many of the business
transactions we have entered into or propose to enter into to move slowly, and
the current uncertainty in the market generally makes doing business at the
present time more complicated.

9

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Item 4.  INFORMATION ON THE COMPANY.

History
and Development of the Company

Our legal and commercial
name is Silicom Ltd. We were incorporated under the laws of Israel in 1987, and
we operate under Israeli law and legislation. Our registered and principal
executive offices are located in Israel at 8 Hanagar Street, Kfar Sava, Israel
44000, and our telephone number is 011-972-9-764-4555. Our website is http://www.silicom.co.il.
We do not intend for any information contained on our internet website to be
considered part of this annual report.

We are engaged in the
design, manufacture, marketing and support of connectivity solutions for a
broad range of computer users. Our first products were integrated circuits for
IT manufacturers.  Later on, we focused
our strategy on designing, manufacturing, marketing and supporting a range of
connectivity solutions for mobile and remote PC users.  Our traditional line of products serves as a
communication gateway to enable portable computers   to access information and resources found on Local Area Networks
(LANs) and Wide Area Networks (WANs).

Responding to changes in
the market for connectivity products, we leveraged our expertise in developing
connectivity solutions for portable and desk-top computer users and introduced
a range of connectivity solutions which facilitate connection between PCs and
broadband internet modems in the years 2000 and 2001. In 2002 we leveraged our
expertise and know-how in networking and operating systems to develop a line of
high-end server/storage networking cards. We are currently introducing this
line to potential markets and customers. A description of our principal capital
expenditures and divestitures for the last three fiscal years and currently in
progress is hereby incorporated by reference to Item 5 of this annual report.

Business
Overview

Our business model is
based on the exploitation of our core intellectual property relating to  connectivity solutions and networking.  On one side of the spectrum, at the
conception or pure thought stage, we offer production files (and software, in
the case of the self-install technology), in which we develop the required
product and deliver full documentation needed to produce the product.  In the middle of the spectrum, we design
modules which are subassemblies containing our intellectual property for
integration into products of other companies. 
At the far end of the IP spectrum, we produce completed products which
fulfill the time-to-market needs of our clients.

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We are currently active in the following markets, each
of which is described in greater detail below:

| | Connectivity
  solutions for portable PCs:  this is our traditional
  area of expertise.                                                          
|- | --------------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                                   
| | Broadband
  Internet access:  this is the area in which we leveraged our
  core technology and connectivity solutions know-how in 2000 and 2001.  
|  |                                                                                                                                                   
| | High-end
  Server/Storage networking cards:this is the newest area in which we are leveraging our expertise in
  networking and operating systems.

Traditional Connectivity Solutions for Portable PCs.

In the past few years,
there has been a steady growth in sales of portable computers.This growth has been driven by
technological advances, which have resulted in the continued introduction to
the market place of more compact, more powerful, lighter and easier to use
portable computers.  These advances have
made portable computers a solution for an increasingly mobile workforce, such
as traveling executives, consultants, salespeople, telecommuters and people who
take their work home with them.  In
addition, as portable computers have 
become more powerful, an increasing number of portable computers are now
utilized as primary personal computers, or PCs, in and out of the office, and
are used instead of (and not in addition to) legacy desktop PCs.  The growth in the use of portable computers
has corresponded with an increased dependence on network-based communication
systems, resulting from the need to effectively and efficiently use resources
and communicate information in todays competitive business environment.  In the field of portable computers, our core
strength has been our broad range of single and multi-function connectivity
products that incorporate various technologies to provide portable computer
users with a comprehensive solution to their connectivity problems.  Our products enable connection of portable
computers to (i) any LAN networking standard, whether Ethernet, Fast Ethernet,
Token Ring or ARCnet, (ii) all commonly used cable types, whether Coaxial,
Twisted Pair or AUI, (iii) all forms of interfaces, whether parallel port, USB,
PCMCIA or CardBus, and (iv) commonly used serial ports, whether RS-232 or USB.  Our connectivity products incorporate
pre-configured software drivers that support a broad range of network operating
systems and communication protocols.

11

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While all the above is still true, the trend in the
data communications industry has been to incorporate modems as built-in
elements of portable PCs, and to incorporate Ethernet and Fast Ethernet as
built-in elements of portable PCs.  Both
these trends have  obviated much of the
need for our Modem and Ethernet/Fast Ethernet PC Card products.  We believe that Modem and Ethernet/Fast
Ethernet PC Cards  will be phased out
completely over time. Nevertheless, one of our major OEM customers integrates
our Ethernet and Fast Ethernet PC Cards in its systems. As such, the impact of
the above-mentioned trend is not relevant for this customer. Sales of Ethernet
and fast Ethernet PC Cards for this customer in the years 2002, 2001 and 2000
were $899,000, $1,387,000 and $1,701,000 respectively. Also as mentioned above,
our PC card sales are based on sales of products other than Ethernet/Modem
products. See Item 5  OPERATING AND FINANCIAL REVIEW AND PROSPECTS  Trend
Information.

Broadband Internet Access

One of the technological
challenges in delivering high-speed internet services to subscribers is to
easily connect a broadband modem to a subscribers PC.  Most Broadband modems are external and must
be physically connected to the PC. 
While initially most broadband modems used Ethernet technology, most
home computers did not have an Ethernet card installed.  This created a bottleneck in installation,
limiting the speed with which broadband internet service providers could
penetrate the market.  This bottleneck
was further complicated by the fact that telephone and cable companies supplying
broadband internet service may not have had enough qualified technicians who
had the know-how to connect the internet platform to the PC.

Our solutions to this
challenge, which we dubbed the Last 10 Feet, were our  USB-based external Ethernet product (the
U2E), as well as our USB Ethernet self-install adapter (the U2ES), a
product which incorporated our self-install technology. The U2ES was intended
to connect broadband modems to PCs through the PCs USB port, while
performing  automatic installation and
configuration steps.

While initially most
broadband modems used Ethernet technology for connection to PCs, broadband
manufacturers are now moving towards adding USB ports to their modems, hence
enabling USB to USB connection between the modem and the PC.  Although this solution eliminates the need
for Ethernet connectivity, the USB modem must still be installed into the PC
with an installation CD or diskette. The goal of our self-install technology
was  to enable broadband manufacturers
to offer self-install solutions, either inside the modem or externally, that
would perform all installation and configuration steps automatically, with no
user intervention.

12

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Our self-install technology, called IPlug, removed
the need for human intervention in the installation process, whether by users
or by technical support staff of broadband Internet service providers.
Installation could be completely automated.

We  entered into a number of agreements to
license our self-install technology in the year 2002.  In September, 2002 we entered into a license agreement with
Thales Avionics, a European leader in in-flight entertainment, to license the
IPlug technology in order to enable internet hook-up for airplane passengers.
This agreement, however, is not currently being implemented.  In July, 2002 (pursuant to an agreement
which was signed in 2001), we licensed the IPlug technology to STSN, a global
provider of broadband services, to be used in major hotel chains around the
world. In April, 2002, we signed a three-year agreement with Hyundai Networks
Inc., to co-develop the industrys first self-installing ADSL modem.

We also entered in
January 2003 into a license agreement with Triz Co. Ltd., a Korean ADSL modem
manufacturer, to incorporate the IPlug technology into their ADSL modems, and
in February 2003 we entered into a license agreement with ExtremeSpeed, a
Canadian internet provider for hotels, apartments and condominiums, to
incorporate the IPlug technology into two of their USB devices.

Due to the general
downturn worldwide in industries based on technology, the business transactions
we proposed to enter into in the broadband area moved very slowly, and the
uncertainty in the market made doing business more complicated.  In addition, the technology and products we
developed in the broadband field, including the IPlug technology, lost their
competitive edge because of similar products which became commodities in 2002.  For instance, regular peripherals without
self-install technology became a commodity, to the disadvantage of peripherals
which included our self-install technology. As such, we  have decided not to invest more of our
resources in the further development of this area.

High end Server/Storage Networking Cards

In an effort to leverage
our strengths, we have recently begun to explore a new direction which we feel
will be our primary growth driver in the future:  high-end server/storage networking cards.  Our core expertise has always been our broad
range of Ethernet and connectivity products, which provided personal computer
users with solutions to their connectivity problems.  We have decided to employ our core know-how in the realm of
server-based systems.  Doing so takes
advantage of our competitive edge by using the expertise we have developed in
connectivity solutions for personal computers in industries which require
broader connectivity solutions with very high-performance environments.  These industries include data storage, video
on demand, internet content delivery, high-performance computing, web servers,
etc. Data storage is the leading application that uses such networking cards.
Our decision to move into the server-based systems area also capitalizes on our
previous experience with the storage market. In order to increase our sales
efforts and to improve our access to the relevant markets, we recently
recruited two salesmen in the U.S., one in the Boston area and the other in
California, both with experience in selling networking cards to the
server/storage industries.

13

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We
have developed a line of products for the evolving server/storage networking
industry which facilitate interaction between servers, allowing them to speak
to each other.  It would be impossible
to design such sophisticated products without a high level of
cross-disciplinary knowledge.    The
products we have developed use our Ethernet and operating systems
expertise.  The first products in this
line are eight multi-port Gigabit-Ethernet Server/Storage Networking cards.
These are powerful products that allow server-based systems to fully exploit
the high-speed potential of Gigabit Ethernet. The products have either two,
four or six ports, which plug into the servers between whom interaction is
facilitated.   Our main competitors in
this area, Intel and 3Com Corporation, have developed cards which do not cover
the full scope of features that our products do.  For instance, neither of our competitors offers six ports.  This gives us a competitive edge. We are
currently the only company offering such a product with six ports.  In addition, our products are based on two
different chip sets, both of which are industry leaders, making them more
compatible with our potential customers needs.

The following is a brief
description of the eight new networking products:

The eight products are
divided into two groups: four products are based on Broadcoms chipset and four
products are based on Intels chipset.

Products based on
Broadcoms chipset are: PXG6, PXG4, PXG2 and PXG2F. The number in each product
name represents the number of Gigabit-Ethernet ports that each product has. The
F in the fourth product represents a Fiber-optic Ethernet interface, rather
than a copper Ethernet interface in the first three products. Products based on
the Intel chipset carry the same name with an addition of I at the end to
indicate the Intel chipset. Except for the difference in the type of chipset,
number of ports and type of Ethernet interface, all other key applications and
features are almost similar for all products, as following:

Key Applications:

| | Network-attached storage (NAS)                    
|- | --------------------------------------------------
|  |                                                   
| | Video on Demand servers                           
|  |                                                   
| | Content Delivery servers                          
|  |                                                   
| | Internet Service Providers / Web Hosting          
|  |                                                   
| | Firewalls, Gateways & Routers                     
|  |                                                   
| | Network segmentation for network security purposes

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Key Features:

| | Six, four or two independent copper, or two
  independent fiber, Gigabit Ethernet channels with support for Gigabit
  Ethernet (1000Base-T), Fast Ethernet (100Base-Tx), and Ethernet (10Base-T)
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                                                                                 
| | Auto-negotiation automatic sensing and switching
  between 1000Mbps full duplex or 100 / 10 Mbps operations Simplex or Full
  Duplex                                                            
|  |                                                                                                                                                                                                 
| | Host Interface standard support:                                                                                                                                                                
|  |                                                                                                                                                                                                 
|  |                                                                                                                                                                                                
|  |                                                                                                                                                                                                 
|  |                                                                                                                                                                                                
|  |                                                                                                                                                                                                 
| | Individual MAC address for each port (support
  multiple domain/IP networks)                                                                                                                    
|  |                                                                                                                                                                                                 
| | Ultra deep, 64 KB packet buffer per channel, which
  lowers CPU utilization and avoids PCI-X congestion                                                                                         
|  |                                                                                                                                                                                                 
| | Dual high speed RISC processor per channel for
  advanced packet classification                                                                                                                 
|  |                                                                                                                                                                                                 
| | TCP/UDP/IP checksum offloadsto
  shift checksum processing from the host CPU to the NIC for improved system
  response and longer CPU life                                                      
|  |                                                                                                                                                                                                 
| | TCP segmentation offloads
  to reduce host CPU load for improved system performance.                                                                                                            
|  |                                                                                                                                                                                                 
| | Server class reliability, availability and
  performance features.                                                                                                                              
|  |                                                                                                                                                                                                 
| | Link Aggregation and Load Balancing:                                                                                                                                                            
|  |                                                                                                                                                                                                 
|  |                                                                                                                                                                                                
|  |                                                                                                                                                                                                 
|  |                                                                                                                                                                                                
|  |                                                                                                                                                                                                 
|  |                                                                                                                                                                                                
|  |                                                                                                                                                                                                 
| | Priority queuing - 802.1p layer 2 priority encoding.                                                                                                                                            
|  |                                                                                                                                                                                                 
| | Virtual LANs -802.1q VLAN tagging.                                                                                                                                                              
|  |                                                                                                                                                                                                 
| | Jumbo Frame (9KB)
  to speed data transfer rates and further improve the throughput.                                                                                                            

15

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| | PCI Hot-Plug for
  replacement and removal of server NIC to a PCI Hot Plug compatible server
  without powering down the system
|- | -------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                
| | 802.x flow control.                                                                                                            
|  |                                                                                                                                
| | Boot ROM, embedded or optional, which can be used
  for Boot ROM applications.                                                 

We are currently developing the next generation of
products, which is based on a TOE (TCP/IP Offload Engine) solution. Multi port
Gigabit-Ethernet cards can work at very high speeds, but in some cases, they
bring the CPU utilization of the host-server to almost 100%. The TCP/IP Offload
Engine solution off-loads the CPU work from the host to the networking card
itself.  This releases the CPU of the
host-server, and allows it to deal with its original missions.

We
believe that the high-end storage/server networking cards will fuel our growth
in the future.  A distinct advantage of
these products is that the demand for them has been much less affected by the
world-wide downturn in the high technology industry than has the demand for
dot.com products and companies. 
Server-based systems and data storage are industries that continue to
require innovative solutions which must be faster and faster.  However, the sales cycle for products in
this industry is long, meaning that it may be difficult for us to build a
customer base.  Once we begin to build
this base, though, each success we have may represent an opportunity for
sustained, long-term revenues. We cannot assure you that we will succeed in
having significant sales in this area.

Principal
Markets

The principal markets in
which we compete are set forth more particularly and are incorporated by
reference to footnote 10(A) to Item 18 of this annual report (the Financial
Statements).  In    2000, 2001 and 2002, approximately   42%, 37 % and 21%, respectively, of our
sales were in Europe,  36%, 45% and 65%,
respectively, were in the United States and Canada, and  22%, 18% and 14%, respectively, were in
other countries.  Our
main business is not seasonal, and we believe that there are sufficient sources
and raw materials available to sustain it.

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Sales and Marketing

Over the last few years,
our sales and marketing has been carried out through a network of strategic
relationships with leading original equipment manufacturers, installers and
integrators in the computer industry which sell our Connectivity Products under
their own private labels or incorporate our integrated circuits or modules into
their products.  They are referred to in
this report as OEMs, or OEM customers. 
Our strategy of carrying out strategic relationships with OEM customers
has not changed.  We believe that these
relationships enable us to take advantage of the superior financial resources
and market presence of these companies to increase our sales and establish,
maintain and strengthen our position and reputation in the market for
connectivity products.  We will continue
to market complete product solutions, but believe that these complete product
solutions will become less important as we move towards the server/storage networking
markets. In addition, we believe that such relationships improve access to new
technologies developed by such OEMs, thereby shortening the time-to-market of
our products and technology and ensuring smooth integration of our products and
technology with those of the OEMs. In furtherance of this strategy, we have
entered into strategic arrangements with several OEMs, including Compaq, Tut,
EMC2,Hyundai, KLSI and
others.These companies
incorporate our connectivity products and/or technology under their own private
labels or integrate our products/technology into their systems or as part of
their systems.  Revenues from sales of
our connectivity products  (including
integrated circuits) to OEM customers in 
2002 constituted approximately 43% of our revenues. The loss of any one of our OEM customers may have a material
adverse effect on our operations and financial results.  We cannot assure you that we will be able to
enter into strategic relationships with OEMs in the future.  Our products are marketed directly, through
our U.S.-based subsidiary, through a worldwide network of independent
distributors (generally on a non-exclusive basis) and through OEMs which sell
our Connectivity Products under their own private labels or incorporate our
technology into their products. Normal payment terms of our distributors are up
to 60 days net.Substantially all
of our international sales are denominated in U.S. dollars and may be subject
to government controls and other risks, including, in some cases, export
licenses, federal restrictions on export, currency fluctuations, political
instability, trade restrictions, and changes in tariffs and freight rates. We
have experienced no material difficulties to date as a result of these factors.

Our arrangements with
distributors, OEMs and resellers are generally non-exclusive.  We have generally experienced good relations
with our distributors and are not aware of any pending terminations.

Our OEMs, distributors
and resellers are not within our control. 
They are not obligated to purchase products from us and may represent
other lines of products.  A reduction in
sales effort or discontinuance of sales of our products by our OEMs,
distributors and resellers could lead to reduced sales and could materially
adversely affect our operating results. 
Use of distributors and OEMs also entails the risk that distributors or
OEMs will build up inventories in anticipation of a growth in sales.  If such growth does not occur as
anticipated, these distributors or OEMs may substantially decrease the amount
of products ordered in subsequent quarters, discontinue product orders or even
attempt to return unsold products.  The
distribution industry has been characterized by rapid change, including
consolidations and financial difficulties of distributors and the emergence of
alternative distribution channels.  In
addition, an increasing number of companies are competing for access to these
channels.  The loss or ineffectiveness
of any of our major distributors or OEMs could have a material adverse effect
on our operating results.  We  believe that no termination of a single
distributor is likely to have a material adverse effect on us. However, the
termination or loss of several distributors at approximately the same time
might have a temporary material adverse effect on us.  We consider certain criteria in our selection of a new
distributor, including the sales and support capabilities of the proposed
distributor, the technical level of its personnel, the reputation and
accessibility to the marketplace of the proposed distributor and its
credit-worthiness.  We closely monitor
the performance of each distributor.

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Research and Product Development

Since we commenced
operations, we have conducted extensive research, development and engineering
activities.  Our efforts emphasized the
development of new products, cost reduction of current products, and the
enhancement of existing products, generally in response to rapidly changing
customer preferences, technologies and industry standards.  We intend to capitalize on our technology
base and our experience in order to develop server/storage networking cards to
be used by manufacturers of server-based systems.

We cannot assure you that
any of our development efforts will result in commercially successful products,
that such products will be released in a timely manner or that we will be able
to respond effectively to technological changes or new product announcements by
others.

The markets for our
products are characterized by rapidly changing technology, short product-life
cycles and evolving industry standards. 
We believe that success will depend upon our ability to successfully
market new networking and connectivity concepts, and to a lesser extent, upon
our ability to enhance our existing products, and to introduce new products on
a timely basis. Accordingly, we intend to make substantial investments in
technology development. Notwithstanding these efforts, we cannot assure you
that we will be successful in selecting, developing, manufacturing and
marketing our technology or our enhanced and new products in a timely manner.

Manufacturing
and Suppliers

Our manufacturing
operations for hardware components consist primarily of producing finished
goods from components and sub-assemblies purchased from third parties.  In addition, we perform testing and quality
assurance procedures with respect to the components and sub-assemblies which
are incorporated into our final products and the final products themselves.

We seek to monitor
quality with respect to each stage of the production process including, but not
limited to, the selection of component suppliers, warehouse procedures and
final testing, packaging and shipping. 
We have been certified as complying with ISO 9002, which is a quality
control standard used in the industry. 
We believe that our quality assurance procedures have been instrumental
in achieving a high degree of reliability for our products.  We intend to continue to maintain and
improve the efficiency of such procedures.

18

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Although we generally use standard parts and components
for our products, certain key components used in our products are currently
available from only one source, and others are available from a limited number
of sources. Components currently available from one source include a
proprietary LAN (Fast Ethernet and Ethernet) chipset, modem chipsets and other
components, including other semiconductor devices, transformers and plastic and
metal product housings.  We believe that
we maintain a sufficient inventory of these components to protect against
delays in deliveries. There can be no assurance that we will not experience
delays in the supply of critical components in the future or that we will have
a sufficient inventory of critical components at such time to produce products
at full capacity.  If we do experience
such delays and there is an insufficient inventory of critical components at
that time, our operations and financial results would be adversely affected.

We are generally required
to fill orders for our products within a few weeks after receipt of a firm
purchase order.  Consequently, backlog
is maintained at low levels.

Competition

The data communications
industry, and in particular the market for Connectivity Products, is highly
competitive.  We face extreme
competition from numerous companies, most of which are more established,
benefit from greater market recognition (especially in the United States) and
have greater financial, production and marketing resources than we do.  In particular, our primary competitor, with
product lines very similar to our PCMCIA product line, is Xircom, which was
acquired by Intel.  In addition, with
respect to certain products that we market, we face competition from large,
multi-national corporations.  Major
competitors in the traditional connectivity solutions area include 3Com
Corporation, International Business Machines Corp. (IBM), and Accton
Technologies, in addition to Xircom. Many other companies from Taiwan and the
Far East are also competitors.

In the broadband internet
access area, our major competition comes from a handful of companies based in
Taiwan.    In addition, there are a
number of companies offering broadband products containing built-in internal
USB connectivity, thus decreasing the need for an adapter like our U2E and/or
U2ES.

In the server/storage
networking area, our major competition comes from major NIC manufacturers such
as Intel, 3Com and Adaptec.

We cannot assure you that
the marketplace will find our products or technology preferable to those of our
competitors.  Furthermore, there can be
no assurance that competitive pressures will not result in price reductions
that could materially adversely affect us.

19

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Intellectual
Property Rights And Software Protection

Our success and ability to compete are dependent to a significant degree
on our proprietary technology.  We
currently rely on a combination of trade secret, copyright and trademark laws,
together with non-disclosure agreements and technical measures, to establish
and protect proprietary rights in our products.    These measures afford only limited protection, and accordingly,
there can be no assurance that the steps we take to protect these proprietary
rights will be adequate to prevent misappropriation of our technology or the
independent development of similar technologies by others.  Despite our efforts to protect our
proprietary rights, unauthorized parties may attempt to copy aspects of our
products and develop similar hardware or software or to obtain and use
information that we regard as proprietary. 
In addition, there can be no assurance that one or more parties will not
assert infringement claims against us. 
The cost of responding to claims could be significant, regardless of
whether the claims are valid.

In April 2002 we reached agreement with a company that suggested that
certain of our connectivity products infringe its patents.  We agreed to pay the amount of $150,000 to
this company in exchange for the right to license for our past and future
products which use this alleged infringing technology. In reaching agreement we
avoided incurring additional costs and expenses. See Note 6 to the consolidated
financial statements.

Governmental Regulation Affecting the Company

As a company which focuses on research and development and which
receives grants in order to do so from the Government of Israel, we are
affected by the terms of the grants we have received from the Office of the
Chief Scientist of Israel.  Under the terms
of these grants, we are responsible to pay royalties based on the net sales of
our products.  In addition,
manufacturing of products developed with these grants should be performed in
Israel (otherwise additional royalties are due), and approval must be obtained
to transfer technologies developed through projects in which the government
participates.  See Item 5. Research and
development, patents and licenses, etc.

In addition, we receive certain tax benefits and reduced tax rates from
the Israeli government.  See Item
10.  Additional Information 
Taxation.  The entitlement to these
benefits is conditional upon our fulfillment of the conditions stipulated by
the law, regulations published thereunder and the instruments of approval for
the specific investments. In the event of failure to comply with these
conditions, the benefits could be canceled and we would be required to refund
the amount of the benefits, in whole or in part, with the addition of linkage
differences and interest.

