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            MAG
      SILVER CORP.
              (An
      exploration stage company)
              
              Independent
      Auditors' Report and
              Consolidated
      Financial Statements
              For the
      year endedDecember
      31, 2008
              
              Dated:
      March 13, 2009




















































A copy of
this report will be provided to any shareholder who requests
it.


VANCOUVER
      OFFICE
                    Suite
      328
                    550
      Burrard Street
                    Vancouver,
      BC V6C 2B5
                  604
      630 1399 phone
                    866
      630 1399 toll free
                    604
      484 4710 fax
                  
                  
                  TSX:MAG
                    NYSE-A:MVG
                    www.magsilver.com
                    info@magsilver.com




Management’s
responsibility for the Financial Statements





The
preparation and presentation of the accompanying consolidated financial
statements, Management’s Discussion and Analysis (“MD&A”) and all financial
information in the Annual Report are the responsibility of management and have
been approved by the Board of Directors.





The
consolidated financial statements have been prepared in accordance with Canadian
generally accepted accounting principles. Financial statements, by nature, are
not precise since they include certain amounts based upon estimates and
judgments. When alternative methods exist, management has chosen those it deems
to be the most appropriate in the circumstances. The financial information
presented elsewhere in the Annual Report is consistent with that in the
consolidated financial statements.





Management,
under the supervision, and with the participation of, the Chief Executive
Officer and the Chief Financial Officer, have a process in place to evaluate
disclosure controls and procedures and internal control over financial reporting
as required by Canadian and U.S. securities regulations. We, as Chief Executive
Officer and Chief Financial Officer, will certify our annual filings with the
CSA and SEC as required in Canada by Multilateral Instrument 52-109 and in the
United States as required by the Securities Exchange Act of 1934.





The board
of Directors is responsible for ensuring that management fulfills its
responsibilities for financial reporting and is ultimately responsible for
reviewing and approving the consolidated financial statements. The Board carries
out this responsibility principally through its Audit Committee, which is
independent from management.





The Audit
Committee is appointed by the Board of Directors and reviews the consolidated
financial statements and MD&A, considers the report of the external
auditors; assesses the adequacy of our internal controls, including management’s
assessment described below, examines and approves the fees and expenses for the
audit services, and recommends the independent auditors to the Board for the
appointment by the shareholders. The independent auditors have full and free
access to the Audit Committee and meet with it to discuss their audit work, our
internal control over financial reporting and financial reporting matters. The
Audit Committee reports its findings to the Board for consideration when
approving the consolidated financial statements for issuance to the shareholders
and management’s assessment of the internal control over financial
reporting.





Management’s
Report on Internal Control over Financial Reporting





Management
is responsible for establishing and maintaining adequate internal control over
financial reporting.





Management
has assessed the effectiveness of our internal control over financial reporting
as of December 31, 2008 using criteria established in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on this evaluation, management concluded that our
internal control over financial reporting was effective as of December 31,
2008.








/s/
“Daniel
MacInnis”                                                                                                /s/ “Frank
Hallam”


Daniel
MacInnis                                                                                     Frank Hallam


Chief
Executive
Officer                                                                                                           Chief
Financial Officer





March 13,
2009





Report
of Independent Registered Chartered Accountants








To the
Board of Directors and Shareholders of


MAG
Silver Corp.


(An
exploration stage company)





We have
audited the accompanying consolidated balance sheets of MAG Silver Corp. and
subsidiaries (an exploration stage company) (the “Company”) as at December 31,
2008 and 2007, and the related consolidated statements of loss and comprehensive
loss, shareholders’ equity and cash flows for each of the three years in the
period ended December 31, 2008 and the cumulative period from
incorporation


April 21,
1999 to December 31, 2008. These financial statements are the responsibility of
the Company’s management. Our responsibility is to express an opinion on these
financial statements based on our audits.





We
conducted our audits in accordance with Canadian generally accepted auditing
standards and the standards of the Public Company Accounting Oversight Board
(United States). These standards require that we plan and perform the audit to
obtain reasonable assurance about whether 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 management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.





In our
opinion, these consolidated financial statements present fairly, in all material
respects, the financial position of MAG Silver Corp. and subsidiaries as at
December 31, 2008 and 2007, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2008 and the
cumulative period from incorporation April 21, 1999 to December 31, 2008 in
accordance with Canadian generally accepted accounting principles.





We have
also audited, in accordance with the standards of the Public Accounting
Oversight Board


(United
States), the Company’s internal control over financial reporting as of December
31, 2008, based on the criteria established in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated March 12, 2009 expressed an unqualified opinion
on the Company’s internal control over financial reporting.








"Deloitte & Touche
LLP"





Independent
Registered Chartered Accountants


Vancouver,
Canada


March 12,
2009





Comments
by Independent Registered Chartered Accountants on Canada - United States of
America Reporting Differences








The
standards of the Public Company Accounting Oversight Board (United States)
require the addition of an explanatory paragraph (following the opinion
paragraph) when there are changes in accounting principles that have a material
effect on the comparability of the Company’s financial statements, such as the
changes described in Note 2 to the consolidated financial statements. In
addition, the standards of the Public Company Accounting Oversight Board (United
States) require the addition of an explanatory paragraph when the financial
statements are affected by conditions and events that raise substantial doubt on
the Company's ability to continue as a going concern, such as those described in
Note 1 to the consolidated financial statements. Although we conducted our
audits in accordance with both Canadian generally accepted auditing standards
and the standards of the Public Company Accounting Oversight Board (United
States), our report to the Board of Directors and Shareholders dated March 12,
2009 is expressed in accordance with Canadian reporting standards which do not
require a reference to such changes in accounting principles or permit a
reference to such conditions and events in the auditors’ report when these
matters are properly accounted for and adequately disclosed in the financial
statements.





"Deloitte & Touche
LLP"


Independent
Registered Chartered Accountants


Vancouver,
Canada


March 12,
2009








Report
of Independent Registered Chartered Accountants








To the
Board of Directors and Shareholders of


MAG
Silver Corp.


(An
exploration stage company)





We have
audited the internal control over financial reporting of MAG Silver Corp. and
subsidiaries (an exploration stage company) (the “Company”) as of December 31,
2008, based on the criteria established in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. The Company’s management is responsible for maintaining effective
internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting, included in the
accompanying Report of Management on Internal Control over Financial Reporting.
Our responsibility is to express an opinion on the Company’s internal control
over financial reporting based on our audit.





We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based
on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.