Organizational Structure.

We are a member of the Rad Group of companies, which is an affiliated
group of high-technology companies in Israel. We have one wholly-owned
subsidiary which is incorporated in the United States under the name Silicom
Connectivity Solutions Inc.   Two of our
founders, Messrs. Yehuda and Zohar Zisapel, are also founders, directors and
principal shareholders of several other corporations within the Rad Group.  See Item 7. 
Major Shareholders and Related Party Transactions.

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Property,
Plants and Equipment

We do not own any real property, but we lease property at three
locations.  Our executive offices and
research and development facilities are located in Kfar Sava, Israel. Our lease
with respect to such space, which expired on October 31, 1998, may be renewed
for additional one-year periods not to exceed a total of four years.  We exercised this option and renewed the
lease at these premises beginning in November, 1999, and we renewed for an
additional year in November, 2001; we extended the lease agreement until
October 31, 2003, however, we decreased the amount of space currently under
lease. The lease is now for approximately 600 square meters, instead of 945 as
it was last year. We anticipate that we will extend the lease again.   We currently pay a monthly rent of $5,000.
We conduct our manufacturing from a facility of approximately 610 square meters
in Yokneam, Israel.  The monthly rent
payments for this facility are $5,010. 
The lease is for a 4-year period, and will expire on August 15, 2004,
with an option to renew the lease for an additional period of one year.

Commencing in March 1997, we began to lease space in Mahwah, New Jersey
from an affiliate. Currently, the base monthly rent payments are $924, plus an
additional $410 per month for maintenance and utilities.   See Item 7  Major Shareholders and
Related Party Transactions.

We believe that our facilities in Israel and in the United States are
suitable and adequate for our operations as currently conducted.    In the event that additional facilities
are required or we need to seek alternative rental properties, we believe that
we could obtain such additional or alternative facilities at commercially
reasonable prices.

Item 5. 
OPERATING AND FINANCIAL REVIEW AND PROSPECTS

General

Silicom was incorporated in Israel and commenced operations in
1987.  We have traditionally been
engaged in the design, manufacture, marketing and support of connectivity
solutions for mobile and remote personal computer users. In the years 2000 and
2001, we leveraged the IP developed in this area for use in the broadband
internet access market. In 2002 we leveraged our expertise and know-how in
networking and operating systems to develop a line of high-end server/storage
networking cards. We are currently introducing this line to potential markets
and customers. We primarily sell our products through a worldwide network of
independent distributors on a non-exclusive basis and through Original
Equipment Manufacturers.  In the United
States, we market our products through our wholly-owned United States
subsidiary, Silicom Connectivity Solutions, Inc.

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Critical Accounting
Policies.

The discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in
the United States. The preparation of these financial statements requires us to
make estimates and judgments that affect the reported amount of assets and
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities at the date of our financial statements. Actual results may
differ from these estimates under different assumptions or conditions.

Critical accounting policies are defined as those that are reflective of
significant judgments and uncertainties, and potentially result in materially
different results under different assumptions and conditions. We believe that
our critical accounting policies are limited to those described below.

| |  | Inventories
  - Inventories are stated at the lower of cost or market.  Cost is determined using the
  average-cost method for raw materials.                                                                                                                                                                                                                                                                                      
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |   | The cost of
  the work in process and finished goods is determined based on the allocation
  of labor and overhead, which are allocated on the basis of raw materials
  consumption.                                                                                                                                                                                                                                                 
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |   | The company
  carefully examines its obsolete or slow-inventory situation and establishes
  all allowances for obsolete or slow-moving inventory to record at the lower
  of cost or market. The examination of obsolete or slow moving inventory
  includes our estimates of  the
  likelihood of using or selling each of the material inventory parts.                                                                            
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |  | Allowance
  for doubtful accounts -                                                                                                                                                                                                                                                                                                                                                                                                  
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |   | Trade
  receivables are recorded less the related allowance for doubtful accounts
  receivable.   We consider accounts
  receivable to be doubtful when it is probable that the Company will be unable
  to collect all amounts, taking into account current information and events
  regarding the customers ability to repay their obligations.                                                                                   
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |   | The balance
  sheet allowance for doubtful debts is determined as a specific amount for
  those accounts the collection of which is uncertain. We perform our estimates
  regarding potential doubtful debts based on payment history and
  correspondence with our customers, and based on new information we  receive about customers financial
  situation. As of March 31, 2003, the allowance for doubtful debts was
  $20,000.

22

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Deferred
  Taxes - We account for income taxes under SFAS 109 Accounting
  for Income taxes.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |   | Under SFAS
  109, deferred tax assets or liabilities are recognized in respect of
  temporary differences between the tax bases of assets and liabilities and
  their financial reporting amounts as well as in respect of tax losses and
  other deductions which may be deductible for tax purposes in future years,
  based on tax rates applicable to the periods in which such deferred taxes
  will be realized.  Deferred tax assets
  for future tax benefits from realization are included when their realization
  is more likely than not.  Valuation
  allowances are established when necessary to reduce deferred taxes sets to
  the amount expected to be realized. Deferred taxes were not recorded in
  respect of the following matters 
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |   | 1.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |   | 2.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

Recently
Enacted Accounting Pronouncements

SFAS 143 -
Accounting for Asset Retirement Obligations. 
In June 2001, the FASB issued SFAS 143, Accounting for Asset Retirement
Obligations (hereinafter  SFAS 143).  SFAS 143 requires that we record the fair value of an asset
retirement obligation as a liability in the period in which it incurs a legal
obligation associated with the retirement of tangible long-lived assets that
result from the acquisition, construction, development and/or normal use of the
assets.  We also record a corresponding
asset which is depreciated over the life of the asset. Subsequent to the initial
measurement of the asset retirement obligation, the obligation will be adjusted
at the end of each period to reflect the passage of time and changes in the
estimated future cash flows underlying the obligation.  SFAS 143 is effective for financial statements
issued for fiscal years beginning after June 15, 2002.  Earlier application is permitted.  We believe that the adoption of SFAS
143 will not have a significant impact on our consolidated financial
statements.

23

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SFAS 145 -
Rescission of FASB Statement 4, 44 and 64, Amendment of FASB Statement No.
13 and Technical Corrections.  In April
2001, the FASB  issued SFAS 145, Rescission of FASB Statement 4, 44 and
64, Amendment of FASB No. 13 and Technical Corrections (hereinafter - SFAS
145).  SFAS 145 rescinds
FASB Statement No. 4, Reporting Gains and Losses from Extinguishments of
Debt, and an amendment of that Statement, FASB Statement No. 64,
Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements. SFAS 145
also rescinds FASB Statement No. 44, Accounting for Intangible Assets of Motor
Carriers.  SFAS 145 also amends FASB
Statement No. 13, Accounting for Leases, to eliminate an inconsistency
between the required accounting for sale-leaseback transactions and the
required accounting for certain lease modifications that have economic effects
that are similar to sale-leaseback transactions.  SFAS 145 also amends other existing authoritative pronouncements
to make various technical corrections, clarify meanings, or describe their
applicability under changed conditions. The provisions of this Statement
related to the rescission of Statement 4 are applicable in fiscal years
beginning after May 15, 2002.  Early
adoption is encouraged. A calendar-year entity may early adopt the Statement 4
rescission in the fourth quarter of 2002. 
The provisions of this Statement related to Statement 13 are effective
for transactions occurring after May 15, 2002, with early application
encouraged.  All other provisions of
this Statement are effective for financial statements issued on or after May
15, 2002, with early application encouraged. 
We believe that the adoption of SFAS 145 will not have a significant
impact on our consolidated financial statements.

SFAS 146 -
Accounting for Costs Associated with Exit or Disposal Activities.  In July 2002, the FASB issued SFAS 146,
Accounting for Costs Associated with Exit or Disposal Activities (hereinafter
- SFAS 146). SFAS 146 nullifies EITF 94-3. According to SFAS
146, commitment to a plan to exit an activity or dispose of long-lived assets
will no longer be enough to record a one-time charge for most anticipated
costs.  Instead, companies will record
exit or disposal costs when they are incurred and can be measured at fair
value, and they will subsequently adjust the recorded liability for changes in
estimated fair value. SFAS 146 also revises accounting for specified employee
and contract terminations that are part of restructuring activities. SFAS 146
is effective for exit and disposal activities that are initiated after December
31, 2002.  We believe that the adoption
of SFAS 146 will not have a significant impact on our consolidated financial
statements.

SFAS 148 -
Accounting for Stock Based Compensation - Transition and Disclosure - an
amendment  of FASB Statement No. 123.   In December 2002, the FASB  issued
SFAS 148, Accounting for Stock Based Compensation - Transition and Disclosure
- an amendment of FASB Statement No. 123 (hereinafter - SFAS
148).  SFAS 148 permits two additional
transition methods for entities that adopt the fair value based method of
accounting for stock-based employee compensation.  The Statement also requires new disclosures about the ramp-up
effect of stock-based employee compensation on reported results.  In addition, the Statement also requires
that those effects be disclosed more prominently by specifying the form,
content, and location of those disclosures. 
As at the balance sheet date, we continue to apply APB 25. We have
adopted the disclosure requirements of SFAS 148.

24

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SFAS 149-
Amendment of Statement 133 on Derivative Instruments and Hedging Activities SAB
74 disclosure .On April 30, 2003, the FASB issued FASB Statement No.
149, Amendment of Statement 133 on Derivative Instruments and Hedging
Activities, which amends FASB Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities, to address (1) decisions reached by the
Derivatives Implementation Group, (2) developments in other Board projects
that address financial instruments, and (3) implementation issues related to
the definition of a derivative.  Statement 149 has multiple effective date
provisions depending on the nature of the amendment to Statement 133.  The Company is currently evaluating the
impact of adopting Statement 149 on its financial statements.

SFAS 150-
Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity. On May 15, 2003, the FASB issued FASB
Statement No. 150, Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity.  This Statement establishes standards for how an issuer classifies
and measures certain financial instruments with characteristics of both
liabilities and equity. It requires that an issuer classify a financial
instrument that is within its scope as a liability (or an asset in some
circumstances). Many of those instruments were previously classified as equity.
This Statement is effective for financial instruments entered into or modified
after May 31, 2003, and otherwise is effective at the beginning of the first
interim period beginning after June 15, 2003, except for mandatory redeemable
financial instruments of nonpublic entities. It is to be implemented by
reporting the cumulative effect of a change in an accounting principle for
financial instruments created before the issuance date of the Statement and
still existing at the beginning of the interim period of adoption. Restatement
is not permitted. For nonpublic entities, mandatory redeemable financial
instruments are subject to the provisions of this Statement for the first
fiscal period beginning after December 15, 2003.  The Company is currently evaluating the impact of adopting
Statement 150 on its financial statements.

FIN 45 -
Guarantors Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others.  In November 2002, the Financial Accounting
Standards Board issued Interpretation No. 45, Guarantors Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others (hereinafter - the Interpretation), which addresses,
among other things, the disclosure to be made by a guarantor in its interim and
annual financial statements about its obligations under guarantees.  The Interpretation also requires the
recognition of a liability by a guarantor at the inception of certain
guarantees. The Interpretation requires the guarantor to recognize a liability
for the non-contingent component of the guarantee, which is the obligation to
stand ready to perform in the event that specified triggering events or
conditions occur.  The initial
measurement of this liability is the fair value of the guarantee at inception.
The recognition of the liability is required even it is not probable that
payments will be required under the guarantee or if the guarantee was issued
with a premium payment or as part of a transaction with multiple elements. We
have adopted the disclosure requirements of the Interpretation and will apply
the recognition and measurement provisions for all guarantees entered into or
modified after December 31, 2002. We believe that the adoption of FIN 45 will
not have a significant impact on our consolidated financial statements.

25

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EITF 00-21 -
Revenue Arrangements with Multiple Deliverables.  In November 2002, the Emerging Task-Force
issued its consensus on EITF 00-21, Revenue Arrangements with Multiple
Deliverables (hereinafter - EITF 00-21) an approach to determine whether an
entity should divide an arrangement with multiple deliverables into separate
units of accounting. According to the EITF 00-21, in an arrangement with
multiple deliverables, the delivered item should be considered a separate unit
of accounting if all of the following criteria are met: (1) The delivered item
has value to the customer on a standalone basis, (2) There is objective and
reliable evidence of the fair value of the undelivered item(s), (3) If the
arrangement includes a general right of return, delivery or performance of the undelivered
item is considered probable and substantially in the control of the vendor. If
all the conditions above are met and there is objective and reliable evidence
of fair value for all units of accounting in an arrangement, the arrangement
consideration should be allocated to the separate units of accounting based on
their relative fair values.  However,
there may be cases in which there is objective and reliable evidence of the
fair value of the undelivered item in an arrangement but no such evidence for
one or more of the delivered items.  In
those cases, the residual method should be used to allocate the arrangement
consideration. We are evaluating the impact
EITF 00-21 may have on our future consolidated financial statements.

Financial Accounting
Standard Board Interpretation No. 46, Consolidation of Variable Interest
Entities, an interpretation of ARB No. 51.  In January 2003, the Financial Accounting
Standard Board issued Interpretation No. 46, Consolidation of Variable
Interest Entities (hereinafter  the Interpretation).  According to the Interpretation, a Variable
Interest Entity will be consolidated by an enterprise that is subject to a
majority of the risk of loss from the Variable Interest Entitys activities or
entitled to receive a majoritys of the entitys residual returns or both.  The primary beneficiary consolidates the
Variable Interest Entity.  The
Interpretation requires certain disclosures to be made by the primary
beneficiary and by an enterprise that holds a significant variable interest in
a Variable Interest Entity but is not the primary beneficiary.  We believe that the adoption of the
Interpretation will not have a significant impact on our consolidated financial
statements.

26

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Operating
Results

The following table sets forth, for the periods indicated, the
relationship (in percentages) of items from our Consolidated Statement of
Operations Data to our total sales:

Year Ended December 31,

|                                                          |  |  | 2002   |  |  | 2001   |  |  | 2000   | 
|--------------------------------------------------------- |  |  | ------ |  |  | ------ |  |  | ------ | 
|                                                          |  |  |        |  |  |        |  |  |        | 
|Sales                                                     |  |  | 100.0% |  |  | 100.0% |  |  | 100.0% | 
|                                                          |  |  |        |  |  |        |  |  |        | 
|Cost of sales                                             |  |  | 76.7   |  |  | 80.2   |  |  | 62.2   | 
|                                                          |  |  |        |  |  |        |  |  |        | 
|Gross profit                                              |  |  | 23.3   |  |  | 19.8   |  |  | 37.8   | 
|                                                          |  |  |        |  |  |        |  |  |        | 
|R&D costs, gross                                          |  |  | 55.9   |  |  | 29.4   |  |  | 18.3   | 
|                                                          |  |  |        |  |  |        |  |  |        | 
|(Less) government royalty
  bearing participation         |  |  | 0.5    |  |  | (10.3) |  |  | (5.3)  | 
|                                                          |  |  |        |  |  |        |  |  |        | 
|R&D costs, net                                            |  |  | 56.4   |  |  | 19.1   |  |  | 13.0   | 
|                                                          |  |  |        |  |  |        |  |  |        | 
|Selling, marketing, general and
  administrative expenses |  |  | 63.6   |  |  | 38.4   |  |  | 18.2   | 
|                                                          |  |  |        |  |  |        |  |  |        | 
|Operating income (loss)                                   |  |  | (96.7) |  |  | (37.7) |  |  | 6.6    | 
|                                                          |  |  |        |  |  |        |  |  |        | 
|Financial income, net                                     |  |  | 5.5    |  |  | 5.6    |  |  | 5.1    | 
|                                                          |  |  |        |  |  |        |  |  |        | 
|Income (loss) before taxes on
  income                    |  |  | (91.2) |  |  | (32.1) |  |  | 11.7   | 
|                                                          |  |  |        |  |  |        |  |  |        | 
|Taxes on income                                           |  |  | 0.0    |  |  | 0.7    |  |  | 0.3    | 
|                                                          |  |  |        |  |  |        |  |  |        | 
|Net income (loss)                                         |  |  | (91.2) |  |  | (32.8) |  |  | 11.4   | 

Sales in 2002
decreased to $2,726,000 compared to $4,530,000 in 2001, mainly due to the
continuing global slowdown in the data communication markets and the continuing
phasing out of Modem and Ethernet/Fast Ethernet PC Cards .  About 53% of our sales in 2002 were
attributed to our traditional connectivity solutions for portable computers
products, while 35% were attributable to broadband internet access products and
12% were attributable to other sales. During 2002 we invested most of our
R&D efforts in the development of a line of server/storage networking
cards.

Sales in 2001 decreased to $4,530,000 compared to $7,769,000 in 2000,
also mainly due to the global slowdown in the data communication markets.  About 64% of our sales in 2001 were
attributed to our traditional connectivity solutions for portable computers
products, while 36% were attributable to broadband internet access products.
During 2001 we invested most of our R&D efforts in the development of
broadband internet access and MTU products, as well as in our self-install
technology.

27

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Gross profit in 2002 was
$635,000 compared to $895,000 in 2001. 
Gross profit as percentage of sales in 2002 was 23.3%, compared to 19.8%
in 2001. The Gross profit percentage was higher in 2002 mainly due to a
one-time inventory charge of $923,000 we booked in the second quarter of 2001,
which was related to excess inventory.

Gross profit in 2001 was $895,000 compared to $2,940,000* in 2000.  Gross profit as percentage of sales in 2001
was 19.8% compared to 37.8% in 2000, mainly due to a one-time inventory charge
of $923,000 we booked in the second quarter of 2001 which was related to excess
inventory.

Gross research and development expenses for 2002 increased by 14.3% to
$1,523,000 compared to $1,333,000 during 2001, mainly due to R&D efforts
that were even more extensive than in previous years. Because the markets for
our products are characterized by rapidly changing technology, short
product-life cycles and evolving industry standards, our success will depend
upon our ability to select, develop, manufacture and market new and enhanced
connectivity and networking products in a timely manner to meet changing market
needs.  We expect to continue to invest
significant resources in new product development, enhancements to existing
products, and the development of new networking and connectivity technologies.

Gross research and development expenses for 2001 decreased by 6% to
$1,333,000 compared to $1,418,000 during 2000, mainly due to the devaluation of
the Israeli currency against the U.S. dollar which primarily influenced our
expenses for salaries that are paid in Israeli Currency.

Selling and marketing expenses for 2002 decreased by 8.2% to
$1,022,000, compared to $1,113,000 during 2001, mainly due to lower commission
payments as a result of lower sales.

Selling and marketing expenses for 2001 increased by 27.3% to
$1,113,000 compared to $874,000* during 2000, mainly due to our efforts to
present our self install technology to the relevant markets.

Net loss for 2002 was $2,485,000 compared to a net loss of $1,486,000
in 2001. The main reason for the loss in 2002 was the decrease in sales.

Net loss for 2001 was $1,486,000 compared to a net income of $887,000
in 2000. The main reasons for the loss in 2001 were the decrease in sales and
the one-time inventory charge of $923,000.

28

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For a discussion comparing
the results of our operations from 2001 to 2000, please see  Item 5 (on pages 24 to 26 of our annual
report on Form 20-F for the year ending December 31, 2001 filed with the
Securities and Exchange Commission on June 27, 2002, which pages are hereby incorporated
by reference and attached hereto as Exhibit 10.

Impact of Inflation and Devaluation on Results of Operations,
Liabilities and Assets

For many years prior to 1986, the Israeli economy was characterized by
high rates of inflation and devaluation of the Israeli currency against the
U.S. dollar and other currencies. 
However, since the institution by the Israeli government of an economic
recovery program in 1985, inflation, while continuing, has been significantly
reduced and the rate of devaluation has been substantially diminished.  Since the majority of our revenues are
denominated and paid in U.S. dollars, we believe that inflation and
fluctuations in the U.S. dollar exchange rate have no material effect on our
revenue. Inflation and U.S. dollar exchange rate fluctuations, however, have
some effect on our expenses and, as a result, on our net income/loss.  The cost of our Israeli operations, as
expressed in U.S. dollars, is influenced by the extent to which any increase in
the rate of inflation in Israel is not offset (or is offset on a lagging basis)
by a devaluation of the NIS in relation to the U.S. dollar.

The high and low
exchange rates between the NIS and U.S. dollar during the six most recent
months, as published by the Bank of Israel, were as follows:

|MONTH           |  |  | HIGH
  1 U.S. dollar = |  |  | LOW
  1 U.S. dollar = | 
|--------------- |  |  | ---------------------- |  |  | --------------------- | 
|                |  |  |                        |  |  |                       | 
|December
  2002 |  |  | 4.791                  |  |  | 4.632                 | 
|January 2003    |  |  | 4.898                  |  |  | 4.737                 | 
|February
  2003 |  |  | 4.924                  |  |  | 4.810                 | 
|March 2003      |  |  | 4.858                  |  |  | 4.687                 | 
|April 2003      |  |  | 4.671                  |  |  | 4.521                 | 
|May 2003        |  |  | 4.577                  |  |  | 4.373                 | 

The average exchange rate, using the average of the exchange rates on
the last day of each month during the period, for each of the five most recent
fiscal years, was as follows:

29

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|Period                                |  |  | Exchange Rate | 
|------------------------------------- |  |  | ------------- | 
|                                      |  |  |               | 
|January 1,
  1998  December 31, 1998 |  |  | 3.810 NIS/$1  | 
|January 1,
  1999  December 31, 1999 |  |  | 4.154 NIS/$1  | 
|January 1,
  2000  December 31, 2000 |  |  | 4.067 NIS/$1  | 
|January 1,
  2001  December 31, 2001 |  |  | 4.219 NIS/$1  | 
|January 1,
  2002  December 31, 2002 |  |  | 4.737 NIS/$1  | 

In  1998, the rate of
devaluation of the NIS against the U. S. Dollar exceeded the rate of inflation,
a reversal from prior years. This was not the case in 1999, when the rate of
inflation was approximately 1.3% and the rate of devaluation was -0.3%.  In 2000, the rate of inflation was
approximately 0% and the devaluation rate was 2.7%. In 2001, the rate of
inflation was about 1.4% and the NIS was devalued against the dollar by 9.3%. In
2002, the rate of inflation was about 6.5% and the NIS was devalued against the
dollar by 7.3%. As a result of the differential between the rate of inflation
and the rate of devaluation of the NIS, we experienced increases and decreases
in the costs of our Israel operations, as expressed in U.S. dollars, in 2002,
but they did not materially affect our results of operations in such periods.

We do not presently engaged in any hedging or other transactions
intended to manage the risks relating to foreign currency exchange rate or
interest rate fluctuations. However, we may in the future undertake such
transactions if management determines that it is necessary to offset such
risks.

Liquidity and Capital Resources

At December 31, 2002, we had working capital of $5,686,000 and our
current ratio (current assets to current liabilities) was 6.83.  Since inception, our operations have been
funded through capital contributions, research and development grants  and cash flow from operations.Cash
and cash equivalents as at December 31, 2002 decreased by $1,055,000 to
$861,000 compared with  $1,916,000 as at
December 31, 2001. Short-term investments rose by $2,684,000 and long-term
investments fell by $2,648,000. These three balance sheet items represent
together our actual cash reserves. The net decrease of $1,019,000 in 2002 was
caused mainly due to the net annual loss.

Short term trade receivables decreased to $504,000 at December 31, 2002
from $1,232,000 as at December 31, 2001, mainly due to the decrease in sales
and the old debt paid by Gilat Satellite Networks Ltd. (See Item 8. Legal
Proceedings). Other receivables decreased from $355,000 to $277,000.