A
company’s internal control over financial reporting is a process designed by, or
under the supervision of, the company’s principal executive and principal
financial officers, or persons performing similar functions, and effected by the
company’s board of directors, management, and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.





Because
of the inherent limitations of internal control over financial reporting,
including the possibility of collusion or improper management override of
controls, material misstatements due to error or fraud may not be prevented or
detected on a timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting to future periods
are subject to the risk that the controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.





In our
opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2008, based on the criteria
established in Internal Control – Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission.





We have
also audited, in accordance with Canadian generally accepted auditing standards
and the standards of the Public Company Accounting Oversight Board (United
States), the consolidated financial statements as of and for the year ended
December 31, 2008 and the cumulative period from incorporation April 21, 1999 to
December 31, 2008 of the Company and our report dated March 12, 2009 expressed
an unqualified opinion on those financial statements and included a separate
report titled Comments by Independent Registered Chartered Accountants on
Canada-United States of America Reporting Differences referring to changes in
accounting principles, and conditions and events that raise substantial doubt on
the Company’s ability to continue as a going concern.





"Deloitte & Touche
LLP"


Independent
Registered Chartered Accountants


Vancouver,
Canada


March 12,
2009





MAG
      SILVER CORP.(An
      exploration stage company)Consolidated
      Balance Sheets(expressed
      in Canadian dollars)
                  
                  
                  
                  
                  December
      31,2008
                  
                  
                  2007ASSETSCURRENTCash
      and cash equivalents
                  
                  $
                  52,262,561
                  
                  
                  $
                  60,147,307Accounts
      receivable (Note 3)
                  
                  
                  2,339,204
                  
                  
                  
                  647,027Interest
      receivable
                  
                  
                  81,934
                  
                  
                  
                  173,308Marketable
      securities (Note 4)
                  
                  
                  4,116
                  
                  
                  
                  -Prepaid
      expenses
                  
                  
                  110,151
                  
                  
                  
                  49,668TOTAL
      CURRENT ASSETS
                  
                  
                  54,797,966
                  
                  
                  
                  61,017,310EQUIPMENT
      AND LEASEHOLDS (Note 5)
                  
                  
                  66,539
                  
                  
                  
                  22,116INVESTMENT
      IN MINERA JUANICIPIO S.A. DE C.V. (Note 6)
                  
                  
                  8,166,747
                  
                  
                  
                  5,948,361MINERAL
      RIGHTS (Note 7)
                  
                  
                  6,879,060
                  
                  
                  
                  5,071,407DEFERRED
      EXPLORATION COSTS (Note 7)
                  
                  
                  25,237,198
                  
                  
                  
                  13,002,738TOTAL
      ASSETS
                  
                  $
                  95,147,510
                  
                  
                  $
                  85,061,932LIABILITIESCURRENTAccounts
      payable and accrued liabilities
                  
                  $
                  1,503,417
                  
                  
                  $
                  637,180SHAREHOLDERS'
      EQUITYShare
      capital (Note 8)Authorized
      - unlimited common shares,without
      par valueIssued
      and outstanding at Dec. 31, 2008 - 49,155,566common
      shares (Dec.31, 2007 - 46,954,196)
                  
                  
                  107,023,016
                  
                  
                  
                  91,105,640Common
      share purchase warrants
                  
                  
                  -
                  
                  
                  
                  2,218,444Contributed
      surplus
                  
                  
                  9,583,860
                  
                  
                  
                  7,879,650Accumulated
      other comprehensive loss
                  
                  
                  (1,027,690
                  )
                  
                  
                  (716,778
                  )Deficit
                  
                  
                  (21,935,093
                  )
                  
                  
                  (16,062,204
                  )TOTAL
      SHAREHOLDERS' EQUITY
                  
                  
                  93,644,093
                  
                  
                  
                  84,424,752TOTAL
      LIABILITIES AND SHAREHOLDERS' EQUITY
                  
                  $
                  95,147,510
                  
                  
                  $
                  85,061,932CONTINUING
      OPERATIONS (Note 1)ON
      BEHALF OF THE BOARD/s/
      "Derek White"Derek
      White, Director/s/
      "R. Michael Jones"R.
      Michael Jones, Director


See
accompanying notes to the consolidated financial statements.




MAG
      SILVER CORP.(An
      exploration stage company)Consolidated
      Statements of Loss and Comprehensive Loss(expressed
      in Canadian dollars)Cumulativeamount
      fromApril
      21,Year
      ended
                  
                  
                  Year
      ended
                  
                  
                  Year
      ended
                  
                  
                  1999
      toDecember
      31,
                  
                  
                  December
      31,
                  
                  
                  December
      31,
                  
                  
                  December
      31,2008
                  
                  
                  2007
                  
                  
                  2006
                  
                  
                  2008EXPENSESAccounting
      and audit
                  
                  $
                  415,647
                  
                  
                  $
                  319,896
                  
                  
                  $
                  211,168
                  
                  
                  $
                  1,392,793Amortization
                  
                  
                  39,945
                  
                  
                  
                  13,909
                  
                  
                  
                  16,820
                  
                  
                  
                  102,455Bank
      charges and interest
                  
                  
                  3,343
                  
                  
                  
                  2,466
                  
                  
                  
                  2,214
                  
                  
                  
                  29,156Filing
      and transfer agent fees
                  
                  
                  148,886
                  
                  
                  
                  405,844
                  
                  
                  
                  48,782
                  
                  
                  
                  782,098Foreign
      exchange (gain) loss
                  
                  
                  (96,596
                  )
                  
                  
                  260,598
                  
                  
                  
                  12,479
                  
                  
                  
                  240,811Legal
                  
                  
                  884,000
                  
                  
                  
                  232,980
                  
                  
                  
                  89,810
                  
                  
                  
                  1,638,940Management
      and consulting fees
                  
                  
                  1,528,630
                  
                  
                  
                  778,228
                  
                  
                  
                  485,993
                  
                  
                  
                  3,565,324Mineral
      property costs written off
                  
                  
                  1,221,019
                  
                  
                  
                  763,434
                  
                  
                  
                  -
                  
                  
                  
                  1,984,453Property
      investigation expense
                  
                  
                  7,432
                  
                  
                  
                  43,464
                  
                  
                  
                  -
                  
                  
                  
                  55,747Shareholder
      relations
                  
                  
                  404,776
                  
                  
                  
                  354,075
                  
                  
                  
                  288,687
                  
                  
                  
                  1,299,977Stock
      compensation expense
                  
                  
                  2,539,011
                  
                  
                  
                  5,256,566
                  
                  
                  
                  2,341,159
                  
                  
                  
                  11,071,525Telephone
      and office
                  
                  
                  506,332
                  
                  
                  
                  389,980
                  
                  
                  
                  365,880
                  
                  
                  
                  1,809,794Travel
                  
                  
                  235,144
                  
                  
                  
                  243,422
                  
                  
                  
                  212,168
                  
                  
                  
                  1,044,298Other
      write-offs
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  255,0937,837,569
                  
                  
                  
                  9,064,862
                  
                  
                  
                  4,075,160
                  
                  
                  
                  25,272,464LOSS
      BEFORE THE FOLLOWING
                  
                  
                  (7,837,569
                  )
                  
                  
                  (9,064,862
                  )
                  
                  
                  (4,075,160
                  )
                  
                  
                  (25,272,464
                  )INTEREST
      INCOME
                  
                  
                  1,964,680
                  
                  
                  
                  915,604
                  
                  
                  
                  208,593
                  
                  
                  
                  3,337,371NET
      LOSS FOR THE PERIOD
                  
                  $
                  (5,872,889
                  )
                  
                  $
                  (8,149,258
                  )
                  
                  $
                  (3,866,567
                  )
                  
                  $
                  (21,935,093
                  )OTHER
      COMPREHENSIVE LOSSCURRENCY
      TRANSLATION ADJUSTMENT
                  
                  
                  (304,458
                  )
                  
                  
                  (716,778
                  )
                  
                  
                  -
                  
                  
                  
                  (1,021,236
                  )UNREALIZED
      LOSS ON MARKETABLESECURITIES
                  
                  
                  (6,454
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (6,454
                  )COMPREHENSIVE
      LOSS FOR THE PERIOD
                  
                  $
                  (6,183,801
                  )
                  
                  $
                  (8,866,036
                  )
                  
                  $
                  (3,866,567
                  )
                  
                  $
                  (22,962,783
                  )BASIC
      AND DILUTEDLOSS
      PER SHARE
                  
                  $
                  (0.12
                  )
                  
                  $
                  (0.19
                  )
                  
                  $
                  (0.10
                  )WEIGHTED
      AVERAGE NUMBEROF
      SHARES OUTSTANDING
                  
                  
                  48,791,348
                  
                  
                  
                  42,411,815
                  
                  
                  
                  37,055,631
  See
accompanying notes to the consolidated financial
statements.
   MAG
      SILVER CORP.(An
      exploration stage company)Consolidated
      Statements of Shareholders' Equity(expressed
      in Canadian dollars)
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        DeficitAccumulated
                        
                        
                        accumulatedCommon
      shares
                        
                        
                        Common
      share
                        
                        
                        
                        
                        
                        other
                        
                        
                        during
      the
                        
                        
                        Total
                        
                        
                        Totalwithout
      par value
                        
                        
                        purchase
      warrants
                        
                        
                        Contributed
                        
                        
                        comprehensive
                        
                        
                        exploration
                        
                        
                        Deficit
                        
                        
                        shareholders'Shares
                        
                        
                        Amount
                        
                        
                        Number
                        
                        
                        Amount
                        
                        
                        Surplus
                        
                        
                        loss
      ("AOCL")
                        
                        
                        stage
                        
                        
                        and
      "AOCL"
                        
                        
                        equityBalance,
      December 31, 2005
                        
                        
                        36,191,648
                        
                        
                        $
                        20,812,185
                        
                        
                        
                        -
                        
                        
                        $
                        -
                        
                        
                        $
                        915,979
                        
                        
                        $
                        -
                        
                        
                        $
                        (4,046,379
                        )
                        
                        $
                        (4,046,379
                        )
                        
                        $
                        17,681,785Issued
      for cash
                        
                        
                        245,716
                        
                        
                        
                        577,433
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        577,433Issued
      to obtain mineral propertyoption
      rights
                        
                        
                        85,043
                        
                        
                        
                        204,431
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        204,431Warrants
      exercised
                        
                        
                        944,503
                        
                        
                        
                        1,275,079
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        1,275,079Stock
      options exercised
                        
                        
                        461,700
                        
                        
                        
                        564,814
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (197,944
                        )
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        366,870Stock
      options expense
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        2,341,159
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        2,341,159Net
      loss
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (3,866,567
                        )
                        
                        
                        (3,866,567
                        )
                        
                        
                        (3,866,567
                        )Balance,
      December 31, 2006
                        
                        
                        37,928,610
                        
                        
                        
                        23,433,942
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        3,059,194
                        
                        
                        
                        -
                        
                        
                        
                        (7,912,946
                        )
                        
                        
                        (7,912,946
                        )
                        
                        
                        18,580,190Issued
      for cash (Note 8 (a))
                        
                        
                        5,760,000
                        
                        
                        
                        59,955,443
                        
                        
                        
                        1,380,000
                        
                        
                        
                        2,692,571
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        62,648,014Warrants
      exercised
                        
                        
                        2,883,486
                        
                        
                        
                        6,468,783
                        
                        
                        
                        (243,000
                        )
                        
                        
                        (474,127
                        )
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        5,994,656Stock
      options exercised
                        
                        
                        382,100
                        
                        
                        
                        1,247,472
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (436,110
                        )
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        811,362Stock
      options expense
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        5,256,566
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        5,256,566Translation
      adjustment
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (716,778
                        )
                        
                        
                        -
                        
                        
                        
                        (716,778
                        )
                        
                        
                        (716,778
                        )Net
      loss
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (8,149,258
                        )
                        
                        
                        (8,149,258
                        )
                        
                        
                        (8,149,258
                        )Balance,
      December 31, 2007
                        
                        
                        46,954,196
                        
                        
                        
                        91,105,640
                        
                        
                        
                        1,137,000
                        
                        
                        
                        2,218,444
                        
                        
                        
                        7,879,650
                        
                        
                        
                        (716,778
                        )
                        
                        
                        (16,062,204
                        )
                        
                        
                        (16,778,982
                        )
                        
                        
                        84,424,752Issued
      for cash
                        
                        
                        -
                        
                        
                        
                        11,936
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        11,936Warrants
      exercised
                        
                        
                        1,137,000
                        
                        
                        
                        13,588,444
                        
                        
                        
                        (1,137,000
                        )
                        
                        
                        (2,218,444
                        )
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        11,370,000Stock
      options exercised
                        
                        
                        1,064,370
                        
                        
                        
                        2,316,996
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (834,801
                        )
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        1,482,195Stock
      options expense
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        2,539,011
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        2,539,011Translation
      adjustment
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (304,458
                        )
                        