30

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Cash used in operating
activities in 2002 amounted to $956,000 compared to cash used in operating
activities in the amount of $ 7,000 in 2001. The increase in 2002 was mainly
due to the increase in operating loss on one side, somewhat deducted by
the decrease in inventories and trade receivables on the other side.

Inventories decreased from $1,725,000 at the end of 2001 to $1,221,000
at the end of 2002, due to the use of existing inventory for ongoing sales.
Capital expenditures on property and equipment in  2002 increased  by $52,000
as compared with 2001.

We have cash and cash equivalents that we believe will enable us to
continue operating for at least the next 12 months.

Other Assets:  Our subsidiary,
Silicom Connectivity Solutions, Inc., 
entered into a Non-Exclusive Limited Patent License Agreement in April
2002 as part of an  agreement with a
company that suggested that certain of our connectivity products infringe its
patents.   The agreement included a
one-time license fee of $150,000 which represented a licensing fee for both
past and future sales of certain connectors and PC cards under patents of the
licensor.  Our subsidiary has established
a sixteen-year amortization period which is based on the expected life of this
license.  The Subsidiary has estimated
that the past sales period under the licensing agreement was six years and that
the future sales period under the licensing agreement will be ten years;
therefore, in 2002 the Subsidiary recognized amortization expense on the past
six years of approximately $56,200, and $7,100 related to the amortization for
2002.  The total amortization expense
for 2002 was approximately $63,300. The remainder of the license fee to be
amortized as of December 31, 2002 was $87,000. The amount of $10,000 was due
within one year and is presented in Other Receivables in the financial
statements, while the amount of $77,000 was due within two years and more and
is presented as Other Assets in the financial statements.

Trade payables increased from $310,000 at the end of 2001 to $561,000
at the end of 2002, mainly due to increasing demand for the Companys products
that was reflected in the Companys sales in Q1/03. This demand was reflected
in increase in raw materials purchases in Q4/2002 and therefore in increase in
trade payables. There is no assurance that this increasing demand will go on in
the following quarters.  Other payables
and accrued liabilities decreased from $450,000 at the end of 2001 to $415,000
at the end of 2002.

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Off-Balance
Sheet Arrangements

On July 22, 2002, the Audit Committee and the Board of Directors
approved an Indemnification Agreement with our directors and officers.  The Agreement provides that the directors
and officers will be exempt from liability in certain circumstances.  The Agreement also provides that the
expenses of these directors and officers for obligations that are connected to
an act performed in their capacity as an Officer of the Company will be paid by
us.  This right to indemnification is
limited, and does not cover breaches of the officers duty of loyalty or care,
or reckless disregard for the consequences of such breach.  The right to indemnification also does not
cover acts that are taken intentionally to realize personal gain. Before the
Agreement may become effective, an amendment to our Articles of Association
must be approved by our shareholders.

The maximum amount of our liability under the Indemnification Agreement
was initially $2,000,000. On April 21, 2003, the Audit Committee and Board of
Directors passed a resolution that would increase this maximum liability to
$3,000,000.The following table shows our outstanding contractual obligations by
category and by payments due:

|                                                                                         |  |  | Payments due by period | 
|---------------------------------------------------------------------------------------- |  |  | ---------------------- | 
|                                                                                         |  |  |                        | 
|Contractual Obligations                                                                  |  |  | Total                  | 
|                                                                                         |  |  |                        | 
|Long-Term Debt                                                                           |  |  |                        | 
|Capital Lease Obligations                                                                |  |  | 169,000                | 
|Operating Leases                                                                         |  |  | 168,000                | 
|Purchase Obligations                                                                     |  |  | 223,000                | 
|Other Long-Term
  Liabilities
  Reflected on the Registrants Balance
  Sheet under GAAP |  |  | -                      | 
|Total                                                                                    |  |  | 560,000                | 

Research
and development, patents and licenses, etc.

Because the market for our products is characterized by rapidly
changing technology, short product-life cycles and evolving industry standards,
our success will depend upon our ability to select, develop, manufacture and
market new and enhanced products in a timely manner to meet changing market
needs.  As such, we invest significant
resources in research and new product development, enhancements to existing
products, and the development of new networking and connectivity technologies,
and we expect to continue to do so.

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The Government of Israel
encourages research and development projects oriented towards products for
export or projects which will otherwise create surplus yield for the Israeli
economy.  As indicated below, in
each of the four fiscal years from 1998 to 2001, we received grants from the
Office of the Chief Scientist (OCS) for the development of systems and
products.  We have received from OCS
approximately 40% of certain research and development expenditures for
particular projects.  Under the terms of
Israeli Government participation, a royalty of 2% or up to 5% of the net sales
of products developed from a project funded by OCS must be paid, beginning with
the commencement of sales of products developed with grant funds and ending
when 100% or 150% of the grant is repaid. For projects approved after January
1, 1999, the amount of royalties payable is up to a dollar-linked amount equal
to 100% of such grants plus interest at LIBOR. 
The terms of Israeli Government participation also place restrictions on
the location of the manufacturing of products developed with government grants,
which may be performed in Israel, and on the transfer to third parties of
technologies developed through projects in which the government
participates.  See Item 10.  Additional Information - Taxation.  Due to the decreasing budget of the OCS, we
did not receive any grants for our projects in 2002. We cannot assure you that
such encouragement programs will be continued, or that we will continue to
participate in them to the extent they are continued.

The following table shows, for the periods indicated, our gross
research and development expenditures, the portion of such expenditures which
was funded by OCS and certain other individuals, capitalization of software
costs and the net cost to us of our research and development activities:

|                                          |  |  | 1998   |  |  | 1999   |  |  | 2000   |  |  | 2001   |  |  | 2002   | 
|----------------------------------------- |  |  | ------ |  |  | ------ |  |  | ------ |  |  | ------ |  |  | ------ | 
|                                          |  |  |        |  |  |        |  |  |        |  |  |        |  |  |        | 
|Gross research and
  development expenses |  |  | $1,170 |  |  | $1,078 |  |  | $1,418 |  |  | $1,333 |  |  | $1,523 | 
|Portion funded by Chief
  Scientist       |  |  | 383    |  |  | 417    |  |  | 410    |  |  | 469    |  |  | *(15)  | 
|Net research and
  development expenses   |  |  | $787   |  |  | $661   |  |  | $1,008 |  |  | $864   |  |  | $1,538 | 

* This amount
reflects final adjustments for projects supported in previous years.

We expect that we will continue to commit substantial resources to
research and development in the future. 
As of May 31, 2003, the Company employed 19 persons in research and
development.  Our gross research and
development expenses constituted approximately 18%, 29% and 56% of our sales,
and our net research and development expenses constituted approximately 13%,
19% and 56% of such sales, in the respective years ended December 31,  2000, 2001 and 2002. For additional
information concerning commitments to pay royalties on sales of products
developed from projects funded by OCS, see Note 7  to our financial statements included elsewhere in this annual
report and see Item 10.  Additional
Information - Taxation.

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Trend
Information

The trend in the data communications industry has been to incorporate
modems and Ethernet/Fast Ethernet as built-in elements of portable PCs.   This 
trend has  obviated much of the
need for our Modem and Ethernet/Fast Ethernet PC Card products.  Although 38% of our sales in 2002 still came
from Modem and Ethernet/Fast Ethernet PC Card products, most of these sales
were to a single major OEM customer which integrates our Ethernet and Fast
Ethernet PC Cards into its systems.  We
believe that this shift in the market will continue, and that gradually, Modem
and Ethernet/Fast Ethernet PC Cards will be phased out completely.
Nevertheless, the major OEM customer mentioned above integrates our Ethernet PC
Cards in its systems. As such, the impact of the above-mentioned trend is
currently not relevant for this customer. 
Of our sales in 2002, 33% came from sales of Ethernet/Fast Ethernet PC
Cards to this OEM customer (this percentage is included in the 38% mentioned
above).

Having anticipated the above trend, we began a
number of years ago to position ourselves to compete in the broadband internet
access arena.  In 1999, 2000 and 2001,
we invested most of our R&D efforts in this arena. In 2000, 2001 and 2002
sales to the broadband internet access and MTU markets constituted 34%, 36% and
35% of our total sales, respectively. 
An additional trend currently affecting us is the worldwide slowdown in
technology-based companies, which has worsened over the past two years, and had
a ripple effect on our performance. 
Especially in the broadband internet access and MTU markets, our
products are used by cable companies and internet providers.  These companies have been adversely affected
by the global downturn in the technology sector, which has caused some of them
to go out of business.  Those companies
which have not gone out of business find themselves in a more precarious
situation.  We can give no assurance
that our results will not be affected if any of the cable companies or internet
providers we work with consolidate, merger or initiate bankruptcy or liquidation
proceedings.

In 2002, we leveraged our expertise and know-how in networking and
operating systems to develop a line of high-end server/storage networking
cards. In todays data communication environment, there is a growing demand for
server-based and storage systems. The markets for such systems were less
affected by the worldwide slowdown described above. We are currently
introducing this line to potential markets and customers. The sales cycle in
these markets is long, but once we establish customers, each such customer will
represent an opportunity for sustained, long-term revenues. We cannot assure
you that we will succeed in having significant sales in this area.

34

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The worldwide slowdown in
technology-related fields and the events of September 11, 2001 have
contributed to an atmosphere of great uncertainty, in which doing business has
become more complicated.  In this
current environment, business transactions which are already in progress take
much longer to conclude, and new business transactions are more difficult to
come by.  This situation has worsened
over the past year.

Item 6. 
DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

Directors and Senior Management

The following table and notes thereto set forth information regarding
our officers, directors and senior managers as of May 31, 2003.

|Name             |  | Age |  | Position with Company                                         
|---------------- |  | --- |  | --------------------------------------------------------------
|                 |  |     |  |                                                               
|Avi Eizenman     |  | 46  |  | Chairman of
  the Board                                       
|Shaike
  Orbach  |  | 52  |  | Chief
  Executive Officer, Director                           
|Yehuda
  Zisapel |  | 60  |  | Director                                                      
|Tsipi Kagan      |  | 36  |  | Outside
  Director                                            
|Zohar Gilon      |  | 56  |  | Outside
  Director                                            
|Paul
  Bjorndahl |  | 48  |  | Vice
  President Sales, Silicom
  Connectivity Solutions, Inc.
|David Hendel     |  | 42  |  | Vice
  President Research and
  Development                   
|Ilan Erez        |  | 36  |  | Chief
  Financial Officer and VP
  Operations                 

Avi Eizenman
co-founded the Company in 1987 and has served as its President and Chief
Executive Officer, as well as Director, since its inception.  Mr. Eizenman stepped down as Chief Executive
Officer on April 1, 2001, and became Chairman of the Board on that date.  Mr. Eizenman served as head of the ASIC
department at Scitex Ltd. in 1986.  From
1979 until 1985, Mr. Eizenman held various positions, including project
manager, ASIC specialist and engineer, with the Electronic Research &
Development Department of the Israeli Ministry of Defense. Mr. Eizenman holds a
B.Sc. degree, with honors, in Electrical Engineering from the Technion, and an
M.B.A. degree in Business Administration from Tel Aviv University.

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Shaike Orbachhas been President and
Chief Executive Officer of the company since April 2001.  In December, 2001, Mr. Orbach was named a
Director, replacing Zohar Zisapel, who resigned from the Board of Directors.  Until recently and for a period of four and
a half years, Mr. Orbach was President and CEO of Opgal Ltd., a high-tech
subsidiary of Israels Rafael and El-Op corporations. Previously, he was
General Manager of Edusoft, an Israeli company the shares of which were traded
on the NASDAQ National Market, and Managing Director of Tecsys Ltd. He holds a
B.Sc degree in Mechanical Engineering from the Technion.

Yehuda Zisapel
is a co-founder of the Company.  He has
served as a Director since its inception and served as Chairman of the Board
from 1999 until March 2001.  Mr. Zisapel
is also a founder and a director of Rad Data Communications Ltd. (Rad), Bynet
Data Communications Ltd. (Bynet) and its subsidiaries and other companies in
the Rad  Group (as hereafter
defined).  We have certain dealings with
members of the Rad  Group.  See Item 7.  Major Shareholders and Related Party Transactions.  In 1966 and 1968, Mr. Zisapel received a
B.Sc. and an M.Sc. degree, respectively, in Electrical Engineering from the
Technion.  In 1975, Mr. Zisapel received
an M.B.A. degree in Business Administration from Tel Aviv University.  Mr. Zisapel and Zohar Zisapel, a former
Director of the Company who stepped down in December, 2001, are brothers.

Tsipi Kagan became
an outside director of the company on June 20th, 2002. Ms. Kagan has
served as the Chief Financial Officer of Phone-Or Ltd., a technology-based
manufacturer of microphones and sensors, since 2000. From 1994 until 2000, Ms.
Kagan was a senior manager at Ernst & Young, Israel. Ms. Kagan is a Certified
Public Accountant in Israel and holds a B.A. in Accounting and Economics from
Tel Aviv University.

Zohar Gilonhas
served as a Director of the Company since 1994, and currently serves as an
Outside Director as well.  Mr. Gilon
also serves as a General Partner and Managing Director of Tamar Technology
Ventures, a venture capital fund investing in Israel and the USA. From 1993 to
August 1995, he served as President of W.S.P. Capital Holdings Ltd.   Mr. Gilon is a private investor in numerous
hi-technology companies. He holds a B.Sc. in Electrical Engineering from the
Technion, and an M.B.A. in Business Administration from Tel Aviv University.

Paul Bjorndahl
has been Vice President, Sales of Silicom Connectivity Solutions, Inc. since
January 2003. From 1994 to 2002 he served as Field Sales Engineer, OEM Sales
Manager and a Regional Sales Manager at Adaptec, Inc., a U.S. company that
designs, manufactures and markets storage access solutions. From 1993 to 1994
Mr. Bjorndahl served as Regional Sales Manager at Electroson, a developer of
CD-R mastering software. From 1986 to 1993 he served as Field Engineer and a
Regional Sales Manager for Ricoh Corporation with their File Products Division.

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David Hendel has been Vice President, Research and Development of the
Company since 1995.  From 1991 to 1995,
he served as a Senior Hardware Engineer of the Company.  Mr. Hendel previously served as an engineer
in the Intelligence Corps of the Israeli Defense Forces.  He holds a B.Sc. degree in Electrical
Engineering from Ben-Gurion University.

Ilan Erez
has been the Chief Financial Officer of the Company since June 1998. He has
also been VP Operations of the Company since May 2001.  From 1996 to 1998 Mr. Erez served as a
Controller and assistant to the Chief Executive Officer at Bio-Dar Ltd.  From 1993 until 1996 Mr. Erez served as an
Auditor at Kesselman & Kesselman accounting firm, a member of
PriceWaterhouseCoopers.  Mr. Erez is a Certified
Public Accountant in Israel and holds a B.A degree in Accounting and Economics
from the Hebrew University in Jerusalem.

Compensation

The aggregate direct remuneration paid to all persons as a group who
served in the capacity of director or executive officer during the year ended
December 31, 2002 was $650,000.  We do
not pay cash compensation to  our
directors for serving on our board of directors, except for Avi Eizenman who is
an active Chairman of the Board, and Shaike Orbach, who is the President and
Chief Executive Officer.. All our officers work full time for us. Certain of the
compensation paid to our directors is paid in the form of options under the
Silicom Directors Share Incentive Plan (1994). 
The Directors Share Incentive Plan was adopted by the board of directors
in August, 1994 in order to grant options to members of the board of directors
who have served on the board of directors for at least three fiscal
quarters.  The Director Share Incentive
Plan is administered by the board of directors, which designates the optionees,
dates of grant and the exercise price of options. Under the Plan, 500,000 of
our ordinary shares have been reserved for issuance. The options expire at the
end of ten years and are non-assignable except by the laws of descent. The
grantee is responsible for all personal tax consequences of the grant and the
exercise thereof.  We believe that no
tax consequences will result to us in connection with such grant or
exercise.  Previously, 185,000 options
were granted pursuant to the Director Share Incentive Plan to Mr. Avi Eizenman,
95,000 options were granted to Mr. Yehuda Zisapel and 75,000 options were
granted to Mr. Zohar Gilon.  (See Note 8 to the Financial Statements).   On July 22, 2002, options to purchase
10,000 ordinary shares of the Company at an exercise price of $0.33 were
granted to Ms. Tsipi Kagan.  Ms. Kagan
will continue to receive options to purchase 10,000 of our ordinary shares for
every year in which she serves as an outside director. On January 27, 2002,
60,000 options were granted to Shaike Orbach at an exercise price of $0.90 per
share, and on Dec. 3, 2002, another 60,000 options were granted to him at an
exercise price of $0.55 per share. 
Previously, 120,000 options were granted to Mr. Orbach at an exercise
price of $4.25  per share.

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On October 24, 2000,  the board of directors adopted the
Silicom Ltd. US Share Option Plan (2000). This Plan is intended to constitute a
means of providing additional incentive to officers, consultants and certain
other present and future employees and directors of the Company and its
subsidiaries.  Pursuant to the Plan, the
Company may grant both Incentive Stock Options (as such term is defined in
Section 422 of the Internal Revenue Code of 1986, as amended; ISOs) and  Nonqualified Stock Options (NSOs),
provided, however, that only our employees or employees of our subsidiaries can
receive ISOs.  The Plan is administered
by the board of directors, which has full authority to grant options under the
Plan.  Under the terms of the Plan, up
to a maximum of 200,000 of our ordinary shares are reserved for issuance,
subject to certain adjustments.  The
exercise price of the options granted under the Plan shall be not less than the
higher of 100 percent (or, in the case of a grant of ISOs to a holder of more
than 10% of the Companys outstanding shares, 110 percent) of the Fair Market
Value (as defined in the Plan) of the ordinary shares subject to the option on
the date the option is granted.  The
vesting period of the options is subject to the discretion of the Board.  The term of ISOs shall not exceed 10 years
from the date that the ISO was granted (or 5 years, in the case of optionees
who hold more than 10% of our outstanding shares). In total, as of May 31,
2003, we have granted 15,600 options pursuant to the US Share Option Plan
(2000) to employees of our US subsidiary  Silicom Connectivity Solutions,
Inc.

In addition to the Plans described above, the oldest of the Companys
share option plans was adopted in December 1993, and amended in 1997. Pursuant
to this plan, 500,000 ordinary shares are currently reserved for issuance upon
the exercise of options to be granted to employees and consultants of the
Company.  This reserve was increased by
the board of directors from 300,000 ordinary shares on April 23, 2001.   The Share Option Plan is administered by
the board of directors, which designates the optionees, dates of grant, vesting
periods and the exercise price of options. The options expire after 10 years
and are non-assignable except by the laws of descent. The
grantee is responsible for all personal tax consequences of the grant and the
exercise thereof.   In total, as of May
31, 2003, we have granted 454,200 options pursuant to the Share Option Plan to
our various executive officers and employees. The options granted to Shaike
Orbach, as described above, are included in the total of 454,200 options
granted under this plan.

There were no black-out periods under the Share Option Plan.

Board Practices

Each of Yehuda Zisapel,  Avi
Eizenman and Shaike Orbach was elected to the board of directors most recently
on June 20, 2002 to serve until the next Annual Shareholders Meeting. Zohar
Zisapel, one of our Founders, voluntarily resigned from the Board of Directors
in December, 2001.  Messrs. Yehuda
Zisapel and Avi Eizenman are both Founders of the Company, and have served as
Directors since our inception in 1987.   
None of the members of the board of directors is entitled to receive any
severance or similar benefits upon termination of his service with the board of
directors, except for Avi Eizenman, who also functions as the active Chairman
of the board.

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Board of Directors

Our Articles of Association provide for a
board of directors of not less than two nor more than eight members.  Each director is elected to serve until the
next annual general meeting of shareholders and until his successor has been
elected. Officers serve at the discretion of the board of directors. The
Articles of Association of the Company provide that any director may, by
written notice to the Company, appoint another person to serve as a substitute
director and may cancel such appointment. 
Under the Israeli Companies Law (5759-1999) (the
Companies Law) which entered into effect on February 1, 2000, a person who is
already serving as a director will not be permitted to act as a substitute
director.  Additionally, the Companies
Law also prohibits a person from serving as a substitute director for more than
one director.

The term of appointment of a substitute
director may be for one meeting of the board of directors or for a specified
period or until notice is given of the cancellation of the appointment. To our
knowledge, no director currently intends to appoint any other person as a
substitute director, except if the director is unable to attend a meeting of
the board of directors.

Outside 
Directors; Audit Committee

Under the Companies Law, companies registered
under the laws of Israel the shares of which have been offered to the public in
or outside of Israel are required to appoint two outside directors.  No person may be appointed as
an outside director if the person or the persons relative, partner, employer
or any entity under the persons control, has or had, on or within the two
years preceding the date of the persons appointment to serve as outside director,
any affiliation with the company or any entity controlling, controlled by or
under common control with the company. 
The term affiliation includes:

| |  | an employment relationship;                                           
| | - | ----------------------------------------------------------------------
| |   |                                                                       
| |  | a business or professional relationship maintained on a regular basis;
| |   |                                                                       
| |  | control; and                                                          
| |   |                                                                       
| |  | service as
  an office holder.                                        

No person may
serve as an outside director if the persons position or other business
activities create, or may create, a conflict of interest with the persons
responsibilities as an outside director or may otherwise interfere with the
persons ability to serve as an outside director.  If, at the time outside directors are to be appointed, all
current members of the board of directors are of the same gender, then at least
one outside director must be of the other gender.

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Outside directors are to
be elected by a majority vote at a shareholders meeting, provided that either:

| |  | the majority
  of shares voted at the meeting, including at least one-third of the shares
  held by non-controlling shareholders voted at the meeting, vote in favor of
  election of the director; or
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                       
| |  | the total
  number of shares held by non-controlling shareholders voted against the
  election of the director does not exceed one percent of the aggregate voting
  rights in the company.           

The initial
term of an outside director is three years and may be extended for one
additional term of three years.  Outside
directors may be removed only by the same percentage of shareholders as is
required for their election, or by a court, and then only if the outside
directors cease to meet the statutory qualifications for their appointment or
if they violate their duty of loyalty to the company.  Each committee of a companys board of directors must include at
least one outside director.

An outside director is entitled to compensation as provided in
regulations adopted under the Companies Law and is otherwise prohibited from
receiving any other compensation, directly or indirectly, in connection with
service provided as an outside director. 
Tsipi Kagan was elected to the board of directors as an outside director
on June 20, 2002.  Paulett Eitan was elected to the board of
directors as an outside director on December 28, 2000, and voluntarily
resigned from the Board of Directors in November 2002.  Zohar Gilon, who also currently
serves as an outside director, was appointed under a predecessor law to a fixed
five-year term which will expire in 2005. 
Pursuant to the listing requirements of the Nasdaq National Market, we
are required to have at least two independent directors on our board of
directors and to establish an audit committee, at least a majority of whose
members are independent of management.

Audit Committee

The new Companies Law requires public companies to appoint an audit committee.  The responsibilities of the audit committee
include identifying irregularities in the management of our business and
approving related party transactions as required by law.  An audit committee must consist of at least
three directors, including the outside directors of the company.  The chairman of the board of directors, any
director employed by or otherwise providing services to the company, and a
controlling shareholder or any relative of a controlling shareholder, may not
be a member of the audit committee. Currently, Tsipi Kagan, Yehuda Zisapel and
Zohar Gilon serve as members of our audit committee.