                        
                        -
                        
                        
                        
                        (304,458
                        )
                        
                        
                        (304,458
                        )Unrealized
      loss on marketablesecurities
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (6,454
                        )
                        
                        
                        -
                        
                        
                        
                        (6,454
                        )
                        
                        
                        (6,454
                        )Net
      loss
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (5,872,889
                        )
                        
                        
                        (5,872,889
                        )
                        
                        
                        (5,872,889
                        )Balance,
      December 31, 2008
                        
                        
                        49,155,566
                        
                        
                        $
                        107,023,016
                        
                        
                        
                        -
                        
                        
                        $
                        -
                        
                        
                        $
                        9,583,860
                        
                        
                        $
                        (1,027,690
                        )
                        
                        $
                        (21,935,093
                        )
                        
                        $
                        (22,962,783
                        )
                        
                        $
                        93,644,093
  See
accompanying notes to the consolidated financial
statements.
   MAG
      SILVER CORP.(An
      exploration stage company)Consolidated
      Statements of Cash Flows(expressed
      in Canadian dollars)Cumulativeamount
      fromApril
      21,Year
      ended
                
                Year
      ended
                
                Year
      ended
                
                1999
      toDecember
      31,
                
                December
      31,
                
                December
      31,
                
                December
      31,2008
                
                2007
                
                2006
                
                2008OPERATING
      ACTIVITIESNet
      loss for the period
                $   (5,872,889)
                
                $   (8,149,258)
                
                $
      (3,866,567)
                
                $(21,686,965)Items
      not involving cash:Other
      write-offs
                -
                
                -
                
                -
                
                255,093Amortization
                39,945
                
                13,909
                
                16,820
                
                102,455Mineral
      property costs written off (Note 7)
                1,221,019
                
                763,434
                
                -
                
                1,984,453Non-cash
      stock compensation expense
                2,539,011
                
                5,256,566
                
                2,341,159
                
                11,071,525Changes
      in operating assets and liabilitiesAccounts
      receivable
                (1,692,177)
                
                (373,992)
                
                (167,963)
                
                (2,339,203)Interest
      receivable
                91,374
                
                (58,081)
                
                (88,815)
                
                (81,934)Prepaid
      expenses
                (60,483)
                
                (8,703)
                
                (18,729)
                
                (110,152)Accounts
      payable and accrued liabilities
                605,237
                
                (52,188)
                
                (43,253)
                
                903,417(3,128,963)
                
                (2,608,313)
                
                (1,827,348)
                
                (9,901,311)INVESTING
      ACTIVITIESPurchase
      of equipment and leasehold improvements
                (84,368)
                
                (4,693)
                
                (8,238)
                
                (171,667)Purchase
      of marketable securities
                (10,570)
                
                -
                
                -
                
                (10,570)Advances
      to Minera Los Lagartos, S.A. de C.V.
                -
                
                -
                
                -
                
                (113,139)Acquisition
      of Minera Los Lagartos, S.A. de C.V.
                -
                
                -
                
                -
                
                (357,500)Investment
      in Juanicipio JV
                (2,522,844)
                
                (3,620,630)
                
                (98,957)
                
                (9,104,650)Mineral
      rights
                (2,025,488)
                
                (819,789)
                
                (441,598)
                
                (3,359,021)Deferred
      exploration costs
                (12,976,644)
                
                (5,760,230)
                
                (3,896,504)
                
                (26,103,912)Other
                
                -
                
                -
                
                -
                
                (252,420)(17,619,914)
                
                (10,205,342)
                
                (4,445,297)
                
                (39,472,879)FINANCING
      ACTIVITIESIssue
      of share capital
                12,864,131
                
                69,454,032
                
                2,219,382
                
                101,509,879Issue
      of special warrants
                -
                
                -
                
                -
                
                375,00012,864,131
                
                69,454,032
                
                2,219,382
                
                101,884,879INCREASE
      (DECREASE) IN CASH
                (7,884,746)
                
                56,640,377
                
                (4,053,263)
                
                52,510,689CASH
      AND EQUIVALENTS, BEGINNING OF PERIOD
                60,147,307
                
                3,506,930
                
                7,560,193
                
                -CASH
      AND EQUIVALENTS, END OF PERIOD(Note
      2 (e))
                $  52,262,561
                
                $  60,147,307
                
                $   3,506,930
                
                $  52,510,689Interest
      paid
                $                 -
                
                $                 -
                
                $               -
                
                $         12,500Non-cash
      investing and financing activities:Issue
      of shares in connection with acquisitions
                $                 -
                
                $                 -
                
                $               -
                
                $       430,000Issue
      of shares in exchange for mineral propertyoption
      rights
                $                 -
                
                $                 -
                
                $      204,431
                
                $    3,220,472
  See
accompanying notes to the consolidated financial
statements.


MAG
SILVER CORP.
 (An
exploration stage company)
 Notes
to the Consolidated Financial Statements


1.           CONTINUING
OPERATIONS





MAG
Silver Corp (“the Company” or “MAG”) was incorporated on April 21, 1999 under
the Company Act of the Province of British Columbia and its shares were listed
on the TSX Venture Exchange on April 21, 2000. On October 5, 2007, the Company
moved to the TSX.  Unless the context requires otherwise, references
in these consolidated financial statements to the Company include the
subsidiaries of the Company whose financial results are consolidated in these
financial statements.





The
Company is an exploration company working on mineral properties it has staked or
acquired by way of option agreement, principally in Mexico. The Company has not
yet determined whether these mineral properties contain any economically
recoverable ore reserves. The Company defers all acquisition, exploration and
development costs related to the properties on which it is conducting
exploration. The recoverability of these amounts is dependent upon the existence
of economically recoverable reserves, the ability of the Company to obtain the
necessary financing to complete the development of the interests, and future
profitable production, or alternatively, upon the Company’s ability to dispose
of its interests on a profitable basis.





These
consolidated financial statements have been prepared in accordance with
generally accepted accounting principles applicable to a going concern, which
assume that the Company will realize its assets and discharge its liabilities in
the normal course of business for the foreseeable future. The Company has
incurred losses from inception and does not currently have any revenue
generating operations. The Company’s ability to continue as a going concern is
dependent upon its ability in the future to achieve profitable operations and,
in the meantime, to obtain the necessary financing to meet its obligations and
repay its liabilities when they become due. External financing, predominantly by
the issuance of equity to the public, will be sought to finance the operations
of the Company. If the going concern assumption was not appropriate, the
financial statements would require revision and restatement on a liquidation
basis.