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Internal Auditor

Under the new Companies Law, the board of directors must appoint an
internal auditor, nominated by the audit committee.  The role of the internal auditor is to examine, among other
matters, whether our actions comply with the law and orderly business
procedure.  Under the Companies Law, the
internal auditor may be an employee of the company but not an office holder (as
defined in Item 10 below), or an affiliate, or a relative of an office holder
or affiliate, and he may not be our independent accountant or its
representative.  Our board of directors
appointed Gideon Duvshani, CPA to be our internal auditor on April 23, 2001, according
to the recommendation of the audit committee.

Employees

The number of employees over the last three financial years is set
forth in the table below.

|Period ending December 31                   |  |  | 2000 |  |  | 2001 |  |  | 2002 | 
|------------------------------------------- |  |  | ---- |  |  | ---- |  |  | ---- | 
|                                            |  |  |      |  |  |      |  |  |      | 
|Total
  Employees                           |  |  | 49   |  |  | 47   |  |  | 41   | 
|Marketing,
  Sales, Customer Services       |  |  | 8    |  |  | 8    |  |  | 5    | 
|Research
  & Development                    |  |  | 17   |  |  | 19   |  |  | 19   | 
|Manufacturing                               |  |  | 17   |  |  | 13   |  |  | 11   | 
|Corporate
  Operations and
  Administration |  |  | 7    |  |  | 7    |  |  | 6    | 

At May 31,
2003, we had 43 employees, including 6 in marketing, sales and customer
services, 19 in research and development, 12 in manufacturing, and 6 in
corporate operations and administration. 
All such employees, except for 4 employees in the United States, are
based in Israel.  We consider our
relations with our employees excellent and have never experienced a labor
dispute, strike or work stoppage. None of our employees is represented by a
labor union. We do not employ a significant number of temporary employees, but
we do use temporary employees every once in a while, as necessary.

Certain provisions of the collective bargaining agreements between the
Histadrut (General Federation of Labor in Israel) and the Coordination Bureau
of Economic Organizations including the Industrialists Associations) are
applicable to our Israeli employees by order of the Israeli Ministry of
Labor.    The laws principally concern
the length of the work day, minimum daily wages for professional workers,
contributions to a pension fund, insurance for work-related accidents,
procedures for dismissing employees, determination of severance pay and other
conditions of employment.  We generally
provide our employees with benefits and working conditions beyond the required
minimums.  See Note 5 of Notes to our
Consolidated Financial Statements.

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Israeli law
generally requires severance pay, which may be funded by Managers Insurance
described below, upon the retirement or death of an employee or termination of
employment without cause (as defined in the law).  The payments thereto amount to approximately 8.33% of wages.  Furthermore, Israeli employees and employers
are required to pay predetermined sums to the National Insurance Institute,
which is similar to the United States Social Security Administration. Such amounts
also include payments for national health insurance.  The payments to the National Insurance Institute are equal to
approximately 14.5% of the wages, of which the employee contributes
approximately 66% and the employer contributes approximately 34%.  In the past, National Insurance payments
were made on salaries up to a specified ceiling, but this ceiling was cancelled
effective June, 2002 such that National Insurance payments are now made on the
entire salary, no matter how high it is. Pursuant to legislation recently
enacted by the Knesset, the ceiling is to be reinstated beginning in July 2003.

A general practice followed by the Company, although not legally
required, is the contribution of funds on behalf of most of its employees to a
fund known as Managers Insurance. 
This fund provides a combination of savings plan, insurance and
severance pay benefits to the employee, giving the employee a lump sum payment
upon retirement and securing the severance pay, if legally entitled, upon
termination of employment.  The Company
decides whether each employee is entitled to participate in the plan; each
employee who agrees to participate contributes an amount equal to 5% of his
salary, and the employer contributes between 13.3% and 15.8% of the employees
salary.

Our success has been, and will be, dependent to a large degree on our
ability to retain the services of key personnel and to attract additional
qualified personnel in the future. 
Competition for such personnel is intense.  We cannot assure you that we will be able to attract, assimilate
or retain key personnel in the future and our failure to do so would have a
material adverse affect on our business, financial condition and results of
operations.  During 2002, Ran Rachlin,
the former Vice President of Marketing and Sales at our subsidiary, Silicom
Connectivity Solutions, Inc., was replaced by Paul Bjorndahl, who now acts as
our Vice President of Sales.

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Share
Ownership

The following table sets forth, as of May 31, 2003, the number of
Shares owned by officers, directors and senior management of the Company:

|Name and Address                          |  |  | Number of
  Shares Owned |  |  | Percent of
  Outstanding
  Shares |  |  | Number of
  Options | 
|----------------------------------------- |  |  | ------------------------ |  |  | --------------------------------- |  |  | ------------------- | 
|                                          |  |  |                          |  |  |                                   |  |  |                     | 
|Yehuda
  Zisapel                          |  |  | 838,723                  |  |  | 20.33%                            |  |  | 95,000              | 
|Avi
  Eizenmann                           |  |  | 208,315**                |  |  | 5.05%                             |  |  | 110,000             | 
|Zohar Gilon                               |  |  |                          |  |  |                                   |  |  | 75,000              | 
|Shaike
  Orbach                           |  |  |                          |  |  |                                   |  |  | 240,000             | 
|Paul
  Bjorndahl                          |  |  |                          |  |  |                                   |  |  | *                   | 
|David Hendel                              |  |  |                          |  |  |                                   |  |  | *                   | 
|Ilan Erez                                 |  |  |                          |  |  |                                   |  |  | *                   | 
|Tsipi Kagan                               |  |  |                          |  |  |                                   |  |  | *                   | 
|All
  directors and officers as a
  group |  |  | 1,047,038                |  |  | 25.38%                            |  |  | 584,500             | 

* Denotes
ownership of less than 1% of the outstanding shares.

** Of the total number of shares held by Avi Eizenman, 200,000 are held
by a trustee for the benefit of his descendants and others.

The terms of the options granted to each of the shareholders in the
above table who hold more than 1% of the Companys shares are described
above.  See Item 6.  Directors and Senior Management 
Compensation. Assuming that all of the 584,500 Shares underlying the options
held by the Directors and Senior Management were issued and outstanding, the
corresponding percentages set forth above for Yehuda Zisapel, Avi Eizenman,
Shaike Orbach and Zohar Gilon would be 19.8%, 6.76%, 5.10% and 1.59%,  respectively.

Item 7. 
MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

Major Shareholders

The shareholders of the Company who own over 5% or more of each class
of shares, as well as the number of shares owned and the percentage of
outstanding shares owned by each, and additional information, is set forth
below. The voting rights of our major shareholders do not differ from the voting
rights of other holders of our ordinary shares.

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|Name of
  Shareholder |  |  | Number of
  Shares
  Owned |  |  | Percentage of
  Outstanding
  Shares |  |  | Any
  significant
  change in
  Past 3 Years |  |  | Different
  Voting Rights | 
|--------------------- |  |  | -------------------------- |  |  | ------------------------------------ |  |  | -------------------------------------------- |  |  | ------------------------- | 
|                      |  |  |                            |  |  |                                      |  |  |                                              |  |  |                           | 
|Yehuda
  Zisapel      |  |  | 838,723                    |  |  | 20.33%                               |  |  | -33,863                                      |  |  | No                        | 
|Zohar
  Zisapel       |  |  | 830,906                    |  |  | 20.14%                               |  |  | -162,180                                     |  |  | No                        | 
|Avi Eizenman          |  |  | 208,315*                   |  |  | 5.05%                                |  |  | -327,500                                     |  |  | No                        | 

* 200,000 of
these shares are held by a trustee for the benefit of Mr. Eizenmans
descendants and others.

As of May 30, 2003, there were approximately 16 record holders of
ordinary shares, including approximately 9 record holders in the United
States.  Collectively, these record
holders held approximately 46% of the outstanding ordinary shares.

Related Party Transactions

Mr. Avi Eizenman and Messrs. Yehuda and Zohar Zisapel are our
founders.  Messrs. Eizenman and Yehuda
Zisapel are currently Directors. 
Messrs. Yehuda and Zohar Zisapel are also founders, directors and
principal shareholders of several other corporations within the Rad  Group, as described above.

The other members of the Rad Group are actively engaged in designing,
manufacturing, marketing and supporting data communications products, none of
which are currently the same as our products. Certain products of members of
the Rad Group are complementary to, and may be used in connection with, our
products.  We and other members of the
Rad  Group also market certain of our
products through the same distribution channels.  Such products may, to a limited extent, compete with one another
for the distributors time and efforts. Rad Data Communications is currently
providing us with certain services pursuant to 
a sublease agreement for space (hereinafter the Space) in Mahwah, New
Jersey, for which we are paying $924 per month in rent, and $410 for
maintenance and utilities. The original agreement term expired and we now lease
the Space on a month-to-month basis and at the same terms of the original
agreement. We do not anticipate any material difficulties that would affect our
U.S. operations should we be requested to vacant the Space on short notice.
Finally, the Rad Group provides us with certain  personnel and other services, and is reimbursed by us for the
respective costs in providing such services.

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In addition to
being a founder, director and principal shareholder of each member of the Rad
Group, Yehuda Zisapel is the founder and principal shareholder of Bynet and its
subsidiaries.  Bynet acts as a
distributor in Israel for us and for other members of the Rad Group and also
acts as a distributor in Israel for numerous unaffiliated manufacturers of data
communications and other equipment.  We
believe that the terms of our relationship with Bynet are generally no less
favorable to us than terms which might be available to us from unaffiliated
third parties.

We believe that the terms of the transactions in which we have engaged
and are currently engaged with other members of the Rad  Group are generally no less favorable to us
than terms which might be available to us from unaffiliated third parties.  All future related party transactions and
arrangements (or modifications of existing ones) with members of the Rad  Group, transactions in which office holders
of the Company have a personal interest, or transactions which raise issues of
such office holders fiduciary duties, may require approval by the board of
directors and our shareholders under the Companies Law.

Except as indicated above, we do not currently compete with other
members of the Rad Group and do not currently contemplate engaging in
competition with any other member of the Rad 
Group in the future.  However,
opportunities to develop, manufacture or sell new products (or otherwise enter
new fields) may arise in the future, which opportunities might be pursued by us
or by one or more other members of the Rad 
Group to the exclusion of (or in competition with) other members of the
Rad  Group (including us).  In the event that any such opportunity
arises, the directors then in office will determine whether or not we should
seek to pursue it.  Any such
determination will be based upon such factors as the directors then deem
relevant.  However, in making any such
determination, the directors will be bound by their fiduciary duties to the
Company (and to any other corporation or other person to whom they then owe a
fiduciary duty). (See also Note 12 to the Financial Statements)

Item 8. 
FINANCIAL INFORMATION

Our consolidated financial statements and other financial information
is incorporated herein by reference to pages F-1 through F- 29.

Legal Proceedings

In our annual report on Form 20-F for the year ending December 31,
2000, we reported that Gilat Satellite Networks Ltd. had ordered customized USB
technology from us, but had not paid approximately $900,000 owed for this
equipment despite correspondence and meetings.   In our annual report on Form 20-F for the year ending December
31, 2001, we reported that we reached an amicable resolution of this situation,
without the need for costly litigation. Under the terms of the agreement
reached with Gilat, Gilat agreed to pay the amount of $348,394 on or before
November 15, 2001, and the amount of $460,998 on or before April 15, 2002. To
date, Gilat has fully paid both agreed-upon payments.

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In our annual report on Form 20-F for the year ending December 31,
2001, we  reported that one of our
Taiwanese suppliers, through its attorney, sent us correspondence alleging that
it was owed approximately $125,000 based on our cancellation of certain supply
orders.  It was our belief that, under
the terms of the pertinent purchase orders, no money was owed.  We responded as such, and have not heard
from this supplier regarding this issue 
since their first letter in June of 2002.

We are not a party to any material litigation and we are not aware of
any pending or threatened litigation that would have a material adverse effect
on us or our business.

Item 9. 
THE OFFER AND LISTING

Markets and Share Price History

The primary trading market for our ordinary shares is the NASDAQ
Small-Cap Market, where our shares are listed and traded under the symbol
SILCF.  Our ordinary shares are not
listed on any other stock exchange and have not been publicly traded outside
the United States.

The table below sets forth the high and low bid prices in dollars of
our ordinary shares, as reported by NASDAQ during the indicated periods as
reported by such Exchange:

|PERIOD                                           |  |  | HIGH   |  |  | LOW    | 
|------------------------------------------------ |  |  | ------ |  |  | ------ | 
|                                                 |  |  |        |  |  |        | 
|LAST 6
  CALENDAR MONTHS                         |  |  |        |  |  |        | 
|May, 2003                                        |  |  | 0.89   |  |  | 0.56   | 
|April, 2003                                      |  |  | 0.60   |  |  | 0.30   | 
|March, 2003                                      |  |  | 0.39   |  |  | 0.33   | 
|February,
  2003                                 |  |  | 0.35   |  |  | 0.29   | 
|January,
  2003                                  |  |  | 0.44   |  |  | 0.28   | 
|December,
  2002                                 |  |  | 0.56   |  |  | 0.30   | 
|FINANCIAL
  QUARTERS DURING THE PAST
  TWO YEARS |  |  |        |  |  |        | 
|Fourth
  Quarter, 2002                           |  |  | 0.56   |  |  | 0.30   | 
|Third
  Quarter 2002                             |  |  | 0.69   |  |  | 0.32   | 
|Second
  Quarter 2002                            |  |  | 0.85   |  |  | 0.32   | 
|First
  Quarter 2002                             |  |  | 1.01   |  |  | 0.80   | 
|Fourth
  Quarter, 2001                           |  |  | 1.30   |  |  | 0.56   | 
|Third
  Quarter 2001                             |  |  | 1.80   |  |  | 0.57   | 
|Second
  Quarter 2001                            |  |  | 3.50   |  |  | 1.61   | 
|First
  Quarter 2001                             |  |  | 5.44   |  |  | 2.25   | 
|FIVE MOST
  RECENT FULL FINANCIAL
  YEARS        |  |  |        |  |  |        | 
|2000                                             |  |  | 23.375 |  |  | 3.4375 | 
|1999                                             |  |  | 7.375  |  |  | 1.375  | 
|1998                                             |  |  | 4.125  |  |  | 0.9375 | 
|1997                                             |  |  | 8.00   |  |  | 3.5625 | 
|1996                                             |  |  | 5.50   |  |  | 2.00   | 

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Item
10.  ADDITIONAL INFORMATION

Memorandum and Articles of Association

Articles of Association

Our shareholders last approved the amendment of our Articles of
Association (Articles) in February, 1994. 
The objective stated in the Articles is to engage in any business
permitted under the law.

We have currently outstanding only one class of securities, our
Ordinary Shares, having a nominal value of 
NIS 0.001 per share. Holders of Ordinary Shares have one vote per share,
and are entitled to participate equally in the payment of dividends and share
distributions and, in the event of a liquidation of the Company, in the
distribution of assets after satisfaction of liabilities to creditors. No
preferred shares are currently authorized.

Our Articles require that we hold our annual general meeting of
shareholders each year no later than 15 months from the last annual meeting, at
a time and place determined by the board of directors, upon at least 7 days
prior notice to our shareholders or, if a special resolution is to be proposed
at an extraordinary general meeting, upon at least 21 days prior notice to our
shareholders.  No business may be
commenced at a general meeting until a quorum of two or more shareholders is
present in person or by proxy.  No
business may be commenced at an extraordinary general meeting, which is
anything other than an annual general meeting, until a quorum of two or more
shareholders holding at least 51% of the voting rights is present in person or
by proxy. Shareholders may vote in person or by proxy.

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The Israeli Companies Law
provides that a simple majority is required to amend the Articles unless the
Articles provide otherwise. According to our Articles, any amendment of
the Articles, any modification of the shareholders rights, and any increase or
reduction of our authorized share capital and alterations of our share capital,
must be decided upon in a special resolution, by a majority of 75% of the
shareholders who vote at the General Meeting, without taking abstaining votes
into account.

Resolutions regarding the following matters must be passed at a general
meeting of shareholders:

| |  | appointment
  or termination of our auditors;                                                                                                                                                                                                                               
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                             
| |  | appointment and dismissal of directors;                                                                                                                                                                                                                                     
| |   |                                                                                                                                                                                                                                                                             
| |  | approval of
  interested party acts and transactions requiring general meeting approval as
  provided in sections 255 and 268 to 275 of the Israeli Companies Law;                                                                                                          
| |   |                                                                                                                                                                                                                                                                             
| |  | a merger as
  provided in section 320(a) of the Israeli Companies Law;                                                                                                                                                                                                      
| |   |                                                                                                                                                                                                                                                                             
| |  | the exercise
  of the board of directors powers by a general meeting, if the board of
  directors is unable to exercise its powers and the exercise of any of its
  powers is vital for our proper management, as provided in section 52(a) of
  the Israeli Companies Law.

An
extraordinary general meeting may be convened by demand of two directors or by
written request of one or more shareholders holding at least 5% of our issued
share capital and 1% of the voting rights or one or more shareholders holding
at least 5% of the voting rights. 
Shareholders requesting a special meeting must submit their proposed
resolution with their request.  Within
21 days of receipt of the request, the Board must convene a special meeting and
send out notices setting forth the date, time and place of the meeting.

The Companies Law

We are subject to the provisions of the Israeli Companies Law, which
became effective on February 1, 2000. 
The Companies Law codifies the fiduciary duties that office holders,
including directors and executive officers, owe to a company.  An office holder, as defined in the
Companies Law, is a director, general manager, chief business manager, deputy
general manager, vice general manager, executive vice president, vice
president, another manager directly subordinate to the managing director or any
other person assuming the responsibilities of any of the foregoing positions
without regard to such persons title. Each person listed in the table in Item
6. Directors, Senior Management and Employees above is an office holder.

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The Israeli Companies Law
requires that an office holder of a company promptly disclose, no later than
the first board meeting in which such transaction is discussed, any personal
interest that he or she may have and all related material information known to
him or her, in connection with any existing or proposed transaction by the
company. In addition, if the transaction is an extraordinary transaction, the
office holder must also disclose any personal interest held by the office
holders relative (as defined above), or by any corporation in which the office
holder is a 5% or greater shareholder, holder of 5% or more of the voting
power, director or general manager or in which he or she has the right to
appoint at least one director or the general manager.  An extraordinary transaction is defined as a transaction not in
the ordinary course of business, not on market terms, or that is likely to have
a material impact on the companys profitability, assets or liabilities.

In the case of a transaction that is not an extraordinary transaction,
after the office holder complies with the above disclosure requirement, only
Board approval is required unless the Articles of Association of the company
provide otherwise.  The transaction must
not be adverse to the companys interests. 
If the transaction is an extraordinary transaction, then, in addition to
any approval required by the Articles of Association, it must also be approved
by the audit committee and by the board of directors, and, under specified
circumstances, by a meeting of the shareholders, as well.

Agreements regarding directors terms of employment require the
approval of the board of directors and the audit committee.  In all matters in which a director has a
personal interest, including matters of his/her terms of employment, he/she
shall not be permitted to vote on the matter or be present in the meeting in
which the matter is considered. 
However, if a majority of the audit committee or of the board of
directors has a personal interest in the matter then:

| | a) | all of the
  directors are permitted to vote on the matter and attend the meeting in which
  the matter is considered; and
| | -- | --------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                           
| | b) | the matter
  requires approval of the shareholders at a general meeting.                                                  

According to
the Israeli Companies Law, the disclosure requirements discussed above also
apply to a controlling shareholder of a public company. The term controlling
shareholder is defined as a shareholder who has the ability to direct the
activities of a company, other than if this power derives solely from the
shareholders position on the board of directors or any other position with the
company, and the definition for these purposes also includes shareholders that
hold 25% or more of the voting rights if no other shareholder owns more than
50% of the voting rights in the company. 
In general, extraordinary transactions with a controlling shareholder or
in which a controlling shareholder has a personal interest, and agreements
relating to employment and compensation terms of a controlling shareholder,
require the approval of the audit committee, the board of directors and the
shareholders of the company.

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The shareholder approval must either include at least one-third of the
shares held by disinterested shareholders who are present in person or by proxy
at the meeting (without taking abstaining votes into account), or,
alternatively, the total shareholdings of the disinterested shareholders who
vote against the transaction must not represent more than one percent of the
voting rights in the company.

In addition, a private placement of securities that will increase the
relative holdings of a shareholder that holds five percent or more of the
companys outstanding share capital, assuming the exercise of all of the
securities convertible into shares held by that person, or that will cause any
person to become, as a result of the issuance, a holder of more than five
percent of the companys outstanding share capital, requires approval by the
board of directors and the shareholders of the company.  The regulations to the Israeli Companies Law
provide certain exceptions. Any placement of securities that does not fit the
above description may be issued at the discretion of the board of
directors.

Under the Israeli Companies Law, a shareholder has a duty to act in
good faith towards the company and other shareholders when exercising his
rights and refrain from abusing his power in the company, including, among
other things, voting in the general meeting of shareholders on the following
matters:

| |  | any
  amendment to the Articles of Association;                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                      
| |  | an increase
  of the companys authorized share capital;                                                                                                             
| |   |                                                                                                                                                                      
| |  | a merger; or                                                                                                                                                         
| |   |                                                                                                                                                                      
| |  | approval of
  interested party acts and transactions that require general meeting approval
  as provided in sections 255 and 268 to 275 of the Israeli Companies Law.

In addition,
any controlling shareholder, any shareholder who knows that it possesses power
to determine the outcome of a shareholder vote and any shareholder who has the
power to appoint or prevent the appointment of an office holder in the company
is under a duty to act with fairness towards the company. The Israeli Companies
Law does not describe the substance of this duty. The Israeli Companies Law
requires that specified types of transactions, actions and arrangements be
approved as provided for in a companys articles of association and in some
circumstances by the audit committee, by the board of directors and by the
general meeting of the shareholders. The vote required by the audit committee
and the board of directors for approval of these matters, in each case, is a
majority of the disinterested directors participating in a duly convened
meeting.

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Material
Contracts

All of our contracts over the past two years have been entered into in
the ordinary course of business, except for our real property leases, described
in  Item 4.  Information on the Company  Property, Plants and Equipment.

Exchange Controls

Under current Israeli regulations, any dividends or other distributions
paid in respect of our ordinary shares purchased by nonresidents of Israel with
certain non-Israeli currencies (including dollars) and any amounts payable upon
the dissolution, liquidation or winding up of our affairs, as well as the
proceeds of any sale in Israel of our securities to an Israeli resident, will
be freely repatriable in such non-Israeli currencies at the rate of exchange
prevailing at the time of conversion pursuant to the general permit issued
under the Israeli Currency Law, 1978, provided that Israeli income tax has been
paid on (or withheld from) such payments. 
Because exchange rates between the NIS and the U.S. dollar fluctuate
continuously, U.S. shareholders will be subject to any such currency
fluctuation during the period from when such dividend is declared through the
date payment is made in U.S. dollars.

Investments outside Israel by the Company no longer require specific approval
from the Controller of Foreign Currency at the Bank of Israel.

Taxation

The following is a summary of some of the current tax law applicable to
companies in Israel, with special reference to its effect on us. The following
also contains a discussion of specified Israeli tax consequences to our
shareholders and government programs from which we benefit.  To the extent
that the discussion is based on tax legislation (including the legislation
passed as part of the recent tax reform in Israel) that has not been subject to
judicial or administrative interpretation, there can be no assurance that the
views expressed in the discussion will be accepted by the tax authorities in
question.

The discussion is not intended, and should not be construed, as legal
or professional tax advice and is not exhaustive of all possible tax
considerations.

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Holders of our ordinary shares should
consult their own tax advisors as to the United States, Israeli or other tax
consequences of the purchase, ownership and disposition of ordinary shares, including, in particular, the effect of any
foreign, state or local taxes.