Although
the Company has taken steps to verify title to the properties on which it is
conducting exploration and in which it has an interest, in accordance with
industry standards for the current stage of exploration of such properties,
these procedures do not guarantee the Company’s title. Property title may be
subject to unregistered prior agreements and non-compliance with regulatory
requirements.





2.           SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES





These
financial statements have been prepared in accordance with Canadian generally
accepted accounting principles (“Canadian GAAP”) and include the following
significant policies outlined below. These policies conform, in all material
respects, with accounting principles generally accepted in the United States of
America (“US GAAP”), except as described in Note 16 to these consolidated
financial statements.





(a)           Principles
of consolidation





The
financial statements of entities which are controlled by the Company through
voting equity interests, referred to as subsidiaries, are consolidated. Variable
interest entities (“VIEs”), which include, but are not limited to, special
purpose entities, trusts, partnerships, and other legal structures, as defined
by the Accounting Standards Board in Accounting Guideline (“AcG”) 15, Consolidation of Variable Interest
Entities (“AcG 15”), are entities in which equity investors do not
have the characteristics of a “controlling financial interest” or there
is not sufficient equity at risk for the entity to finance its activities
without additional subordinated financial support.  VIEs are subject
to consolidation by the primary beneficiary who will absorb the majority of the
entities’ expected losses and/or expected residual returns.  The
Company does not believe that it has any VIEs subject to consolidation. All
significant intercompany balances and transactions have been eliminated upon
consolidation.  The principal subsidiary at December 31, 2008 is
Minera Los Lagartos, S.A. de C.V. (“Lagartos”) which holds several properties in
Mexico.





Investments
where the Company has the ability to exercise significant influence, generally
where the Company has a 20% to 50% equity interest, are accounted for using the
equity method. Under this method, the Company’s share of the investee’s earnings
or losses is included in operations and its investments therein are adjusted by
a like amount. Dividends received from these investments are credited to the
investment accounts.





The
Company’s 44% interest in the Juanicipio Joint Venture (Note 6) is recorded
using the equity method.





(b)           Measurement
uncertainty





The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenditures during the reported period.
Significant estimates used in preparation of these financial statements include
estimates of the net realizable value of mineral properties and deferred
exploration costs, asset retirement obligations, stock based compensation,
income tax provisions and contingencies. Actual results may differ from those
estimated.





(c)           Asset
retirement obligations





The
Company records the present value of asset retirement obligations including
reclamation costs when the obligation is incurred and it is recorded as a
liability with a corresponding increase in the carrying value of the related
mining assets.  The carrying value is amortized over the life of the
related mining asset on a units-of-production basis commencing with initial
commercialization of the asset.  The liability is accreted to the
actual liability on settlement through charges each period in the statement of
operations.





(d)           Financial
instruments





The
carrying values of cash and cash equivalents, accounts receivable, interest
receivable, accounts payable, and accrued liabilities reported in the balance
sheet approximate their respective fair values.





Price
risk is the risk that the value of the Company’s financial instruments will vary
because of fluctuations in foreign exchange rates and the degree of volatility
of these rates.  Certain of the Company’s accounts receivable,
accounts payable and accrued liabilities are denominated
in Mexican pesos.  The Company does not use any derivative instruments
to reduce its exposure to fluctuations in foreign exchange rates.





(e)           Cash
and cash equivalents





Cash and
cash equivalents consist of cash and short-term money market instruments which
are readily convertible into cash and have original maturities of 90 days or
less.  The Company holds no asset backed commercial
paper.





Details
of cash and cash equivalents are as follows:




Dec.
      31, 2008
                  
                  
                  Dec.
      31, 2007Cash
                  
                  $
                  52,262,561
                  
                  
                  $
                  912,205Short-term
      deposits
                  
                  
                  -
                  
                  
                  
                  59,235,102$
                  52,262,561
                  
                  
                  $
                  60,147,307


(f)           Mineral
rights and deferred exploration costs





The
Company is in the exploration stage with respect to its activities and
accordingly follows the practice of capitalizing all costs relating to the
acquisition, exploration and development of its mining rights and crediting all
revenues received against the cost of the related interests. At such time as
commercial production commences, these costs will be charged to operations on a
units-of-production method based on proven and probable reserves. The carrying
values related to abandoned interests are charged to operations at the time of
any abandonment.





Mineral
rights include costs to acquire options to acquire interests in unproven mineral
properties.





Deferred
exploration costs include direct exploration costs incurred by the Company in
its effort to determine the existence of economically mineable ore including the
cost of feasibility studies.





Management
reviews the carrying value of mineral rights and deferred exploration costs at
least quarterly for evidence of impairment. This review is generally made with
reference to the timing of exploration work, work programs proposed, exploration
results achieved by the Company and by others in the related area of interest,
and an assessment of the likely results to be achieved from performance of
further exploration. When the results of this review indicate that a condition
of impairment exists, the Company estimates the net recoverable amount of the
deferred exploration costs and related mining rights by reference to the
potential for success of further exploration activity and/or the likely proceeds
to be received from sale or assignment of the rights. When the carrying values
of mining rights or deferred exploration costs are estimated to exceed their net
recoverable amounts, a provision is made for the decline in
value.











(g)           Equipment
and leaseholds





Equipment
and leaseholds are recorded at cost and are amortized at the following annual
rates:





Computer
equipment and
software                                30%
declining balance


Field
equipment                                                                30%
declining balance


Leasehold
improvements                                                  2
years straight line





(h)           Income
taxes





Future
income taxes relate to the expected future tax consequences of differences
between the carrying amount of balance sheet items and their corresponding tax
values.  Future tax assets, if any, are recognized only to the extent
that, in the opinion of management, it is more likely than not that the future
income tax assets will be realized.  Future income tax assets and
liabilities are adjusted for the effects of changes in tax laws and rates on the
date of substantive enactment.





(i)
            Translation of foreign
      currencies





The
      Company’s functional currency is the Canadian dollar. For integrated
      foreign operations, monetary assets and liabilities are translated at year
      end exchange rates and other assets and liabilities are translated at
      historical rates. Revenues, expenses and cash flows are translated at
      average exchange rates. Gains and losses on translation of monetary assets
      and monetary liabilities are charged to
  operations.





The
      accounts of self-sustaining foreign operations are translated at year end
      exchange rates, and revenues and expenses are translated at average
      exchange rates. Differences arising from these foreign currency
      translations are recorded in accumulated other comprehensive income as a
      cumulative translation adjustment until they are realized by a reduction
      in the investment.