General Corporate Tax Structure

Israeli companies are subject to Company
Tax at the rate of 36% of taxable income. 
However, the effective tax rate payable by a company which derives
income from an approved enterprise (as further discussed below) may be
considerably less.

Law for the Encouragement of Capital
Investments, 1959

Certain of our facilities have been granted Approved Enterprise
status under the Law for the Encouragement of Capital Investments, 1959, as
amended (the Investment Law).  The
Investment Law provides that a capital investment in eligible facilities may,
upon application to the Israel Investment Center of the Ministry of Industry and
Trade of the State of Israel (referred to as the Investment Center), be
designated as an Approved Enterprise. 
Each certificate of approval for an Approved Enterprise relates to a
specific investment program delineated both by its financial scope, including
its capital sources and its physical characteristics, e.g., the equipment to be purchased and
utilized pursuant to the program.  The
tax benefits derived from any such certificate of approval relate only to
taxable income attributable to the specific Approved Enterprise.

Taxable income of a company derived from an Approved Enterprise is
subject to Company Tax at the maximum rate of 25% (rather than 36% as stated
above) for  a period of time termed the
benefit period. The benefit period is a period of seven years commencing with
the year in which the Approved Enterprise first generated taxable income.  In any event, the benefit period is limited
to 12 years from the commencement of production or 14 years from the year of
receipt of approval, whichever is earlier. Under certain circumstances (as
further detailed below), the benefit period may extend to a maximum of ten
years from the commencement of the benefit period.  In the event that a company is operating under more than one
approval or that only part of its capital investments are approved (a Mixed
Enterprise), its effective Company Tax rate is the result of a weighted
combination of the various applicable rates.

A company which qualifies as a Foreign Investors Company is entitled
to an extended benefit period and further reductions in the tax rate normally
applicable to Approved Enterprises. Subject to certain conditions, a Foreign
Investors Company is a company which has more than 25% of its combined
shareholders investment in share capital (in terms of rights to profits,
voting and the appointment of directors) and in long term shareholders loans,
as defined in the Investment Law, made by persons who are not residents of
Israel. The percentage owned by nonresidents of Israel for any tax year will be
determined by the lowest percentage of any of the above rights held by
nonresidents during that year. Such a company will pay Company Tax at reduced
rates for an extended ten-year (rather than the otherwise applicable
seven-year) period as detailed below:

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|Level of
  Foreign Investment   |  | Company
  Tax
  Rate |  | Benefit
  period
  (years) | 
|------------------------------- |  | -------------------- |  | -------------------------- | 
|                                |  |                      |  |                            | 
|Over 0% but less than 25%       |  | 25%                  |  | 7                          | 
|Over 25% but less than 49%      |  | 25%                  |  | 10                         | 
|49% or more but less than
  74% |  | 20%                  |  | 10                         | 
|74% or more but less than
  90% |  | 15%                  |  | 10                         | 
|90% or more                     |  | 10%                  |  | 10                         | 

There can be
no assurance that we will attain approval for additional Approved Enterprises
or that the provisions of this Law will not change or that the above-mentioned
shareholding proportion will be reached for each subsequent year.

In addition, a company owning an Approved Enterprise approved after
April 1, 1986 (or prior thereto provided no government grants or loans had
previously been granted regarding such enterprise) may elect (as we have) to
forego certain Government grants extended to Approved Enterprises in return for
an alternative route of tax benefits (the Alternative Route).  Under the Alternative Route, a companys
undistributed income derived from an Approved Enterprise will be exempt from
Company Tax for a period of between two and ten years from the first year of
taxable income, depending on the geographic location of the Approved Enterprise
within Israel, and such company will be eligible for the reduced tax rates
under the Investment Law for the remainder of the benefit period as mentioned
above.

Our production facilities have been granted Approved Enterprise
status under the Alternative Route according to the Investment Law.  The initial Approved Enterprise status was
granted in 1988 (Initial Approved Enterprise).  An extension program was granted Approved Enterprise status in
1995 (the Extended Approved Enterprise). Income derived from our Approved
Enterprises is tax exempt during six years of the seven year tax benefit period
and is subject to a reduced tax rate of 25% in the seventh year.  The seven year period of benefits commences
in the year the Approved Enterprise first earns taxable income but is limited
to twelve years from commencement of production or fourteen years from date of
approval, whichever is earlier.  The
period of tax benefits, relating to our Initial Approved Enterprise, commenced
in 1991 and expired in 1997.  The period
of tax benefits relating to our Extended Approved Enterprise commenced in 1997
and will expire in 2006, as explained below.

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In June 1995, we reached
an agreement with the tax authorities regarding our entitlement to benefits
under the Investment Law.  The
agreement, effective from tax year 1994 and thereafter, relates to the method
of determination of taxable income from our research and development
activities.  Pursuant to the agreement,
for the purpose of determining our tax liability, our income will be allocated
to our manufacturing plant and to our research and development center,
according to a formula based on the net costs plus royalties of the research
and development center and our profitability. 
Income allocated to the expansion of the manufacturing plant will
benefit from a ten-year tax exemption, while income allocated to the research
and development center will benefit from a two-year exemption, and for a
five-year period immediately following will be taxed at a 25% rate.

Our income to be attributed to our Extended Approved Enterprise in any
year will be computed as a ratio of the increase in our sales turnover, if any,
in that year to our turnover in the year before the Extended Approved
Enterprise commenced its tax benefits entitlement.  The tax authorities have reserved their right to reconsider our claim
to such tax benefits in future years.

The entitlement to the above benefits is conditional upon our
fulfillment of the conditions stipulated by the law, regulations published
thereunder and the instruments of approval for the specific investments in the
Approved Enterprise.  In the event of
failure to comply with these conditions, the benefits may be canceled and we
may be required to refund the amount of the benefits, in whole or in part, with
the addition of linkage differences, interest and penalties.

Should we derive income from sources other than the Approved Enterprise
during the relevant periods of benefits, such income will be taxable at regular
corporate tax rates (36%).

A company that has elected the Alternative Route and that subsequently
pays a dividend out of income derived from the Approved Enterprise(s) during
the tax exemption period will be subject to Company Tax in the year the
dividend is distributed in respect of the amount distributed (including the
Company Tax thereon), at the rate that would have been applicable had the
company not elected the Alternative Route (10%-25%, depending on the extent of
foreign shareholders holding the companys ordinary shares).  In addition, the dividend recipient is taxed
at the reduced rate applicable to dividends from Approved Enterprises (15%), if
the dividend is distributed during the tax exemption period or within a
specified period thereafter.  (In the
event, however, that the company qualifies as a Foreign Investors Company,
there is no such time limitation).  This
tax must be withheld by the company at source, regardless of whether the
dividend is converted into foreign currency.

Subject to certain provisions concerning income subject to the
Alternative Route, all dividends are considered to be attributable to the
entire enterprise and the effective tax rate is the result of a weighted
combination of the various applicable tax rates.

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The Investment Law also
provides that an Approved Enterprise is entitled to accelerated depreciation on
its property and equipment that are included in an approved investment
program.  We have not utilized this
benefit.

Grants and certain other incentives received by a company in accordance
with the Investment Law remain subject to final ratification by the Israel
Investment Center and final determination by the Israel Tax Authority.  Such ratification and determination are
conditional upon fulfillment of all of the terms of the approved program.

Law for the Encouragement of Industrial
Research and Development, 1984

Under the Law for the Encouragement of Industrial Research and
Development (the Research Law), research and development programs approved by
the Research Committee (the Research Committee) of the Office of the Chief
Scientist (OCS) are eligible for grants or loans if they meet certain
criteria, in return for the payment of royalties from the sale of the product
developed in accordance with the program and subject to other
restrictions.  Once a project is
approved, the OCS will award grants of up to 50% of the projects expenditures
in return for royalties, usually at the rate of 2% to 5% of sales of products
developed with such grants, up to a dollar-linked amount equal to 100% or
150%of such grants. For projects approved after January 1, 1999, the amount of
royalties payable is up to a dollar-linked amount equal to 100% of such grants
plus interest at LIBOR.  There is no
further liability for payment.

The terms of these grants prohibit the manufacture outside of Israel
without the prior consent of the Research Committee of the Office of the Chief
Scientist (the Research Committee). Such approval, if granted, is generally
subject to an increase in the total amount to be repaid to the Office of the
Chief Scientist to between 120% and 300% of the amount granted, depending on
the extent of the manufacturing to be conducted outside of Israel. A recent
amendment to the Research Law has provided that the restriction on
manufacturing outside of Israel shall not apply to the extent that plans to so
manufacture were declared when applying for funding.

The Research Law also provides that know-how from the research and
development, which is used to produce the product, may not be transferred to
Israeli third parties without the approval of the Research Committee, and may
not be transferred to non-Israeli third parties at all. A recent amendment to
the Research Law has stressed, that it is not just transfer of know-how that is
prohibited, but also transfer of any rights in such know-how.  Such restriction does not apply to exports
from Israel of products developed with such technologies. Approval of the
transfer may be granted only if the transferee abides by all of the provisions
of the Research Law and regulations promulgated thereunder, including the
restrictions on the transfer of know-how and the obligation to pay royalties.

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There can be no assurance
that such consent, if requested, will be granted.

Tax Benefits and Grants for Research and
Development

Israeli tax law allows, under certain conditions, a tax deduction in
the year incurred for expenditures (including capital expenditures) in
scientific research and development projects, if the expenditures are approved
by the relevant Israeli Government Ministry (determined by the field of
research) and the research and development is for the promotion of the
enterprise and is carried out by or on behalf of the company seeking such
deduction.  Expenditures not so approved
are deductible over a three-year period.

Law for the Encouragement of Industry
(Taxes), 1969

Under the Law for the Encouragement of
Industry (Taxes), 1969 (the Industry Encouragement Law), Industrial Companies
(as defined below) are entitled to the following tax benefits:

(a)     Amortization
of purchases of know-how and patents over eight years for tax purposes.

(b)     The
right to elect, under specified conditions, to file a consolidated tax return
with other related Israeli Industrial Companies.

(c)     Amortization
of expenses incurred in connection with certain public securities issuances
over a three-year period.

d)     Tax
exemption for shareholders who held shares before a public offering on capital
gains derived from the sale (as defined by law) of securities, if realized
after more than five years from the public issuance of additional securities of
the Company.  (As of November 1994, this
exemption was repealed, however, it applies to some of our shareholders
pursuant to a grand-fathering clause; the recent tax reform repealed the
grandfathered exemption for any gains accrued from January 1, 2003.)

(e)     Accelerated
depreciation rates on equipment and buildings.Eligibility for benefits under the Industry
Encouragement Law is not subject to receipt of prior approval from any
governmental authority.  Under the
Industry Encouragement Law, an Industrial Company is defined as a company
resident in Israel, at least 90% of the income of which, in any tax year,
determined in Israeli currency, exclusive of income from government loans,
capital gains, interest and dividends, is derived from an Industrial
Enterprise owned by it.  An Industrial
Enterprise is defined as an enterprise whose major activity in a given tax
year is industrial production activity.

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We
believe that we currently qualify as an Industrial Company within the definition of the Industry Encouragement Law.  No assurance can be given that we will
continue to qualify as an Industrial Company or that the benefits described
above will be available in the future.

Taxation under Inflationary Conditions

The Income Tax Law (Inflationary Adjustments), 1985 (the Inflationary
Adjustments Law) represents an attempt to overcome the problems presented to a
traditional tax system by an economy undergoing rapid inflation.  The Inflationary Adjustments Law is
characterized by a high degree of complexity and its salient features can be
described generally as follows:

(a)     A
special tax adjustment for the preservation of equity whereby certain corporate
assets are classified broadly into Fixed (inflation resistant) Assets and Non-Fixed
(non-inflation resistant) Assets. Where a corporations equity, as defined in
such law, exceeds the depreciated cost of Fixed Assets, a tax deduction which
takes into account the effect of the annual inflationary change on such excess
is allowed (up to a ceiling of 70% of taxable income in any single tax year,
with the unused portion permitted to be carried forward on a linked
basis).  If the depreciated cost of
Fixed Assets exceeds a corporations equity, then such excess multiplied by the
annual inflation rate is added to taxable income.

(b)     Depreciation
deductions on Fixed Assets and losses carried forward are adjusted for
inflation based on the increase in the Israeli Consumer Price Index.

(c)     Gains
from the sale of certain traded securities are fully taxable notwithstanding
the exemptions or reduced tax rates which might otherwise apply to those
securities.

Capital Gains Tax on Sales of Our Ordinary
Shares

Until the end of the year 2002 and provided
we maintained our status as an industrial corporation, capital gains from the
sale of our securities were generally exempt from Israeli Capital Gains
Tax.  This exemption did not apply to a
shareholder whose taxable income is determined pursuant to the Israeli Income
Tax Law (Inflationary Adjustments) 1985, or to a person whose gains from
selling or otherwise disposing of our securities are deemed to be business
income.

As a result of the recent tax reform
legislation in Israel, gains from the sale of our ordinary shares derived from
January 1, 2003 and on will in general be liable to capital gains tax of up to
15%.  This will be the case so long as
our securities remain listed for trading on the NASDAQ or are listed on another
designated foreign stock exchange or on the Tel Aviv Stock Exchange.  However, according to the tax reform
legislation, non-residents of Israel will be exempt from any capital gains tax
from the sale of our securities so long as the gains are not derived through a
permanent establishment that the non-resident maintains in Israel, and so long
as our securities remain listed for trading as described above.  These provisions dealing with capital gains
are not applicable to a person whose gains from selling or otherwise disposing
of our securities are deemed to be business income or whose taxable income is
determined pursuant to the Israeli Income Tax Law (Inflation Adjustments) 1985;
the latter law would not normally be applicable to non-resident shareholders
who have no business activity in Israel.

57

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---

In any event, under the US-Israel Tax Treaty, a
US treaty resident may in general only be liable to Israeli capital gains tax
on the sale of our ordinary shares (subject to the provisions of Israeli
domestic law as described above) if that US treaty resident holds 10% or more
of the voting power in our company.

Taxation of Non-Residents

Non-residents of Israel are subject to income tax on income accrued or
derived from sources in Israel.  Such
sources of income include passive income such as dividends, royalties and
interest, as well as non-passive income from services rendered in Israel.  On distributions of dividends other than
bonus shares or stock dividends, income tax at the rate of 25% is withheld at
source, unless a different rate is provided in a treaty between Israel and the
shareholders country of residence. 
Under the U.S.-Israel Tax Treaty, the maximum tax on dividends paid to a
holder of ordinary shares who is a U.S. resident will be 25%; however, dividends
generated by an Approved Enterprise as defined in the Investment Law are taxed
at the rate of 15%.  Furthermore, dividends not generated by an
Approved Enterprise paid to a U.S. company holding 10% or more of our ordinary
shares for a certain period of time are taxed at a rate of 12.5%.

Passive Foreign Investment Company Status
under U.S. Federal Income Tax Law

In general, a foreign corporation will be classified for U.S. tax
purposes as a passive foreign investment company (hereafter also referred to as
a PFIC) in any taxable year in which either (i) 75% or more of its gross
income (including the pro rata gross income of any company (U.S. or foreign) in
which it is considered to own 25% or more of the ordinary shares by value) for
the taxable year is passive income, or (ii) at least 50% of the average value
of all of its gross assets (including the pro rata fair market value of the
assets of any company in which it is considered to own 25% or more of the
ordinary shares by value) during the taxable year, calculated quarterly by
value, produce, or are held for the production of, passive income.  Passive income for these purposes includes
items such as dividends, interest, royalties, rents and gains from commodities
and securities transactions.

58

---

---

If we are classified as a
passive foreign investment company, highly complex rules will apply to
our U.S. shareholders. Accordingly, U.S. shareholders are urged to consult
their tax advisors regarding the application of such rules.

If a corporation is a passive foreign investment company, a U.S. shareholder
will be subject to one of three alternative taxing regimes:

The simplest is the QEF regime. 
If the shareholder elects to treat the PFIC as a qualified electing
fund (QEF), then each year the shareholder includes in its gross income a
proportionate share of the PFICs ordinary income and net capital gain.  A second regime may be elected if the PFIC
stock is marketable.  The U.S.
shareholder may elect to mark the stock to market each year.  At the end of each taxable year, the
shareholder recognizes gain equal to the excess of the fair market value of the
PFIC stock over the shareholders tax basis in the stock.  (Losses may also be recognized to the extent
of previously recognized gains.)

A U.S. shareholder making neither of these elections is subject to the
excess distribution regime.  The tax
is triggered when the shareholder receives an excess distribution from the
PFIC.  An excess distribution is either
(1) a distribution with respect to stock that is greater than 125% of the average
of such distributions over the preceding three years, or (2) 100% of the gain
from the disposition of shares in the PFIC.

An excess distribution is subject to special tax rules.  In most cases, only a portion of it is
included in the gross income of the U.S. shareholder and taxed at normal
rates.  The remainder is never so
included, but is used as the basis for calculating a deferred tax amount,
which is simply added to the shareholders tax bill.

The deferred tax amount is computed as follows.  The excess distribution is first ratably
allocated, share by share, to each day of the shareholders holding
period.  Portions allocated to the
current year, and to any pre-PFIC years (that is, years before 1987, when there
were no PFICs, or years before the first year in which the company was a PFIC
with respect to that shareholder), are included in ordinary income for the
current year.  Portions allocated to
prior PFIC years are hypothetically taxed at the highest marginal rate in
effect for those years (without regard to the shareholders actual rate or to
any deductions or credits for those years). 
To this hypothetical tax is added the interest that the shareholder
would have paid if it were simply paying that tax late for that year.  The sum of the tax and the interest charge
is the deferred tax amount, which cannot be offset or otherwise affected by
current net operating losses or other deductions.

A U.S. person who inherits shares in a foreign corporation that was a
PFIC in the hands of the decedent (who did not make either of the elections
described above), is denied the otherwise available step-up in the tax basis of
such shares to fair market value at the date of death.  The U.S. person steps into the shoes of the
decedent and will be subject to the rules described above.

59

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---

Although a determination as to a corporations PFIC status is made
annually, an initial determination that a corporation is a PFIC for any taxable
year generally will cause the above-described consequences to apply for all
future years as to U.S. shareholders who held shares in the corporation at any
time during the PFIC taxable year and who made neither a valid QEF election
with respect to such shares nor a valid election to mark such shares to market.
This will be true even if the corporation loses its PFIC status in later years.
However, with respect to  a PFIC that
does not make any distributions or deemed distributions, the above tax
treatment would apply only to gains realized on the disposition of such shares
by a U.S. shareholder.

If we are classified as a PFIC, complicated rules will apply to our
U.S. shareholders. Our status in future years will depend on our assets and
activities in those years, although shareholders will be treated as continuing
to own an interest in a passive foreign investment company if we are a passive
foreign investment company in any year in which a shareholder owns our shares,
unless certain elections are made.

This discussion does not address all aspects of U.S. federal income
taxation that may be relevant to a U.S. shareholder in light of his or her
particular circumstances or to a U.S. shareholder subject to special treatment
under U.S. federal income tax law.  U.S.
shareholders are urged to consult their tax advisors about the U.S. federal
income taxation rules to which they will be subject, as well as the PFIC rules,
including the advisability, procedure and timing of making a mark-to-market
election, in connection with their holding of our shares, including warrants or
rights to acquire our shares.

Tax Assessment

Silicom Ltd. received final tax assessments for all years up to and
including the tax year ended December 31st, 2000. Our U.S. subsidiary, Silicom
Connectivity Solutions, Inc., has not yet been assessed for tax purposes since
incorporation in 1993.

Documents on Display

We are required to file reports and other information with the
securities and exchange commission under the Securities Exchange Act of 1934
and the regulations thereunder applicable to foreign private issuers. As a
foreign private issuer we are not required to file periodic information as
frequently or as promptly as United States companies. We are also exempt from
the rules under the Exchange Act prescribing the furnishing and content of
proxy statements and our officers, directors and principal shareholders are
exempt from the reporting and other provisions in Section 16 of the Exchange
Act.

As a foreign private issuer we have not been  required to file through the securities and exchange commissions
EDGAR system
until this Annual Report on Form 20-F, and our periodic filings until now are
therefore not available on the securities and exchange commissions Web site. The
documents referred to in this document may be inspected at the Companys
offices, located at 8 Hanagar Street, Kfar Sava, Israel 44000.

60

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Item
11.  QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk represents the risk of changes in the value of a financial
instrument caused by fluctuations in interest rates, equity prices and foreign
exchange rates.

Interest Rate Risk

At December 31, 2002 we did not have any short or long term interest
bearing loans or debts, hence there was no exposure to interest rate risk.

Equity Price Risk

At December 31, 2002 we did not have any marketable securities which
were recorded at a fair value, hence there was no exposure to equity price
risk.

Foreign Currency Exchange Risk

At December 31, 2002 we had cash and cash equivalents in New Israeli
Shekels (NIS) or in funds linked thereto in the amount of $183,000 (out of
$861,000 cash and cash equivalents that we had in total). Market risk was
estimated as the potential decrease in fair value resulting from a hypothetical
10% increase in the year-end Dollar exchange rate. Assuming such increase in
the Dollar exchange rate, the fair value of our cash and cash equivalents would
decrease immaterially by $17,000.  The devaluation of the Shekel against the
Dollar in 2002 did not result in any material change.  At December 31, 2002 we had accounts receivable in New Israeli
Shekels (NIS) or in funds linked thereto in the amount of $211,000. Market risk
was estimated as the potential decrease in fair value resulting from a
hypothetical 10% increase in the year-end Dollar exchange rate. Assuming such
increase in the Dollar exchange rate, the fair value of our accounts receivable
would decrease by $19,000.   The
devaluation of the Shekel against the Dollar in 2002 did not result in any
material change.At December 31, 2002 we had accounts payable in New
Israeli Shekels (NIS) or in funds linked thereto in the amount of $1,122,000.
Market risk was estimated as the potential increase in fair value resulting
from a hypothetical 10% decrease in the year-end Dollar exchange rate. Assuming
such decrease in the Dollar exchange rate, the fair value of our accounts
payable would increase by $125,000.

As at December 31,2002 we were not engaged in any hedging transactions.

Item 12. 
DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

Not applicable.

61

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PART II.

Item 13. 
DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

None.

Item 14. 
MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS

None.

Item 15.CONTROLS AND PROCEDURES

Silicom has established
and maintains disclosure controls and procedures that are designed to ensure
that material information relating to us and to our subsidiary required to be
disclosed in the reports that we file or submit under the Securities Exchange
Act of 1934 is recorded, processed, summarized, and reported within the time
periods specified in the Securities and Exchange Commissions rules and forms,
and that such information is accumulated and communicated to the companys
management, including its Chief Executive Officer and Chief Financial Officer,
as appropriate to allow timely decisions regarding required disclosure.

Within the 90 days prior to the filing date
of this annual report, the company carried out an evaluation, under the
supervision and with the participation of management, including the Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of disclosure controls and procedures. Based on that
evaluation of these disclosure controls and procedures, the Chief Executive
Officer and Chief Financial Officer concluded that Silicoms disclosure
controls and procedures were effective as of the date of such evaluation.

The Chief Executive Officer and Chief
Financial Officer have also concluded that there were no significant changes in
the Companys internal controls or in other factors that could significantly
affect the internal controls subsequent to the date that Silicom completed its
evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.

Item 16. 
Reserved

Item 17. 
FINANCIAL STATEMENTS.

Not applicable

Item 18. 
FINANCIAL STATEMENTS

See pages F-1 to F- 29

62

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Item
19.  EXHIBITS

|1.   | Articles of
  Association, adopted on February 1, 1994, filed by us as an Exhibit to our to
  our annual report on Form 20-F  for
  the fiscal year ended December 31, 2000, as filed with the Securities and
  Exchange Commission on June 30, 2001, and incorporated herein by reference.                                                                                                                                                                                                          
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|3.   | Lease
  between the Company and Yaakov Metzkin and Dov Segev, for premises in Kfar
  Sava, Israel, dated November 1, 1994, and amendment dated March 17, 2002,
  filed by us as an Exhibit to our annual report on Form 20-F  for the fiscal year ended December 31,
  2001, as filed with the Securities and Exchange Commission on June 27, 2002,
  and incorporated herein by reference. 
  As this lease and the amendment are written in Hebrew, a summary of
  each is included in the Exhibit.
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|4.1  | Lease
  between the Company and Ground A.S. Ltd., for manufacturing facility in
  Yokneam, Israel, dated June 27, 2000. 
  As this lease is written in Hebrew, a summary was filed by us as an
  Exhibit to our annual report on Form 20-F 
  for the fiscal year ended December 31, 2000, as filed with the
  Securities and Exchange Commission on June 30, 2001.  It is incorporated herein by reference.                                                                                         
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|4.2  | Lease
  between Silicom Connectivity Solutions, Inc. and RAD Data Communications
  Inc., for space in Mahwah, New Jersey, dated as of September 1, 1997, filed
  by us as an Exhibit to our to our annual report on Form 20-F  for the fiscal year ended December 31,
  2000, as filed with the Securities and Exchange Commission on June 30, 2001,
  and incorporated herein by reference.                                                                                                         
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|8.   | List of
  subsidiaries, filed by us as an Exhibit to our annual report on Form
  20-F  for the fiscal year ended
  December 31, 2000, as filed with the Securities and Exchange Commission on
  June 30, 2001, and incorporated herein by reference.                                                                                                                                                                                                                                                 
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|18.1 | Opinion of
  MacGladrey & Pullen, LLP, dated January 6, 2003, on the financial
  statements of Silicom Connectivity Solutions, Inc., for the three years ended
  December 31, 2000, 2001 and 2002.                                                                                                                                                                                                                                                                                                   
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|19.1 | Certification
  by Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act
  of 2002.                                                                                                                                                                                                                                                                                                                                                                                              
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|19.2 | Certification
  by Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act
  of 2002.                                                                                                                                                                                                                                                                                                                                                                                              
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|20.1 | Certification
  by Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act
  of 2002.                                                                                                                                                                                                                                                                                                                                                                                              
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|20.2 | Certification
  by Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act
  of 2002.                                                                                                                                                                                                                                                                                                                                                                                              

63

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SIGNATURES

Pursuant to
the requirements of Section 12 of the Securities Exchange Act of 1934, the
Registrant certifies that it meets all of the requirements for filing on Form
20-F and has duly caused this Annual Report to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Kfar Sava, State of
Israel, on the 25th day of June, 2003.

| |  | SILICOM LIMITED |                          
| |  | --------------- | -------------------------
| |  |                 |                          
| |  |                 |                          
| |  | By:             | /S/ Shaike Orbach        
| |  |                 |                          
| |  |                 | Shaike
  Orbach          
| |  |                 | Chief
  Executive Officer

64

---

---

CERTIFICATION

I, Shaike Orbach, certify that:

1.    I have reviewed
this annual report on Form 20-F of Silicom Ltd.;

2.    Based on my knowledge, this annual report
does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with
respect to the period covered by this annual report;

3.    Based on my knowledge, the financial
statements, and other financial information included in this annual report,
fairly present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the periods
presented in this annual report;

4.    The registrants other certifying officer and
I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the
registrant and have:

| | a)  designed
  such disclosure controls and procedures to ensure that material information
  relating to the registrant, including its consolidated subsidiaries, is made
  known to us by others within those entities, particularly during the period
  in which this annual report is being prepared;
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                         
| | b)  evaluated
  the effectiveness of the registrants disclosure controls and procedures as
  of a date within 90 days prior to the filing date of this annual report (the
  Evaluation Date); and                                                                                                    
| |                                                                                                                                                                                                                                                                                                         
| | c)  presented
  in this annual report our conclusions about the effectiveness of the
  disclosure controls and procedures based on our evaluation as of the
  Evaluation Date;                                                                                                                          

5.    The registrants other certifying officer and
I have disclosed, based on our most recent evaluation, to the registrants
auditors and the audit committee of registrants board of directors (or persons
performing the equivalent function):

| | a)  all
  significant deficiencies in the design or operation of internal controls
  which could adversely affect the registrants ability to record, process,
  summarize and report financial data and have identified for the registrants
  auditors any material weaknesses in internal controls; and
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

65

---

---

| | b)  any
  fraud, whether or not material, that involves management or other employees
  who have a significant role in the registrants internal controls; and
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------

6.    The registrants other certifying officer and
I have indicated in this annual report whether or not there were significant
changes in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies and
material weaknesses.

Date:  June
25, 2003

| |  | By:                                      | /S/ Shaike Orbach
| |  | ---------------------------------------- | -----------------
| |  |                                          |                  
| |  | Shaike
  Orbach, Chief Executive Officer

66

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---

CERTIFICATION

I, Ilan Erez, certify that:

1.    I have reviewed
this annual report on Form 20-F of Silicom Ltd.;

2.    Based on my knowledge, this annual report
does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with
respect to the period covered by this annual report;

3.    Based on my knowledge, the financial
statements, and other financial information included in this annual report,
fairly present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the periods
presented in this annual report;

4.    The registrants other certifying officer and
I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the
registrant and have:

| | a)  designed
  such disclosure controls and procedures to ensure that material information
  relating to the registrant, including its consolidated subsidiaries, is made
  known to us by others within those entities, particularly during the period
  in which this annual report is being prepared;
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                         
| | b)  evaluated
  the effectiveness of the registrants disclosure controls and procedures as
  of a date within 90 days prior to the filing date of this annual report (the
  Evaluation Date); and                                                                                                    
| |                                                                                                                                                                                                                                                                                                         
| | c)  presented
  in this annual report our conclusions about the effectiveness of the
  disclosure controls and procedures based on our evaluation as of the
  Evaluation Date;                                                                                                                          

5.    The registrants other certifying officer and
I have disclosed, based on our most recent evaluation, to the registrants
auditors and the audit committee of registrants board of directors (or persons
performing the equivalent function):

| | a)  all
  significant deficiencies in the design or operation of internal controls
  which could adversely affect the registrants ability to record, process,
  summarize and report financial data and have identified for the registrants
  auditors any material weaknesses in internal controls; and
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                           
| | b)  any
  fraud, whether or not material, that involves management or other employees
  who have a significant role in the registrants internal controls; and                                                                                                                                            

67

---

---

6.    The
registrants other certifying officer and I have indicated in this annual
report whether or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions
with regard to significant deficiencies and material weaknesses.

Date:  June 25, 2003

| | By:                                  | /S/ Ilan
  Erez
| | ------------------------------------ | ---------------
| |                                      |                
| | Ilan Erez,
  Chief Financial Officer

68

---

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Certification Pursuant to 18.U.S.C. Section
1350, 
As adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

In connection with the annual report of Silicom Ltd. (the Company) on
Form 20-F for the period ending December 31, 2002 as filed with the Securities
and Exchange Commission on the date hereof (the Report), I the undersigned,
being the Chief Executive Officer of the Company, certifies, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that to my knowledge:

|1) |  | The Report
  fully complies with the requirements of sections 13(a) or 15(d) of the
  Securities Exchange Act of 1934; and                              
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------
|   |  |                                                                                                                                                         
|2) |  | The
  information contained in the Report fairly presents, in all material
  respects, the financial condition and results of operations of the Company.



|Signature:                                 | /S/ Shaike
  Orbach
|------------------------------------------ | -------------------
|                                           |                    
|Shaike
  Orbach, Chief Executive
  Officer
|                                          
|Date:  June 25, 2003                      

69

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---

Certification Pursuant to 18.U.S.C. Section
1350, 
As adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

In connection with the annual report of Silicom Ltd. (the Company) on
Form 20-F for the period ending December 31, 2002 as filed with the Securities
and Exchange Commission on the date hereof (the Report), I the undersigned,
being the Chief Financial Officer of the Company, certifies, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that to my knowledge:



|1) |  | The Report
  fully complies with the requirements of sections 13(a) or 15(d) of the
  Securities Exchange Act of 1934; and                              
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------
|   |  |                                                                                                                                                         
|2) |  | The
  information contained in the Report fairly presents, in all material
  respects, the financial condition and results of operations of the Company.



|Signature:                           | /S/ Ilan
  Erez
|------------------------------------ | ---------------
|                                     |                
|Ilan Erez,
  Chief Financial Officer
|                                    
|Date:  June 25, 2003                

70

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Silicom Ltd.Financial StatementsDecember 31, 2002

---

---

|Silicom Ltd. (An Israeli Corporation) and Subsidiary     
|---------------------------------------------------------
|                                                         
|Consolidated Financial Statements as of December 31, 2002
|                                                         

Contents

|                                                           | Page
|---------------------------------------------------------- | ----
|                                                           |     
|                                                           |     
|Report of Independent

Auditors                            | 2   
|                                                           |     
|Consolidated Financial Statements:                         |     
|                                                           |     
|Consolidated
  Balance Sheets                              | 3   
|                                                           |     
|Consolidated Statements of Income                          | 4   
|                                                           |     
|Consolidated Statements of Changes in Shareholders Equity | 5   
|                                                           |     
|Consolidated
  Statements of Cash Flows                    | 6   
|                                                           |     
|Notes to
  Consolidated Financial Statements               | 7   

---

---

Report of Independent
Auditors to the Board of Directors
and Shareholders of Silicom Ltd. and its Subsidiary

We have audited the

accompanying consolidated balance sheets of Silicom
Ltd. (Silicom) and its subsidiary as of December 31, 2002

and 2001 and the
related consolidated statements of income, changes in

shareholders equity and
cash flows for each of the years in the three-year period ended

December 31,
2002.  These consolidated financial
statements are the responsibility of Silicoms board of directors

and management.  Our responsibility is to express an opinion
on these consolidated financial statements based on our

audits.

We did not audit the financial

statements of a consolidated subsidiary
whose assets constitute approximately 8.6% and 5.7% of total

consolidated
assets at December 31, 2002 and 2001 respectively, and whose revenues
constitute approximately 63.9%, 43.7% and 35.2% of total consolidated

revenues
for the years ended December 31, 2002, 2001 and 2000

respectively.  Those financial statements were audited by
other auditors whose reports thereon have been furnished to us and our

opinion
expressed herein, insofar as it relates to the amounts included for the
abovementioned subsidiary, is based solely upon the reports of the

other
auditors.

We conducted our audits in

accordance with auditing standards generally
accepted in the United States of America. 
Those standards require that we plan and perform the audit to obtain
reasonable assurance that the financial statements are free of material
misstatement.  An audit includes
examining, on a test basis, evidence supporting the amounts and

disclosures in
the financial statements.  An audit also
includes assessing the accounting principles used and significant

estimates
made by the board of directors and management, as well as evaluating

the
overall financial statements presentation. 
We believe that our audits and the report of the other auditors provide
a reasonable basis for our opinion.

In our opinion, based upon our

audits and the report of the other auditors,
the aforementioned consolidated financial statements referred to above

present
fairly, in all material respects, the consolidated financial position

of
Silicom and its subsidiary as of December 31, 2002 and 2001 and the
consolidated results of their operations, and their cash flows for each

of the
years in the three-year period ended December 31, 2002, in conformity

with
generally accepted accounting principles in the United States of

America.

By: /s/ Somekh Chaikin
Somekh Chaikin
Certified Public Accountants (Isr.)
A member of KPMG International

Tel Aviv, Israel, January 20,

2003

---

---

|Consolidated Balance Sheets at December

31
|-------------------------------------------
|                                           
|                                           
|                                           

|                                    |  |  |          |  |  | 2002                         |  |  | 2001                         | 
|----------------------------------- |  |  | -------- |  |  | ---------------------------- |  |  | ---------------------------- | 
|                                    |  |  |          |  |  |                              |  |  |                              | 
|                                    |  |  | Note     |  |  | U.S. dollars

  in thousands |  |  | U.S. dollars 
  in thousands | 
|                                    |  |  |          |  |  |                              |  |  |                              | 
|Assets                              |  |  | 10E      |  |  |                              |  |  |                              | 
|                                    |  |  |          |  |  |                              |  |  |                              | 
|Current assets                      |  |  |          |  |  |                              |  |  |                              | 
|Cash and
  cash equivalents         |  |  | 2D       |  |  | 861                          |  |  | 1,916                        | 
|Investment securities               |  |  | 2E,

3   |  |  | 3,799                        |  |  | 1,115                        | 
|Receivables:                        |  |  |          |  |  |                              |  |  |                              | 
|Trade                               |  |  | 2O,

10A |  |  | 504                          |  |  | 1,232                        | 
|Other                               |  |  | 10B      |  |  | 277                          |  |  | 355                          | 
|Inventories                         |  |  | 2F,

10C |  |  | 1,221                        |  |  | 1,725                        | 
|                                    |  |  |          |  |  |                              |  |  |                              | 
|                                    |  |  |          |  |  |                              |  |  |                              | 
|Total
  current assets              |  |  |          |  |  | 6,662                        |  |  | 6,343                        | 
|                                    |  |  |          |  |  |                              |  |  |                              | 
|                                    |  |  |          |  |  |                              |  |  |                              | 
|Investment securities               |  |  | 2E,

3   |  |  | -                            |  |  | 2,648                        | 
|                                    |  |  |          |  |  |                              |  |  |                              | 
|                                    |  |  |          |  |  |                              |  |  |                              | 
|Assets held for severance

benefits |  |  | 2G,

5   |  |  | 408                          |  |  | 361                          | 
|                                    |  |  |          |  |  |                              |  |  |                              | 
|                                    |  |  |          |  |  |                              |  |  |                              | 
|Property, plant and

equipment      |  |  | 2H,

4   |  |  |                              |  |  |                              | 
|                                    |  |  |          |  |  |                              |  |  |                              | 
|Cost                                |  |  |          |  |  | 1,411                        |  |  | 1,343                        | 
|Less -
  accumulated depreciation   |  |  |          |  |  | 1,154                        |  |  | 1,037                        | 
|                                    |  |  |          |  |  |                              |  |  |                              | 
|                                    |  |  |          |  |  |                              |  |  |                              | 
|Net property
  and equipment        |  |  |          |  |  | 257                          |  |  | 306                          | 
|                                    |  |  |          |  |  |                              |  |  |                              | 
|                                    |  |  |          |  |  |                              |  |  |                              | 
|Other assets                        |  |  | 2I; 

6  |  |  | 77                           |  |  | -                            | 
|                                    |  |  |          |  |  |                              |  |  |                              | 
|                                    |  |  |          |  |  |                              |  |  |                              | 
|                                    |  |  |          |  |  |                              |  |  |                              | 
|                                    |  |  |          |  |  |                              |  |  |                              | 
|                                    |  |  |          |  |  |                              |  |  |                              | 
|                                    |  |  |          |  |  |                              |  |  |                              | 
|Total assets                        |  |  |          |  |  | 7,404                        |  |  | 9,658                        | 
|                                    |  |  |          |  |  |                              |  |  |                              | 

|BY: /S/ Avi Eizenman               | BY: /S/ Shaike Orbach   | BY: /S/ Ilan Erez      
|---------------------------------- | ----------------------- | -----------------------
|Avi Eizenman                       | Shaike Orbach           | Ilan Erez              
|Chairman of the Board of Directors | Chief Executive Officer | Chief Financial Officer

Kfar-Saba,   Israel:  January 20, 2003

---

---

|Silicom Ltd. (An Israeli Corporation) and

Subsidiary
|-----------------------------------------------------
|                                                     
|                                                     

|                                                           |  |  |      |  |  | 2002                         |   |  | 2001                         |  
|---------------------------------------------------------- |  |  | ---- |  |  | ---------------------------- | - |  | ---------------------------- | -
|                                                           |  |  |      |  |  |                              |   |  |                              |  
|                                                           |  |  | Note |  |  | U.S. dollars

  in thousands |   |  | U.S.

dollars
  in thousands |  
|                                                           |  |  |      |  |  |                              |   |  |                              |  
|Liabilities
  and shareholders equity                     |  |  | 10E  |  |  |                              |   |  |                              |  
|                                                           |  |  |      |  |  |                              |   |  |                              |  
|Current liabilities                                        |  |  |      |  |  |                              |   |  |                              |  
|Trade
  accounts payable                                   |  |  |      |  |  | 561                          |   |  | 310                          |  
|Other
  accounts payable and accrued expenses              |  |  | 10D  |  |  | 415                          |   |  | 450                          |  
|                                                           |  |  |      |  |  |                              |   |  |                              |  
|                                                           |  |  |      |  |  |                              |   |  |                              |  
|Total
  current liabilities                                |  |  |      |  |  | 976                          |   |  | 760                          |  
|                                                           |  |  |      |  |  |                              |   |  |                              |  
|                                                           |  |  |      |  |  |                              |   |  |                              |  
|Long-term liability                                        |  |  |      |  |  |                              |   |  |                              |  
|                                                           |  |  |      |  |  |                              |   |  |                              |  
|Liability
  for employees severance benefits               |  |  | 5    |  |  | 743                          |   |  | 728                          |  
|                                                           |  |  |      |  |  |                              |   |  |                              |  
|                                                           |  |  |      |  |  |                              |   |  |                              |  
|Total
  liabilities                                        |  |  |      |  |  | 1,719                        |   |  | 1,488                        |  
|                                                           |  |  |      |  |  |                              |   |  |                              |  
|                                                           |  |  |      |  |  |                              |   |  |                              |  
|Commitments and

contingencies                             |  |  | 7    |  |  |                              |   |  |                              |  
|                                                           |  |  |      |  |  |                              |   |  |                              |  
|                                                           |  |  |      |  |  |                              |   |  |                              |  
|Shareholders equity                                       |  |  | 8    |  |  |                              |   |  |                              |  
|Ordinary
  shares, NIS 0.001 par value;                    |  |  |      |  |  |                              |   |  |                              |  
|authorized
  10,000,000 shares;                            |  |  |      |  |  |                              |   |  |                              |  
|issued
  and outstanding 4,125,300 shares as of            |  |  |      |  |  |                              |   |  |                              |  
|December
  31, 2002 and 2001                               |  |  |      |  |  | 14                           |   |  | 14                           |  
|Additional
  paid in capital                               |  |  |      |  |  | 5,536                        |   |  | 5,536                        |  
|Treasury
  shares (at cost) - 14,971 ordinary shares as at |  |  |      |  |  |                              |   |  |                              |  
|December
  31, 2002 and 2001                               |  |  | 2P   |  |  | (38                          | ) |  | (38                          | )
|Retained
  earnings                                        |  |  | 8C   |  |  | 173                          |   |  | 2,658                        |  
|                                                           |  |  |      |  |  |                              |   |  |                              |  
|                                                           |  |  |      |  |  |                              |   |  |                              |  
|Total
  shareholders equity                               |  |  |      |  |  | 5,685                        |   |  | 8,170                        |  
|                                                           |  |  |      |  |  |                              |   |  |                              |  
|                                                           |  |  |      |  |  |                              |   |  |                              |  
|Total
  liabilities and shareholders equity               |  |  |      |  |  | 7,404                        |   |  | 9,658                        |  
|                                                           |  |  |      |  |  |                              |   |  |                              |  

The
accompanying notes are an integral part of the consolidated financial
statements.

3

---

---

|Silicom Ltd. (An Israeli Corporation) and
Subsidiary              
|------------------------------------------------------------------
|                                                                  
|Consolidated Statements of Income for the

Year Ended December 31,
|                                                                  

|                                               |  |  |          |  |  | 2002                                                  |   |  | 2001   |   |  | 2000  |  
|---------------------------------------------- |  |  | -------- |  |  | ----------------------------------------------------- | - |  | ------ | - |  | ----- | -
|                                               |  |  |          |  |  |                                                       |   |  |        |   |  |       |  
|                                               |  |  | Note     |  |  | U.S.
dollars in thousands
  except for per share data
|                                               |  |  |          |  |  |                                                       |  
|Sales                                          |  |  | 2J,

11A |  |  | 2,726                                                 |   |  | 4,530  |   |  | 7,769 |  
|                                               |  |  |          |  |  |                                                       |   |  |        |   |  |       |  
|Cost of sales                                  |  |  | 11B      |  |  | 2,091                                                 |   |  | 3,635  |   |  | 4,829 |  
|                                               |  |  |          |  |  |                                                       |   |  |        |   |  |       |  
|                                               |  |  |          |  |  |                                                       |   |  |        |   |  |       |  
|Gross profit                                   |  |  |          |  |  | 635                                                   |   |  | 895    |   |  | 2,940 |  
|                                               |  |  |          |  |  |                                                       |   |  |        |   |  |       |  
|                                               |  |  |          |  |  |                                                       |   |  |        |   |  |       |  
|Research and development

costs                |  |  | 2L,

11C |  |  |                                                       |   |  |        |   |  |       |  
|Total costs                                    |  |  |          |  |  | 1,523                                                 |   |  | 1,333  |   |  | 1,418 |  
|Less:
  royalty-bearing participations, net    |  |  | 2M,

7A  |  |  | 15                                                    |   |  | (469   | ) |  | (410  | )
|                                               |  |  |          |  |  |                                                       |   |  |        |   |  |       |  
|                                               |  |  |          |  |  |                                                       |   |  |        |   |  |       |  
|Research and
  development costs, net          |  |  |          |  |  | 1,538                                                 |   |  | 864    |   |  | 1,008 |  
|                                               |  |  |          |  |  |                                                       |   |  |        |   |  |       |  
|                                               |  |  |          |  |  |                                                       |   |  |        |   |  |       |  
|Selling, marketing, general and                |  |  |          |  |  |                                                       |   |  |        |   |  |       |  
|administrative

expenses                       |  |  |          |  |  |                                                       |   |  |        |   |  |       |  
|Selling and
  marketing expenses               |  |  | 11D      |  |  | 1,022                                                 |   |  | 1,113  |   |  | 874   |  
|General and
  administrative expenses          |  |  |          |  |  | 712                                                   |   |  | 625    |   |  | 545   |  
|                                               |  |  |          |  |  |                                                       |   |  |        |   |  |       |  
|                                               |  |  |          |  |  | 1,734                                                 |   |  | 1,738  |   |  | 1,419 |  
|                                               |  |  |          |  |  |                                                       |   |  |        |   |  |       |  
|                                               |  |  |          |  |  |                                                       |   |  |        |   |  |       |  
|Operating income (loss)                        |  |  |          |  |  | (2,637                                                | ) |  | (1,707 | ) |  | 513   |  
|                                               |  |  |          |  |  |                                                       |   |  |        |   |  |       |  
|Financial income, net                          |  |  | 11E      |  |  | 152                                                   |   |  | 254    |   |  | 398   |  
|                                               |  |  |          |  |  |                                                       |   |  |        |   |  |       |  
|Income (loss) before taxes on

income          |  |  |          |  |  | (2,485                                                | ) |  | (1,453 | ) |  | 911   |  
|                                               |  |  |          |  |  |                                                       |   |  |        |   |  |       |  
|Taxes on income                                |  |  | 2Q,

9   |  |  | -                                                     |   |  | 33     |   |  | 24    |  
|                                               |  |  |          |  |  |                                                       |   |  |        |   |  |       |  
|Net income (loss) for the

year                |  |  |          |  |  | (2,485                                                | ) |  | (1,486 | ) |  | 887   |  
|                                               |  |  |          |  |  |                                                       |   |  |        |   |  |       |  
|                                               |  |  |          |  |  |                                                       |   |  |        |   |  |       |  
|Earnings (loss) per share                      |  |  | 2T,8D    |  |  |                                                       |   |  |        |   |  |       |  
|Basic
  earnings (losses) per ordinary share   |  |  |          |  |  | (0.605                                                | ) |  | (0.362 | ) |  | 0.216 |  
|                                               |  |  |          |  |  |                                                       |   |  |        |   |  |       |  
|                                               |  |  |          |  |  |                                                       |   |  |        |   |  |       |  
|Weighted
  average number of ordinary          |  |  |          |  |  |                                                       |   |  |        |   |  |       |  
|shares
  used to compute basic earnings        |  |  |          |  |  |                                                       |   |  |        |   |  |       |  
|per
  share (in thousands)                     |  |  |          |  |  | 4,110                                                 |   |  | 4,110  |   |  | 4,103 |  
|                                               |  |  |          |  |  |                                                       |   |  |        |   |  |       |  
|                                               |  |  |          |  |  |                                                       |   |  |        |   |  |       |  
|Diluted
  earnings (losses) per ordinary share |  |  |          |  |  | (0.605                                                | ) |  | (0.362 | ) |  | 0.202 |  
|                                               |  |  |          |  |  |                                                       |   |  |        |   |  |       |  
|Weighted
  average number of ordinary          |  |  |          |  |  |                                                       |   |  |        |   |  |       |  
|shares
  used to compute diluted earnings      |  |  |          |  |  |                                                       |   |  |        |   |  |       |  
|per
  share (in thousands)                     |  |  |          |  |  | 4,110                                                 |   |  | 4,110  |   |  | 4,394 |  
|                                               |  |  |          |  |  |                                                       |   |  |        |   |  |       |  

The
accompanying notes are an integral part of the financial

statements.