(j)           Stock-based
compensation





The fair
value of all stock-based compensation and other stock-based payments are
estimated using the Black-Scholes-Merton option valuation model and are recorded
in operations over their vesting periods.





The total
compensation expense recognized in the statement of operations for share
purchase options granted during the year ended December 31, 2008 amount to
$2,539,011 (2007 - $5,256,566). Please refer to Note 8 (b) for a
summary of stock options granted in the current year and the related valuation
assumptions.




(k)           Earnings
(loss) per common share





Basic
earnings (loss) per share calculations are based on the weighted average number
of common shares outstanding.





The
Company uses the treasury stock method for the calculation of diluted earnings
per share. Diluted earnings per share are computed using the weighted average
number of common and common equivalent shares outstanding during the year.
Common equivalent shares consist of the incremental common shares upon the
assumed exercise of stock options and warrants, but are excluded from the
computation if their effect is anti-dilutive.





For the
year ended December 31, 2008, the Company had 3,312,407 (2007
– 4,942,700) common share equivalents consisting of the
common shares issuable upon the exercise of outstanding exercisable stock
options and share purchase warrants.  These common share equivalents
were not included for the purpose of calculating fully diluted
earnings per share as their effect would be anti-dilutive.





(l)           Comparative
figures





Certain
of the prior years’ comparative figures have been reclassified to conform with
the classifications used in 2008. The Mineral Rights and Deferred Exploration
costs table in Note 7 and the Differences between Canadian and United States
Generally Accepted Accounting Principles disclosure in Note 16 have been
reclassified.





(m)           Comprehensive
Income





Effective
January 1, 2007, the Company adopted CICA Handbook Section 1530, Comprehensive Income, CICA
Handbook Section 3861, Financial Instrument Presentation
and Disclosure,CICA Handbook Section 3855, Financial Instruments – Recognition and
Measurement, CICA Handbook Section 3865, Hedges, and CICA Handbook
Section 3251, Equity.
 These new Handbook Sections provide comprehensive requirements for the
recognition and measurement of financial instruments, transaction costs incurred
on financial instruments, as well as standards on when and how hedge accounting
may be applied.  CICA Handbook Section 1530 also introduces a new component
of equity referred to as other accumulated comprehensive income. Comprehensive
income includes changes in shareholders’ equity during a period arising from
non-owner sources and, for the Company, other comprehensive income includes
currency translation adjustments on its net investment in self sustaining
foreign operations. The new standards also require all derivatives to be
recorded on the balance sheet at fair value and establish new accounting
requirements for hedges. The Company has adopted these standards effective
January 1, 2007. The adoption of these new standards had no material effect on
the financial position or opening account balances on January 1,
2007.





In
accordance with these new standards, the Company now classifies all financial
instruments as either held-to-maturity, available-for-sale, held-for-trading,
loans and receivables,
or other financial liabilities.  Financial assets held to maturity, loans
and receivables and financial liabilities other than those held for trading, are
measured at amortized cost.  Available-for-sale instruments are measured at
fair value with unrealized gains and losses recognized in other comprehensive
income.  Instruments classified as held for trading are measured at fair
value with unrealized gains and losses recognized in the statement of
operations.  Transaction costs are expensed as incurred.





Upon
adoption of these new standards, the Company has designated its cash and cash
equivalents as held-for-trading, which are measured at fair value.
 Accounts receivable and other are classified as loans and receivables,
which are measured at amortized cost.  Accounts payable and accrued
liabilities, property and mining taxes payable, convertible debentures, notes
payable, and accrued site closure costs are classified as other liabilities,
which are measured at amortized cost.





The
impact of adoption of these new standards on the results of operations for the
year ended December 31, 2007 and financial position as at that date was the
reporting of a currency translation loss of $716,778 recognized on December 31,
2007 as an item of other comprehensive loss for the year and the inclusion of
that balance in accumulated other comprehensive loss within a separate component
of shareholders’ equity.





(n)
            Adoption
      of new accounting pronouncements





On
January 1, 2008, the Company adopted four new presentation and disclosure
standards that were issued by the Canadian Institute of Chartered Accountants:
Handbook Section 1535, Capital Disclosures ("Section 1535"), Handbook Section
3031, Inventories – (“Section 3031”), Handbook Section 3862, Financial
Instruments - Disclosures ("Section 3862") and Handbook Section 3863, Financial
Instruments - Presentation ("Section 3863").





(i)           Capital
disclosures – Section 1535





Section
1535, Capital Disclosures, establishes disclosure requirements regarding an
entity’s capital, including (i) an entity’s objectives, policies, and processes
of managing capital; (ii) quantitative data about what the entity regards as
capital; (iii) whether the entity has complied with any externally imposed
capital requirements; and (iv) if it has not complied, the consequences of such
non-compliance. The new standard has had no impact on the consolidated financial
position or results of operations for the year ended December 31,
2008.





(ii)           Inventories
– Section 3031





Section
3031, Inventories, provides more guidance on the measurement and disclosure
requirements for inventories. Specifically, the new pronouncement requires
inventories to be measured at the lower of cost or net realizable value, and
provides guidance on the determination of cost and its subsequent recognition as
an expense, including any write-down to net realizable value. The new standard
has had no impact on the consolidated financial position or results of
operations for the year ended December 31, 2008.





(iii)           Financial
instruments – Sections 3862 and 3863





Section
3862, Financial Instruments – Disclosures and Section 3863 Financial Instruments
– Presentation replace Section 3861 Financial Instruments – Disclosure and
Presentation. These new sections revise and enhance disclosure requirements
while leaving presentation requirements unchanged. These new sections place
increased emphasis on disclosures about the nature and extent of risks arising
from financial instruments and how the entity manages those risks. The new
standards have had no impact on the consolidated financial position or results
of operations for the year ended December 31, 2008. Refer to the additional
sensitivity disclosure in Note 10.





(iv)           Business
Combinations





In
January 2009, the CICA issued Section 1582, Business Combinations, Section 1601,
Consolidations, and Section 1602, Non-controlling Interest. These new standards
are harmonized with International Financial Reporting Standards (IFRS). Section
1582 specifies a number of changes, including: an expanded definition of a
business, a requirement to measure all business acquisitions at fair value, a
requirement to measure non-controlling interests at fair value, and a
requirement to recognize acquisition-related costs as expenses. Section 1601
establishes the standards for preparing consolidated financial statements.
Section 1602 specifies that non-controlling interests be treated as a separate
component of equity, not as a liability or other item outside of equity. The new
standards will become effective in 2011 but early adoption is permitted. The
Company is evaluating the attributes of early adoption of this standard and its
potential effects if events or transactions occurred that this standard applies
to.