4

---

---

|Silicom Ltd. (An Israeli Corporation) and

Subsidiary
|-----------------------------------------------------
|                                                     
|Statements of Changes in Shareholders

Equity       
|                                                     

|                         
|-------------------------
|                         
|                         
|                         
|                         
|Balance                  
|January
  1, 2000        
|                         
|Changes during 2000:     
|Ordinary
  shares issued 
|in
  connection with the 
|exercise
  of stock      
|options                  
|Net
  income for the year
|                         
|                         
|Balance at               
|December
  31, 2000      
|                         
|Changes during 2001:     
|Net loss for the year    
|                         
|                         
|Balance at               
|December 31, 2001        
|                         
|Changes during 2002:     
|Net loss for
  the year  
|                         
|                         
|Balance at               
|December 31, 2002        
|                         

|*  | See Note 8C.                              
|-- | ------------------------------------------
|** | Net of
  14,971 shares held by subsidiary.

The
accompanying notes are an integral part of the financial

statements.

5

---

---



|Silicom Ltd. (An Israeli Corporation) and

Subsidiary    
|---------------------------------------------------------
|                                                         
|Statements of Cash Flows for the Year Ended

December 31,
|                                                         
|                                                         

|                                                              |  |  | 2002                         |   |  | 2001                         |   |  | 2000                         |  
|------------------------------------------------------------- |  |  | ---------------------------- | - |  | ---------------------------- | - |  | ---------------------------- | -
|                                                              |  |  |                              |   |  |                              |   |  |                              |  
|                                                              |  |  | U.S.

dollars
  in thousands |   |  | U.S.

dollars
  in thousands |   |  | U.S.

dollars
  in thousands |  
|                                                              |  |  |                              |   |  |                              |   |  |                              |  
|Cash flows from operating

activities                         |  |  |                              |   |  |                              |   |  |                              |  
|Net income
  (loss)                                           |  |  | (2,485                       | ) |  | (1,486                       | ) |  | 887                          |  
|Adjustments
  to reconcile net income to net cash             |  |  |                              |   |  |                              |   |  |                              |  
|provided
  by operating activities:                           |  |  |                              |   |  |                              |   |  |                              |  
|Depreciation
  and amortization                               |  |  | 200                          |   |  | 147                          |   |  | 162                          |  
|Severance,
  net                                              |  |  | (32                          | ) |  | 2                            |   |  | 82                           |  
|Amortization
  of discounts or premium of                     |  |  |                              |   |  |                              |   |  |                              |  
|investment
  security and interest                            |  |  | (165                         | ) |  | (29                          | ) |  | (16                          | )
|                                                              |  |  |                              |   |  |                              |   |  |                              |  
|Changes in
  operating assets and liabilities:                |  |  |                              |   |  |                              |   |  |                              |  
|Decrease
  (increase) in receivables:                         |  |  |                              |   |  |                              |   |  |                              |  
|Trade                                                         |  |  | 728                          |   |  | 1,089                        |   |  | (1,333                       | )
|Other                                                         |  |  | 78                           |   |  | 184                          |   |  | (223                         | )
|Decrease
  (increase) in inventories                          |  |  | 504                          |   |  | 1,152                        |   |  | (1,788                       | )
|Increase
  (decrease) in payables and accruals:               |  |  |                              |   |  |                              |   |  |                              |  
|Trade                                                         |  |  | 251                          |   |  | (819                         | ) |  | 719                          |  
|Other                                                         |  |  | (35                          | ) |  | (233                         | ) |  | 171                          |  
|                                                              |  |  |                              |   |  |                              |   |  |                              |  
|Net cash
  provided by (used in) operating activities         |  |  | (956                         | ) |  | 7                            |   |  | (1,339                       | )
|                                                              |  |  |                              |   |  |                              |   |  |                              |  
|Cash flows
  from investing activities                        |  |  |                              |   |  |                              |   |  |                              |  
|Acquisition
  of property and equipment                       |  |  | (78                          | ) |  | (90                          | ) |  | (174                         | )
|Acquisition of other assets                                   |  |  | (150                         | ) |  | -                            |   |  | -                            |  
|Proceeds from maturity of investment securities

and deposits |  |  | 1,345                        |   |  | 3,009                        |   |  | 2,419                        |  
|Purchase of
  investment securities and deposits              |  |  | (1,216                       | ) |  | (3,139                       | ) |  | (3,653                       | )
|                                                              |  |  |                              |   |  |                              |   |  |                              |  
|Net cash
  used in investing activities                       |  |  | (99                          | ) |  | (220                         | ) |  | (1,408                       | )
|                                                              |  |  |                              |   |  |                              |   |  |                              |  
|Cash flows
  from financing activities                        |  |  |                              |   |  |                              |   |  |                              |  
|Issuance of
  ordinary shares in connection with the          |  |  |                              |   |  |                              |   |  |                              |  
|exercise
  of stock options                                   |  |  | -                            |   |  | -                            |   |  | 246                          |  
|                                                              |  |  |                              |   |  |                              |   |  |                              |  
|Net cash
  provided by financing activities                   |  |  | -                            |   |  | -                            |   |  | 246                          |  
|                                                              |  |  |                              |   |  |                              |   |  |                              |  
|                                                              |  |  |                              |   |  |                              |   |  |                              |  
|Net decrease
  in cash and cash equivalents                   |  |  | (1,055                       | ) |  | (213                         | ) |  | (2,501                       | )
|                                                              |  |  |                              |   |  |                              |   |  |                              |  
|Cash and
  cash equivalents at beginning of year              |  |  | 1,916                        |   |  | 2,129                        |   |  | 4,630                        |  
|                                                              |  |  |                              |   |  |                              |   |  |                              |  
|                                                              |  |  |                              |   |  |                              |   |  |                              |  
|Cash and cash equivalents at end of

year                     |  |  | 861                          |   |  | 1,916                        |   |  | 2,129                        |  
|                                                              |  |  |                              |   |  |                              |   |  |                              |  
|                                                              |  |  |                              |   |  |                              |   |  |                              |  
|Supplementary disclosure of cash flow

information:           |  |  |                              |   |  |                              |   |  |                              |  
|Cash
  paid during the year for:                              |  |  |                              |   |  |                              |   |  |                              |  
|Financing
  expenses                                          |  |  | 13                           |   |  | 13                           |   |  | 16                           |  
|                                                              |  |  |                              |   |  |                              |   |  |                              |  
|                                                              |  |  |                              |   |  |                              |   |  |                              |  
|Taxes on
  income                                             |  |  | 23                           |   |  | 19                           |   |  | 32                           |  
|                                                              |  |  |                              |   |  |                              |   |  |                              |  

The accompanying
notes are an integral part of the financial statements.

6

---

---



|Silicom Ltd. (An Israeli Corporation) and

Subsidiary
|-----------------------------------------------------
|                                                     
|Notes to the Consolidated Financial

Statements      
|                                                     
|                                                     
|Note 1 - General                                     
|                                                     
|                                                     
|                                                     
|                                                     
|                                                     
|                                                     
|                                                     
|Note 2 - Significant Accounting
  Policies           
|                                                     
|                                                     
|                                                     
|                                                     
|                                                     
|                                                     
|                                                     
|                                                     
|                                                     
|                                                     
|                                                     

7

---

---

|Silicom Ltd. (An Israeli Corporation) and

Subsidiary
|-----------------------------------------------------
|                                                     
|Notes to the Consolidated Financial

Statements      
|                                                     
|                                                     
|Note 2 - Significant Accounting
  Policies (contd)  
|                                                     
|                                                     
|                                                     
|                                                     
|                                                     
|                                                     
|                                                     
|                                                     
|                                                     
|                                                     
|                                                     
|                                                     
|                                                     
|                                                     
|                                                     
|                                                     
|                                                     
|                                                     
|                                                     
|                                                     
|                                                     
|                                                     

8

---

---

|Silicom Ltd. (An Israeli Corporation) and

Subsidiary
|-----------------------------------------------------
|                                                     
|Notes to the Consolidated Financial

Statements      
|                                                     
|                                                     
|Note 2 - Significant Accounting
  Policies (contd)  
|                                                     
|                                                     
|                                                     
|                                                     
|                                                     
|                                                     
|                                                     
|                                                     
|                                                     
|                                                     
|                                                     
|                                                     
|                                                     
|                                                     
|                                                     
|                                                     
|                                                     
|                                                     
|                                                     
|                                                     
|                                                     

| |                                                          | %                                                                                                                                                                         | 
| | -------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
| |                                                          |                                                                                                                                                                           | 
| | Research and
  development equipment, having alternative |                                                                                                                                                                           | 
| | future
  use computers                                   | 20-33                                                                                                                                                                     | 
| | Manufacturing
  equipment                                | 20-33                                                                                                                                                                     | 
| | Motor
  vehicles                                         | 15                                                                                                                                                                        | 
| | Office
  furniture and equipment                         | 6-20                                                                                                                                                                      | 
| | Leasehold
  improvements                                 | (*)                                                                                                                                                                       | 
| |                                                          |                                                                                                                                                                           | 
| | (*)                                                      | Leasehold improvements are
  amortized by the straight-line method over the term of the lease or

the
  estimated useful life of the improvements, whichever is

shorter.

| | I.                                                                                                                                                                                                                                                       | Other

assets
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------
| |                                                                                                                                                                                                                                                         
| | Other assets
  consist of patents.  The cost of
  patents is amortized by the straight-line method over the estimated

useful
  lives of the respective assets.  The
  remaining weighted average life of patents at December 31, 2002 is

nine
  years.
| |                                                                                                                                                                                                                                                          |              

9

---

---

|Silicom Ltd. (An Israeli Corporation) and

Subsidiary
|-----------------------------------------------------
|                                                     
|Notes to the Consolidated Financial

Statements      
|                                                     
|                                                     
|Note 2 - Significant Accounting
  Policies (contd)  
|                                                     
|                                                     
|                                                     
|                                                     
|                                                     
|                                                     
|                                                     
|                                                     
|                                                     
|                                                     
|                                                     
|                                                     
|                                                     
|                                                     
|                                                     
|                                                     
|                                                     
|                                                     
|                                                     
|                                                     
|                                                     
|                                                     
|                                                     
|                                                     
|                                                     
|                                                     

10

---

---

|Silicom Ltd. (An Israeli Corporation) and

Subsidiary
|-----------------------------------------------------
|                                                     
|Notes to the Consolidated Financial

Statements      
|                                                     
|                                                     
|Note 2 - Significant Accounting
  Policies (contd)  
|                                                     
|                                                     
|                                                     
|                                                     
|                                                     
|                                                     
|                                                     
|                                                     
|                                                     
|                                                     
|                                                     
|                                                     
|                                                     
|                                                     
|                                                     
|                                                     
|                                                     
|                                                     
|                                                     
|                                                     
|                                                     
|                                                     
|                                                     
|                                                     

11

---

---

|Silicom Ltd. (An Israeli Corporation) and

Subsidiary
|-----------------------------------------------------
|                                                     
|Notes to the Consolidated Financial

Statements      
|                                                     
|                                                     
|Note 2 - Significant Accounting
  Policies (contd)  
|                                                     
|                                                     
|                                                     
|                                                     
|                                                     
|                                                     
|                                                     
|                                                     
|                                                     
|                                                     
|                                                     
|                                                     
|                                                     
|                                                     

12

---

---

|Silicom Ltd. (An Israeli Corporation) and

Subsidiary
|-----------------------------------------------------
|                                                     
|Notes to the Consolidated Financial

Statements      
|                                                     
|                                                     
|Note 3 - Investment

Securities                      
|                                                     
|                                                     

| |                                                          |  |  | Amortized

cost            |  |  | Gross unrealized
  holding losses |   |  | Fair

value | 
| | -------------------------------------------------------- |  |  | -------------------------- |  |  | --------------------------------- | - |  | ----------- | 
| |                                                          |  |  |                            |  |  |                                   |   |  |             | 
| |                                                          |  |  | U.S.

dollars in thousands | 
| |                                                          |  |  |                           
| | At December 31, 2002                                     |  |  |                            |  |  |                                   |   |  |             | 
| | Corporate
  debt securities                              |  |  | 3,799                      |  |  | (64                               | ) |  | 3,735       | 
| |                                                          |  |  |                            |  |  |                                   |   |  |             | 
| | At December 31, 2001                                     |  |  |                            |  |  |                                   |   |  |             | 
| | Corporate
  debt securities and certificates of deposits |  |  | 3,763                      |  |  | (89                               | ) |  | 3,674       | 
| |                                                          |  |  |                            |  |  |                                   |   |  |             | 

| | Maturities
  of debt securities classified as held-to-maturity and certificates of
  deposits were as follows at December 31, 2002:
| | -----------------------------------------------------------------------------------------------------------------------------------

| |                                             |  |  | Amortized

cost            |  |  | Fair value | 
| | ------------------------------------------- |  |  | -------------------------- |  |  | ---------- | 
| |                                             |  |  |                            |  |  |            | 
| |                                             |  |  | U.S.

dollars in thousands
| |                                             |  |  |                           
| |                                             |  |  |                           
| | Investment
  securities due within one year |  |  | 3,799                      |  |  | 3,735      | 
| |                                             |  |  |                            |  |  |            | 

|                                        | Proceeds
  from redemption of investment securities held-to-maturity are $1,345
  thousand, $ 2,359 thousand and $2,419 thousand in fiscal years 2002,

2001 and
  2000, respectively.
|--------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                        |                                                                                                                                                                                       
|Note 4 - Property Plant and
  Equipment

| |                                  |  |  | Cost                |  |      | Accumulated

depreciation
  and amortization
| | -------------------------------- |  |  | ------------------- |  | ---- | --------------------------------------------
| |                                  |  |  |                     |  |      |                                             
| |                                  |  |  | December

31        |  |      | December

31                                
| |                                  |  |  |                     |  |      |                                             
| |                                  |  |  | 2002                |  | 2001 |                                             
| |                                  |  |  |                     |  |      |                                             
| |                                  |  |  | U.S.$ in

thousands |  |      | U.S $ in

thousands                         
| |                                  |  |  |                     |  |      |                                             
| | Research and
  development       |  |  |                     |  |      |                                             
| | equipment                        |  |  | 857                 |  |      | 725                                         
| | Manufacturing
  equipment        |  |  | 109                 |  |      | 109                                         
| | Motor
  vehicles                 |  |  | 46                  |  |      | 107                                         
| | Office
  furniture and equipment |  |  | 248                 |  |      | 251                                         
| | Leasehold
  improvements         |  |  | 151                 |  |      | 151                                         
| |                                  |  |  |                     |  |      |                                             
| |                                  |  |  |                     |  |      |                                             
| |                                  |  |  | 1,411               |  |      | 1,343                                       
| |                                  |  |  |                     |  |      |                                             
| |                                 

| | Depreciation
  expense amounted to $ 137 thousand, $ 147 thousand and $ 162 thousand

for the
  years ended December 31, 2002, 2001 and 2000

respectively.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                            

13

---

---

|Silicom Ltd. (An Israeli Corporation) and Subsidiary
|----------------------------------------------------
|                                                    
|Notes to the Consolidated Financial

Statements     
|                                                    
|                                                    
|Note 5 - Assets Held for Severance
  Benefits       
|                                                    
|                                                    
|                                                    
|                                                    

| |  |                               |  |  | December

31              | 
| |  | ----------------------------- |  |  | ------------------------- | 
| |  |                               |  |  |                          
| |  |                               |  |  | 2002                      | 
| |  |                               |  |  |                           | 
| |  |                               |  |  | U.S. dollars in thousands | 
| |  |                               |  |  |                          
| |  | Liability
  for severance pay |  |  | 743                       | 
| |  | Severance
  pay fund          |  |  | 408                       | 
| |  |                               |  |  |                           | 
| |  |                               |  |  | 335                       | 
| |  |                               |  |  |                           | 

|                      | B.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | The net
  severance pay expense was $ 98 thousand, $ 100 thousand, and $ 182

thousand
  in the years ended December 31, 2002, 2001 and 2000

respectively.
|--------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------
|                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                                                                                                                                            
|Note 6 - Other Assets
|                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                                                                                                                                            
|                      | The
  Subsidiary entered into a Non-Exclusive Limited Patent License

Agreement in
  April 2002.  The agreement included a
  one-time license fee of $150 thousand which represented a licensing

fee for
  both past and future sales of certain connectors and PC cards under

patents
  of the licensor.  The Subsidiary has
  established a sixteen-year amortization period which relates to

expected life
  of the License.  The Subsidiary has
  estimated that the past sales period under the licensing agreement

was six
  years and that the future sales period under the licensing agreement

to be
  ten years, therefore in 2002 the Subsidiary recognized amortization

expense
  on the past six years or approximately $56,200 and $ 7,100 related to

the
  amortization for 2002.  The total
  amortization expense for 2002 was approximately

$63,300.
|                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|                      | The
  maturities of other assets were as follows at December 31,

2002:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

| |                                   |  |  | U.S. dollars
  in thousands | 
| | --------------------------------- |  |  | --------------------------- | 
| |                                   |  |  |                             | 
| | Due within
  one year             |  |  | 10                          | 
| | Due within
  two years            |  |  | 9                           | 
| | Due within
  three years and more |  |  | 68                          | 
| |                                   |  |  |                             | 
| |                                   |  |  | 87                          | 
| |                                   |  |  |                             | 
| |                                   |  |  |                             | 

14

---

---

|Silicom Ltd. (An Israeli Corporation) and Subsidiary
|----------------------------------------------------
|                                                    
|Notes to the Consolidated Financial

Statements     
|                                                    
|                                                    
|Note 7 - Commitments and
  Contingencies            
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    

| |                            |  |  | U.S.

dollars
  in thousands
| | -------------------------- |  |  | ----------------------------
| |                            |  |  |                             
| | Year ending
  December 31, |  |  |                             
| | 2003                       |  |  | 222                         
| | 2004                       |  |  | 96                          
| | 2005                       |  |  | 19                          

| | C.                                                                                                                                                                                                                                                                                                               | Directors

indemnification
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------
| |                                                                                                                                                                                                                                                                                                                  |                            
| | In July
  2002, the Company prospectively agreed to indemnify its directors for

any
  obligation or expenses imposed on them in consequence of an act they
  performed in the capacity as officers of Silicom, provided that

Silicoms
  undertaking shall be limited to certain types of events and

amounts.
| | The total
  amount of indemnification for each case (including all matters

connected
  therewith) shall not exceed US$ 2,000 thousand (in addition to any

amount
  paid under an insurance coverage).                                                                                                         
| | This
  resolution is subject to mandatory provisions of applicable law in Israel and
  will come into effect after approval of an amendment of the Articles of
  Association by the shareholders.                                                                                                               
| |                                                                                                                                                                                                                                                                                                                  |                            

15

---

---

|Silicom Ltd. (An Israeli Corporation) and Subsidiary
|----------------------------------------------------
|                                                    
|Notes to the Consolidated Financial Statements      
|                                                    
|                                                    
|Note 8 - Shareholders Equity                       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    

| |                                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |  |             |  |  | 2002   |   |  | 2001   |   |  | 2000  | 
| | ----------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------- |  |  | ------ | - |  | ------ | - |  | ----- | 
| |                                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |  |             |  |  |        |   |  |        |   |  |       | 
| | Net income
  (loss)                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |  | As reported |  |  | (2,485 | ) |  | (1,486 | ) |  | 887   | 
| | US dollars
  in thousands           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |  | Pro forma   |  |  | (2,543 | ) |  | (1,950 | ) |  | 91    | 
| |                                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |  |             |  |  |        |   |  |        |   |  |       | 
| | Basic
  earnings (losses) per share |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |  | As reported |  |  | (0.605 | ) |  | (0.362 | ) |  | 0.216 | 
| | US dollars                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |  | Pro forma   |  |  | (0.619 | ) |  | (0.474 | ) |  | 0.022 | 
| |                                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |  |             |  |  |        |   |  |        |   |  |       | 
| | Diluted
  earnings per share        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |  | As reported |  |  | (0.605 | ) |  | (0.362 | ) |  | 0.202 | 
| | US dollars                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |  | Pro forma   |  |  | (0.619 | ) |  | (0.474 | ) |  | 0.021 | 
| |                                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | Fixed Stock Option Plans           
| |                                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | 1.                                  | In 1993 the
  Board of Directors of Silicom adopted a share option plan (the Share Option
  Plan) covering up to 88,676 options at a conversion rate of 1:1, to be
  granted to certain employees and consultants of Silicom.  In June 1997, the Board of Directors of
  Silicom expanded the number of options covered by this plan by 211,324
  options to 300,000 options.  In April
  2001, the Board of Directors expanded the number of options covered by this
  plan by 200,000 options to 500,000 options. 
  The Share Option Plan is administered by the Board of Directors, which
  designates the options and dates of grant. 
  The price of shares to be issued under this plan is equal to the
  market price of Silicom shares on the date upon which the options were
  granted.  The options are for a
  10-year term and are non-assignable except by the laws of succession.
| |                                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |  |             |  |  |        |   |  |        |   |  |       | 

16

---

---

|Silicom Ltd. (An Israeli Corporation) and Subsidiary
|----------------------------------------------------
|                                                    
|Notes to the Consolidated Financial Statements      
|                                                    
|                                                    
|Note 8 - Shareholders Equity
  (contd)            
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    