(o)
            Recent Accounting
      Pronouncements





(i)           Goodwill
and Intangible Assets





In
February 2008, the CICA issued Section 3064, Goodwill and Intangible
Assets, replacing Section 3062, Goodwill and Other Intangible
Assets and Section 3450, Research and Development
Costs. The new pronouncement establishes standards for the recognition,
measurement, presentation, and disclosure of goodwill subsequent to its initial
recognition and of intangible assets by profit-oriented enterprises. Standards
concerning goodwill are unchanged from the standards included in the previous
Section 3062. This Section is effective in the first quarter of 2009, and the
Company is currently evaluating the impact of the adoption of this new Section
on its consolidated financial statements.




(ii)           Convergence
with International Financial Reporting Standards





In
February 2008, the Canadian Accounting Standards Board confirmed that publicly
accountable enterprises will be required to adopt IFRS for fiscal years
beginning on or after January 1, 2011, with earlier adoption permitted.
Accordingly, the conversion to IFRS will be applicable to the Company’s
reporting no later than in the first quarter of 2011, with restatement of
comparative information presented. The conversion to IFRS will impact the
Company’s accounting policies, information technology and data systems, internal
control over financial reporting, and disclosure controls and procedures. The
transition may also impact business activities, such as foreign currency
activities, certain contractual arrangements, capital requirements and
compensation arrangements. The Company is currently evaluating the future impact
of IFRS on its financial statements and will continue to invest in training and
additional resources to ensure a timely conversion.





3.           ACCOUNTS
RECEIVABLE





Dec.
      31, 2008
                          
                          
                          Dec.
      31, 2007Goods
      and services tax recoverable
                          
                          $
                          44,633
                          
                          
                          $
                          50,314Mexican
      value added tax ("IVA") recoverable
                          
                          
                          2,190,188
                          
                          
                          
                          596,713Other
                          
                          
                          104,383
                          
                          
                          
                          -$
                          2,339,204
                          
                          
                          $
                          647,027


4.
            MARKETABLE
      SECURITIES





At
December 31, 2008, the Company has the following marketable
securities:





Available-for-sale
      securities
                
                Number
      of
                  Shares
                
                
                Cost
      ($)
                
                
                Accumulated
      Unrealized
                  Losses
      ($)
                
                
                Fair
                  Value
      ($)Fresnillo
      PLC
                
                
                1,000
                
                
                
                10,570
                
                
                
                6,454
                
                
                
                4,116








During
the year ended December 31, 2008 the Company recognized an unrealized loss of
$6,454 (2007 - $nil) on marketable securities designated as available-for-sale
instruments in other comprehensive income. Management believes that the change
in fair value of its marketable security is only temporary.





Fresnillo
      PLC




In 2008
the Company purchased 1,000 shares of Fresnillo plc, a company which holds a 56%
interest in Minera Juanicipio, S.A. de C.V. (Note 6).







5.
            EQUIPMENT
      AND LEASEHOLDS





December
      31, 2008Accumulated
                                    
                                    
                                    Net
      bookCost
                                    
                                    
                                    depreciation
                                    
                                    
                                    valueComputer
      equipmentand
      software
                                    
                                    $
                                    60,709
                                    
                                    
                                    $
                                    33,018
                                    
                                    
                                    $
                                    27,691Field
      equipment
                                    
                                    
                                    67,201
                                    
                                    
                                    
                                    38,135
                                    
                                    
                                    
                                    29,066Leasehold
      improvements
                                    
                                    
                                    26,084
                                    
                                    
                                    
                                    16,302
                                    
                                    
                                    
                                    9,782$
                                    153,994
                                    
                                    
                                    $
                                    87,455
                                    
                                    
                                    $
                                    66,539
 December
      31, 2007Accumulated
                    
                    
                    Net
      bookCost
                    
                    
                    depreciation
                    
                    
                    valueComputer
      equipmentand
      software
                    
                    $
                    33,755
                    
                    
                    $
                    21,152
                    
                    
                    $
                    12,603Field
      equipment
                    
                    
                    35,191
                    
                    
                    
                    25,678
                    
                    
                    
                    9,513Leasehold
      improvements
                    
                    
                    15,680
                    
                    
                    
                    15,680
                    
                    
                    
                    -$
                    84,626
                    
                    
                    $
                    62,510
                    
                    
                    $
                    22,116


Equipment
and leaseholds are recorded at cost and are amortized on the declining balance
basis at the following annual rates:


Computer
equipment and
software                                                                     30%











The
leasehold improvements are depreciated on a straight-line basis to amortize the
costs over the two year term of the related lease.





6.           INVESTMENT
IN MINERA JUANICIPIO S.A. DE C.V.





Pursuant
to an original option agreement dated July 18, 2002 and subsequent corporate
acquisitions the Company acquired a 100% interest in the Juanicipio Property in
exchange for total consideration of $919,458. Of this amount, $656,125 was paid
in cash and 366,667 common shares of the Company were issued at a value of
$263,333.





Pursuant
to a letter of intent dated March 17, 2005 and a formal agreement effective July
1, 2005 (the “Agreement”) with Industrias Peñoles, S.A. de C.V. (“Peñoles”), the
Company granted to Peñoles or any of its subsidiaries an option to earn a 56%
interest in the Juanicipio Property in Mexico in consideration for Peñoles
conducting US$5,000,000 of exploration on the property over four years and
Peñoles purchasing US$1,000,000 of Common Shares of the Company in two tranches
for US$500,000 each.





In mid
2007, Peñoles met all of the earn-in requirements of the
Agreement.  In December 2007, the Company and Peñoles created an
operating company named Minera Juanicipio, S.A. de C.V. (“Minera Juanicipio”)
for the purpose of holding and operating the Juanicipio Property. In 2008,
Peñoles restructured and transferred its 56% interest of Minera Juanicipio into
a new company called Compania Fresnillo S.A. de C.V., which then transferred its
interest to Fresnillo plc (“Fresnillo”) pursuant to a statutory
merger.  Minera Juanicipio is held as to 56% by Fresnillo and 44% by
the Company.  In December 2007 all mineral rights and surface rights
relating to the Juanicipio project held by
the Company and Peñoles, respectively, were ceded into Minera
Juanicipio.  Minera Juanicipio is currently governed by a shareholders
agreement.  All costs relating to the project and Minera Juanicipio
are required to be shared by the Company and Fresnillo pro-rata based on their
ownership interests in Minera Juanicipio.