17

---

---

|Silicom Ltd. (An Israeli Corporation) and Subsidiary
|----------------------------------------------------
|                                                    
|Notes to the Consolidated Financial Statements      
|                                                    
|                                                    
|Note 8 - Shareholders Equity
  (contd)            
|                                                    
|                                                    
|                                                    
|                                                    

| |                    |  |      | Shares
  (inthousands) |      |  |      | Weighted
  Average
  Exercise Price |  |  |  | Shares(inthousands) |   |  |  | WeightedAverageExercisePrice |  |  |  | Shares
  (inthousands) |   |  |  | Weighted
  Average
  ExercisePrice | 
| | ------------------ |  | ---- | ---------------------- | ---- |  | ---- | ----------------------------------- |  |  |  | ------------------- | - |  |  | ---------------------------- |  |  |  | ---------------------- | - |  |  | ---------------------------------- | 
| |                    |  |      |                        |      |  |      |                                     |  |  |  |                     |   |  |  |                              |  |  |  |                        |   |  |  |                                    | 
| |                    |  | 2002 |                        | 2001 |  | 2000
| |                    |  |      |                        |      |  |     
| |                    |  |      |                        |      |  |      |                                     |  |  |  |                     |   |  |  |                              |  |  |  |                        |   |  |  |                                    | 
| | Outstanding at     |  |      |                        |      |  |      |                                     |  |  |  |                     |   |  |  |                              |  |  |  |                        |   |  |  |                                    | 
| | beginning of       |  |      |                        |      |  |      |                                     |  |  |  |                     |   |  |  |                              |  |  |  |                        |   |  |  |                                    | 
| | year               |  |      | 640,500                |      |  |      |                                     |  |  |  | 530,300             |   |  |  |                              |  |  |  | 364,400                |   |  |  |                                    | 
| | Granted            |  |      | 187,500                |      |  |      | $          0.29                     |  |  |  | 134,600             |   |  |  | $    0.60-5.37               |  |  |  | 274,800                |   |  |  | $       5.42                       | 
| | Exercised          |  |      | -                      |      |  |      | -                                   |  |  |  |                     |   |  |  |                              |  |  |  | (100,700               | ) |  |  | $  2 - 2.25                        | 
| | Forfeited          |  |      | (33,500                | )    |  |      | $ 0.55-5.75                         |  |  |  | (24,400             | ) |  |  | $    1.62-2.50               |  |  |  | (8,200                 | ) |  |  | $       2.25                       | 
| |                    |  |      |                        |      |  |      |                                     |  |  |  |                     |   |  |  |                              |  |  |  |                        |   |  |  |                                    | 
| | Outstanding at     |  |      |                        |      |  |      |                                     |  |  |  |                     |   |  |  |                              |  |  |  |                        |   |  |  |                                    | 
| | end of year        |  |      | 794,500                |      |  |      |                                     |  |  |  | 640,500             |   |  |  |                              |  |  |  | 530,300                |   |  |  |                                    | 
| |                    |  |      |                        |      |  |      |                                     |  |  |  |                     |   |  |  |                              |  |  |  |                        |   |  |  |                                    | 
| | Options            |  |      |                        |      |  |      |                                     |  |  |  |                     |   |  |  |                              |  |  |  |                        |   |  |  |                                    | 
| | exercisable at     |  |      |                        |      |  |      |                                     |  |  |  |                     |   |  |  |                              |  |  |  |                        |   |  |  |                                    | 
| | year-end           |  |      | 573,700                |      |  |      |                                     |  |  |  | 486,500             |   |  |  |                              |  |  |  | 358,000                |   |  |  |                                    | 
| |                    |  |      |                        |      |  |      |                                     |  |  |  |                     |   |  |  |                              |  |  |  |                        |   |  |  |                                    | 
| | Weighted
  average |  |      |                        |      |  |      |                                     |  |  |  |                     |   |  |  |                              |  |  |  |                        |   |  |  |                                    | 
| | fair value of      |  |      |                        |      |  |      |                                     |  |  |  |                     |   |  |  |                              |  |  |  |                        |   |  |  |                                    | 
| | options
  granted  |  |      |                        |      |  |      |                                     |  |  |  |                     |   |  |  |                              |  |  |  |                        |   |  |  |                                    | 
| | during the year    |  |      |                        |      |  |      | $          0.29                     |  |  |  |                     |   |  |  | $           3.22             |  |  |  |                        |   |  |  | $         5.42                     | 
| |                    |  |      |                        |      |  |      |                                     |  |  |  |                     |   |  |  |                              |  |  |  |                        |   |  |  |                                    | 

| | C. | Retained earnings:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | 1. | The
  distribution of cash dividends out of retained earnings as of December 31,
  2002, would subject Silicom to a 25% tax in respect of the income from which
  it was distributed, according to the terms of tax exemption due to its
  approved enterprise status, as explained in note 9B(1).  Silicom has decided not to distribute the
  said tax-exempt income as dividends. 
  In the event of dividend distribution as above, the said tax amount
  would be charged as an expense in the statement of income.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | 2. | In the event
  that cash dividends are declared by the Company, such dividends will be
  declared and paid in Israeli currency. 
  Under current Israeli regulations, any cash dividend in Israeli
  currency paid in respect of Ordinary Shares purchased by non-residents of
  Israel with non-Israeli currency may be freely repatriated in such
  non-Israeli currency, at the rate of exchange prevailing at the time of
  conversion.                                                                               
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

18

---

---

|Silicom Ltd. (An Israeli Corporation) and Subsidiary
|----------------------------------------------------
|                                                    
|Notes to the Consolidated Financial Statements      
|                                                    
|                                                    
|Note 8 - Shareholders Equity
  (contd)            
|                                                    
|                                                    

| |                                                |  |  | Year ended December 31                                                   |  
| | ---------------------------------------------- |  |  | ------------------------------------------------------------------------ | -
| |                                                |  |  |                                                                          |  
| |                                                |  |  | 2002                                                                     |  
| |                                                |  |  |                                                                          |  
| |                                                |  |  |                                                                          |  
| |                                                |  |  | Net
  loss                                                               |  
| |                                                |  |  |                                                                          |  
| |                                                |  |  | U.S. dollars and No. of shares in thousands
  - except per share amounts |  
| |                                                |  |  |                                                                          |  
| | Basic EPS                                      |  |  |                                                                          |  
| |                                                |  |  |                                                                          |  
| | Income (loss) available to common shareholders |  |  | $ (2,485                                                                 | )
| |                                                |  |  |                                                                          |  
| | Effect of Dilutive Securities                  |  |  |                                                                          |  
| |                                                |  |  |                                                                          |  
| | Warrants and
  options                         |  |  | -                                                                        |  
| |                                                |  |  |                                                                          |  
| | Dilutive EPS                                   |  |  |                                                                          |  
| |                                                |  |  |                                                                          |  
| | Income
  (loss) available to common            |  |  |                                                                          |  
| | shareholders and assumed conversion            |  |  | $ (2,485                                                                 | )

19

---

---

|Silicom Ltd. (An Israeli Corporation) and Subsidiary
|----------------------------------------------------
|                                                    
|Notes to the Consolidated Financial Statements      
|                                                    
|                                                    
|Note 9 - Taxes on Income                            
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    

20

---

---

|Silicom Ltd. (An Israeli Corporation) and Subsidiary
|----------------------------------------------------
|                                                    
|Notes to the Consolidated Financial Statements      
|                                                    
|                                                    
|Note 9 - Taxes on Income (contd)                   
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    

21

---

---

|Silicom Ltd. (An Israeli Corporation) and Subsidiary
|----------------------------------------------------
|                                                    
|Notes to the Consolidated Financial Statements      
|                                                    
|                                                    
|Note 9 - Taxes on Income (contd)                   
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    

22

---

---

|Silicom Ltd. (An Israeli Corporation) and Subsidiary
|----------------------------------------------------
|                                                    
|Notes to the Consolidated Financial Statements      
|                                                    
|                                                    
|Note 9 - Taxes on Income (contd)                   
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    

| |  |                                           |  |  | December 31   |   |  | December 31   |  
| |  | ----------------------------------------- |  |  | ------------- | - |  | ------------- | -
| |  |                                           |  |  |               |   |  |               |  
| |  |                                           |  |  | 2002          |   |  | 2001          |  
| |  |                                           |  |  |               |   |  |               |  
| |  |                                           |  |  | US$ thousands |   |  | US$ thousands |  
| |  |                                           |  |  |               |   |  |               |  
| |  | Employees
  rights liabilities           |  |  | 189           |   |  | 191           |  
| |  | Allowance
  for doubtful debts            |  |  | 7             |   |  | 7             |  
| |  | Deferred
  research and development costs |  |  | (78           | ) |  | (67           | )
| |  | Loss for tax
  purposes                   |  |  | 1,448         |   |  | 524           |  
| |  |                                           |  |  |               |   |  |               |  
| |  |                                           |  |  | 1,566         |   |  | 655           |  
| |  | Valuation
  allowance                     |  |  | (1,566        | ) |  | (655          | )
| |  |                                           |  |  |               |   |  |               |  
| |  |                                           |  |  | -             |   |  | -             |  
| |  |                                           |  |  |               |   |  |               |  
| |  | Statutory
  tax rate                      |  |  | 36            | % |  | 36            | %
| |  |                                           |  |  |               |   |  |               |  

| |  | The Company
  has recognized a re-calculation allowance for its deferred tax assets that
  will more likely than not be realized.
| |  | ---------------------------------------------------------------------------------------------------------------------------------

23

---

---

|Silicom Ltd. (An Israeli Corporation) and Subsidiary
|----------------------------------------------------
|                                                    
|Notes to the Consolidated Financial Statements      
|                                                    
|                                                    
|Note 9 - Taxes on Income (contd)                   
|                                                    
|                                                    
|                                                    
|                                                    

| |  |                   |  |  | Year ended December 31   
| |  | ----------------- |  |  | -------------------------
| |  |                   |  |  |                          
| |  |                   |  |  | 2002                     
| |  |                   |  |  |                          
| |  |                   |  |  | U.S. dollars in thousands
| |  |                   |  |  |                          
| |  | Silicom Ltd.      |  |  | -                        
| |  | U.S.
  subsidiary |  |  | -                        
| |  |                   |  |  |                          
| |  |                   |  |  | -                        
| |  |                   |  |  |                          

| | J.                                                                                                                                                                                                      | Reconciliation of the statutory tax expense to actual tax expense
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -----------------------------------------------------------------
| |                                                                                                                                                                                                         |                                                                  
| | A
  reconciliation of the statutory tax expense, assuming all income is taxed at
  the statutory rate of 36% applicable to income of companies in Israel, and
  the actual tax expense, are as follows:

| |                                                        |  |  | Year ended December 31   
| | ------------------------------------------------------ |  |  | -------------------------
| |                                                        |  |  |                          
| |                                                        |  |  | 2002                     
| |                                                        |  |  |                          
| |                                                        |  |  | U.S. dollars in thousands
| |                                                        |  |  |                          
| | Income (Loss) before taxes
  on income, as reported    |  |  |                          
| | in the statements of
  income                          |  |  | (2,485                   
| |                                                        |  |  |                          
| |                                                        |  |  |                          
| | Theoretical tax on the
  above amount                  |  |  | (895                     
| |                                                        |  |  |                          
| | Increase (decrease) in
  taxes resulting from          |  |  |                          
| | permanent
  differences:                               |  |  |                          
| |                                                        |  |  |                          
| | Non-deductible operating
  expenses                    |  |  | 23                       
| |                                                        |  |  |                          
| | Tax exempt income
  resulting from the                 |  |  |                          
| | approved enterprise                                    |  |  | -                        
| |                                                        |  |  |                          
| | Tax exempt income                                      |  |  | (64                      
| |                                                        |  |  |                          
| | Tax due to exercise of
  options by employees         |  |  | -                        
| |                                                        |  |  |                          
| | Valuation allowance                                    |  |  | 911                      
| |                                                        |  |  |                          
| | Adjustments arising from
  differences in the basis of |  |  |                          
| | measurement for tax
  purposes and for financial       |  |  |                          
| | reporting purposes
  and other                         |  |  | 25                       
| |                                                        |  |  |                          
| |                                                        |  |  |                          
| | Tax on income                                          |  |  | -                        
| |                                                        |  |  |                          

| | * | Resulting
  from the difference between the changes in the Israeli CPI (the basis for
  computation of taxable income of the Company) and the exchange rate of the
  Israeli currency relative to the dollar.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                              

24

---

---

|Silicom Ltd. (An Israeli Corporation) and Subsidiary
|----------------------------------------------------
|                                                    
|Notes to the Consolidated Financial Statements      
|                                                    
|                                                    
|Note 10 - Supplementary Balance
  Sheet Information 

| |    |                                          |  |                           | December 31
| | -- | ---------------------------------------- |  | ------------------------- | -----------
| |    |                                          |  |                           |            
| |    |                                          |  |                           | 2002       
| |    |                                          |  |                           |            
| |    |                                          |  | U.S. dollars in thousands
| |    |                                          |  |                           |            
| | A. | Receivables - trade:                     |  |                           |            
| |    | In
  Israel                              |  |                           | 23         
| |    | Abroad                                   |  |                           | 481        
| |    |                                          |  |                           |            
| |    |                                          |  |                           | 504        
| |    |                                          |  |                           |            
| |    | Net of
  allowance for doubtful accounts |  |                           |            
| |    | in the
  amount of                       |  |                           | 20         
| |    |                                          |  |                           |            
| |    |                                          |  |                           |            
| | B. | Receivables - other:                     |  |                           |            
| |    | Government of Israel                     |  |                           | 107        
| |    | Grants from the government of Israel     |  |                           | -          
| |    | Prepaid expenses                         |  |                           | 25         
| |    | Income
  receivable                      |  |                           | 44         
| |    | Advanced
  from trade accounts payables  |  |                           | 73         
| |    | Sundry                                   |  |                           | 28         
| |    |                                          |  |                           |            
| |    |                                          |  |                           | 277        
| |    |                                          |  |                           |            
| | C. | Inventories:                             |  |                           |            
| |    | Raw
  materials and components           |  |                           | 280        
| |    | Products in
  process                    |  |                           | 888        
| |    | Finished
  products                      |  |                           | 53         
| |    |                                          |  |                           |            
| |    |                                          |  |                           | 1,221      
| |    |                                          |  |                           |            
| |    |                                          |  |                           |            
| | D. | Other accounts payable                   |  |                           |            
| |    | and accrued expenses                     |  |                           |            
| |    | Employees
  and employee institutions    |  |                           | 150        
| |    | Provision
  for vacation pay             |  |                           | 184        
| |    | Government
  royalties                   |  |                           | 51         
| |    | Sundry                                   |  |                           | 30         
| |    |                                          |  |                           |            
| |    |                                          |  |                           | 415        
| |    |                                          |  |                           |            

| | E. | Balances in Currencies other than the U.S. dollar
| | -- | -------------------------------------------------

| |             |  |  | December 31              
| | ----------- |  |  | -------------------------
| |             |  |  |                          
| |             |  |  | 2002                     
| |             |  |  |                          
| |             |  |  | Israeli currency         
| |             |  |  |                          
| |             |  |  | Linked*                  
| |             |  |  |                          
| |             |  |  | U.S. dollars in thousands
| |             |  |  |                          
| | Assets      |  |  | 13                       
| | Liabilities |  |  | -                        

| | * | Linked to the Israeli
  Consumer Price Index
| | - | --------------------------------------------
| |   |                                             

25

---

---

|Silicom Ltd. (An Israeli Corporation) and Subsidiary
|----------------------------------------------------
|                                                    
|Notes to the Consolidated Financial Statements      
|                                                    
|                                                    
|Note 11 - Supplementary Income
  Statement Data     

| |    |                                        |  |  | Year ended December 31   
| | -- | -------------------------------------- |  |  | -------------------------
| |    |                                        |  |  |                          
| |    |                                        |  |  | 2002                     
| |    |                                        |  |  |                          
| |    |                                        |  |  | U.S. dollars in thousands
| |    |                                        |  |  |                          
| | A. | Sales* - classified by geographical    |  |  |                          
| |    | destination:                           |  |  |                          
| |    | In Israel                              |  |  | 369                      
| |    | Abroad:                                |  |  |                          
| |    | United
  States                        |  |  | 1,770                    
| |    | Europe                                 |  |  | 562                      
| |    | Other                                  |  |  | 25                       
| |    |                                        |  |  |                          
| |    |                                        |  |  |                          
| |    |                                        |  |  | 2,726                    
| |    |                                        |  |  |                          
| |    |                                        |  |  |                          
| | *  | including - sales to single customers  |  |  |                          
| |    | exceeding 10% of sales                 |  |  |                          
| |    | Customer A                           |  |  | 990                      
| |    | Customer B                           |  |  | 414                      
| |    | Customer C                           |  |  | -                        
| |    |                                        |  |  |                          
| |    |                                        |  |  |                          
| |    |                                        |  |  | Year ended December 31   
| |    |                                        |  |  |                          
| |    |                                        |  |  | 2002                     
| |    |                                        |  |  |                          
| |    |                                        |  |  | U.S. dollars in thousands
| |    |                                        |  |  |                          
| | B. | Cost of sales:                         |  |  |                          
| |    | Materials
  consumed and subcontracted |  |  |                          
| |    | work                                   |  |  | 1,869                    
| |    | Payroll and
  related expenses         |  |  | 211                      
| |    | Royalties                              |  |  | 70                       
| |    | Other costs                            |  |  | 166                      
| |    | Slow moving
  inventory                |  |  | -                        
| |    |                                        |  |  |                          
| |    |                                        |  |  | 2,316                    
| |    | Decrease in
  products in              |  |  |                          
| |    | process
  and finished products        |  |  |                          
| |    | inventories                            |  |  | (225                     
| |    |                                        |  |  |                          
| |    |                                        |  |  |                          
| |    |                                        |  |  | 2,091                    
| |    |                                        |  |  |                          
| |    |                                        |  |  |                          

26

---

---

|Silicom Ltd. (An Israeli Corporation) and Subsidiary    
|--------------------------------------------------------
|                                                        
|Notes to the Consolidated Financial Statements          
|                                                        
|                                                        
|Note 11 - Supplementary Income
  Statement Data (contd)

| |    |                                        |  |  | Year ended December 31   
| | -- | -------------------------------------- |  |  | -------------------------
| |    |                                        |  |  |                          
| |    |                                        |  |  | 2002                     
| |    |                                        |  |  |                          
| |    |                                        |  |  | U.S. dollars in thousands
| |    |                                        |  |  |                          
| | C. | Research and development costs, net    |  |  |                          
| |    | Payroll and
  related expenses         |  |  | 1,042                    
| |    | Materials
  consumed and subcontracted |  |  |                          
| |    | work                                   |  |  | 127                      
| |    | Other costs                            |  |  | 354                      
| |    |                                        |  |  |                          
| |    |                                        |  |  | 1,523                    
| |    | Less:
  royalty-bearing participations |  |  |                          
| |    | from
  the Government of Israel        |  |  | 15                       
| |    |                                        |  |  |                          
| |    |                                        |  |  |                          
| |    | Research and
  development costs, net  |  |  | 1,538                    
| |    |                                        |  |  |                          
| |    |                                       
| |    |                                        |  |  | Year ended December 31   
| |    |                                        |  |  |                          
| |    |                                        |  |  | 2002                     
| |    |                                        |  |  |                          
| |    |                                        |  |  | U.S. dollars in thousands
| |    |                                        |  |  |                          
| | D. | Selling and marketing expenses:        |  |  |                          
| |    | Payroll and
  related expenses         |  |  | 749                      
| |    | Commissions                            |  |  | 36                       
| |    | Advertising                            |  |  | 22                       
| |    | Trade shows
  and travel               |  |  | 112                      
| |    | Other
  expenses                       |  |  | 103                      
| |    |                                        |  |  |                          
| |    |                                        |  |  |                          
| |    |                                        |  |  | 1,022                    
| |    |                                        |  |  |                          
| |    |                                        |  |  |                          

27

---

---

|Silicom Ltd. (An Israeli Corporation) and Subsidiary    
|--------------------------------------------------------
|                                                        
|Notes to the Consolidated Financial Statements          
|                                                        
|                                                        
|Note 11 - Supplementary Income
  Statement Data (contd)

| |    |                                               |  |  | Year ended December 31   
| | -- | --------------------------------------------- |  |  | -------------------------
| |    |                                               |  |  |                          
| |    |                                               |  |  | 2002                     
| |    |                                               |  |  |                          
| |    |                                               |  |  | U.S. dollars in thousands
| |    |                                               |  |  |                          
| | E. | Financial income, net                         |  |  |                          
| |    | Interest
  income                             |  |  | 188                      
| |    | Translation
  loss, net                       |  |  | (21                      
| |    | Interest
  expenses on short-term bank credit |  |  |                          
| |    | and
  bank charges                            |  |  | (15                      
| |    |                                               |  |  |                          
| |    |                                               |  |  |                          
| |    |                                               |  |  | 152                      
| |    |                                               |  |  |                          

|Note 12 - Related Party Balances
  and Transactions
|---------------------------------------------------
|                                                   
|                                                   

| |                      |  |  | December 31               | 
| | -------------------- |  |  | ------------------------- | 
| |                      |  |  |                          
| |                      |  |  | 2002                      | 
| |                      |  |  |                           | 
| |                      |  |  | U.S. dollars in thousands
| |                      |  |  |                          
| | Trade
  receivables* |  |  | 2                         | 
| |                      |  |  |                           | 

| | B. | Expenses to (income from) related parties:
| | -- | ------------------------------------------

| |                        |  |  | Year ended December 31   
| | ---------------------- |  |  | -------------------------
| |                        |  |  |                          
| |                        |  |  | 2002                     
| |                        |  |  |                          
| |                        |  |  | U.S. dollars in thousands
| |                        |  |  |                          
| | Sales*                 |  |  | (15                      
| |                        |  |  |                          
| |                        |  |  |                          
| | Costs and
  expenses** |  |  | 21                       
| |                        |  |  |                          

| | *  | Most of the transactions
  are sales to a company under common control, which is a distributor of the
  Companys products in Israel.  The
  terms of the transactions are not different from regular market terms.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                    
| | ** | Mainly participation in
  insurance, recruiting expenses and public relations expenses..                                                                                                                           
| |    |                                                                                                                                                                                                                    

28

---

---

|Silicom Ltd. (An Israeli Corporation) and Subsidiary 
|-----------------------------------------------------
|                                                     
|Notes to the Consolidated Financial Statements       
|                                                     
|                                                     
|Note 13 - Financial Instruments and
  Risk Management
|                                                     
|                                                     
|                                                     
|                                                     
|                                                     
|Note 14 - Fair Value of Financial
  Instruments      
|                                                     
|                                                     
|                                                     
|                                                     
|                                                     
|Note 15 - Business Segments                          
|                                                     
|                                                     
|                                                     
|Note 16 - Recently Enacted
  Accounting Pronouncement
|                                                     
|                                                     
|                                                     
|                                                     

29

---

---

|Silicom Ltd. (An Israeli Corporation) and Subsidiary          
|--------------------------------------------------------------
|                                                              
|Notes to the Consolidated Financial Statements                
|                                                              
|                                                              
|Note 16 - Recently Enacted
  Accounting Pronouncement (contd)
|                                                              
|                                                              
|                                                              
|                                                              
|                                                              
|                                                              
|                                                              
|                                                              
|                                                              
|                                                              

30

---

---

|Silicom Ltd. (An Israeli Corporation) and Subsidiary          
|--------------------------------------------------------------
|                                                              
|Notes to the Consolidated Financial Statements                
|                                                              
|                                                              
|Note 16 - Recently Enacted
  Accounting Pronouncement (contd)
|                                                              
|                                                              
|                                                              
|                                                              
|                                                              
|                                                              
|                                                              
|                                                              
|                                                              
|                                                              
|                                                              
|                                                              

31

---

---

|Silicom Ltd. (An Israeli Corporation) and Subsidiary          
|--------------------------------------------------------------
|                                                              
|Notes to the Consolidated Financial Statements                
|                                                              
|                                                              
|Note 16 - Recently Enacted
  Accounting Pronouncement (contd)
|                                                              
|                                                              
|                                                              
|                                                              
|                                                              
|                                                              
|                                                              
|                                                              

32

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---