To
capitalize Minera Juanicipio, the Company invested 63.40 million pesos ($6.025
million) into Minera Juanicipio while Peñoles invested 80.69 million pesos
($7.668 million). MAG then received a payout from Minera Juanicipio of 26.41
million pesos ($2.510 million) against its contribution of the Juanicipio
mineral rights while Peñoles received 70.28 million pesos ($6.679 million)
against its contribution of surface rights and the Company’s 44% share of
exploration costs incurred by Peñoles subsequent to the completion of their
earn-in and up to December 31, 2007.





The
Company has recorded its investment in Minera Juanicipio using the equity basis
of accounting. The cost of the investment includes the carrying value of the
deferred exploration and mineral and surface rights costs incurred by the
Company on the Juanicipio Property and contributed to Minera Juanicipio plus the
required net cash investment to establish its 44% interest.





Effective
December 31, 2007 the Company concluded that the functional currency of Minera
Juanicipio was the Mexican peso as expenditures in Minera Juanicipio were
principally being incurred in pesos and funded by advances from the venturers
which were denominated in pesos. The Company translates its net investment in
Minera Juanicipio using the current rate method with translation gains and
losses recorded in other comprehensive loss which is a component of
shareholders’ equity, until there is a realized reduction in the net
investment.





The
Company owns a 44% interest in Minera Juanicipio. The Company’s historical
investment relating to its interest in the Juanicipio property and Minera
Juanicipio are detailed as follows:




Dec.
      31, 2008
                
                Dec.
      31,2007Camp
      costs
                $         14,024
                
                $         13,108Geological
                78,452
                
                66,190Geophysical
                8,163
                
                10,905Gov't
      fees and licenses
                10,131
                
                8,764Travel
                5,736
                
                3,906Site
      administration
                1,667
                
                2,292Cash
      contributions to the Minera Juanicipio
                2,404,671
                
                6,025,0182,522,844
                
                6,130,183Balance,
      beginning of year
                5,948,361
                
                3,044,509$    8,471,205
                
                $    9,174,692Recoveries
                -
                
                (2,509,553)Translation
      adjustment
                (304,458)
                
                (716,778)Balance,
      end of year
                $    8,166,747
                
                $    5,948,361


Summary
of the Audited Statements of Minera Juanicipio





At
December 31, 2008 the assets of Minera Juanicipio consisted of cash and short
term investments in the amount of 18.67 million pesos ($1.65 million), value
added taxes recoverable and other receivables in the amount of 7.74 million
pesos ($0.68 million) and mineral, surface rights and exploration expenditures
in the amount of 175.35 million pesos ($15.52 million).  Payables to
Peñoles and other vendors for exploration work amounted to 0.66 million pesos
($58,800) while shareholders equity was 201.09 million pesos ($17.80
million).








7.           MINERAL
RIGHTS AND DEFERRED EXPLORATION COSTS








(Batopilas)
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          Sierra
      de
                          
                          
                          Cinco
      deDon
      Fippi
                          
                          
                          Guigui
                          
                          
                          Lagartos
      NW
                          
                          
                          Lagartos
      SE
                          
                          
                          Ramirez
                          
                          
                          Mayo
                          
                          
                          Sello
                          
                          
                          Other
                          
                          
                          TotalAcquisition
      costs ofmineral
      rightsBal.,
      beginning of year
                          
                          $
                          1,422,672
                          
                          
                          $
                          1,571,172
                          
                          
                          $
                          50,032
                          
                          
                          $
                          -
                          
                          
                          $
                          800,736
                          
                          
                          $
                          610,448
                          
                          
                          $
                          105,852
                          
                          
                          $
                          510,495
                          
                          
                          $
                          5,071,407Incurred
      during year
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          36,458
                          
                          
                          
                          559,011
                          
                          
                          
                          762,968
                          
                          
                          
                          12,983
                          
                          
                          
                          555,068
                          
                          
                          
                          1,926,488Less
      amounts written off
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          (118,835
                          )
                          
                          
                          -
                          
                          
                          
                          (118,835
                          )Balance,
      end of year
                          
                          $
                          1,422,672
                          
                          
                          $
                          1,571,172
                          
                          
                          $
                          50,032
                          
                          
                          $
                          36,458
                          
                          
                          $
                          1,359,747
                          
                          
                          $
                          1,373,416
                          
                          
                          $
                          -
                          
                          
                          $
                          1,065,563
                          
                          
                          $
                          6,879,060Deferred
      exploration costsCamp
      costs
                          
                          $
                          92,205
                          
                          
                          $
                          -
                          
                          
                          $
                          22,855
                          
                          
                          $
                          79,831
                          
                          
                          $
                          19,892
                          
                          
                          $
                          322,858
                          
                          
                          $
                          13,429
                          
                          
                          $
                          65,541
                          
                          
                          $
                          616,611Drilling
                          
                          
                          913,389
                          
                          
                          
                          -
                          
                          
                          
                          778,171
                          
                          
                          
                          537,063
                          
                          
                          
                          -
                          
                          
                          
                          6,084,484
                          
                          
                          
                          485,327
                          
                          
                          
                          458,376
                          
                          
                          
                          9,256,810Geochemical
                          
                          
                          59,362
                          
                          
                          
                          -
                          
                          
                          
                          4,623
                          
                          
                          
                          45,229
                          
                          
                          
                          847
                          
                          
                          
                          384,988
                          
                          
                          
                          13,584
                          
                          
                          
                          19,432
                          
                          
                          
                          528,065Geological
                          
                          
                          260,151
                          
                          
                          
                          -
                          
                          
                          
                          93,775
                          
                          
                          
                          209,652
                          
                          
                          
                          55,298
                          
                          
                          
                          807,465
                          
                          
                          
                          48,665
                          
                          
                          
                          258,769
                          
                          
                          
                          1,733,775Geophysical
                          
                          
                          63,829
                          
                          
                          
                          -
                          
                          
                          
                          8,162
                          
                          
                          
                          3,398
                          
                          
                          
                          2,063
                          
                          
                          
                          214,263
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          291,715Gov't
      fees and licenses
                          
                          
                          9,774
                          
                          
                          
                          12,529
                          
                          
                          
                          162,886
                          
                          
                          
                          204,838
                          
                          
                          
                          37,440
                          
                          
                          
                          77,380
                          
                          
                          
                          27,424
                          
                          
                          
                          101,617
                          
                          
                          
                          633,888Site
      administration
                          
                          
                          14,863
                          
                          
                          
                          -
                          
                          
                          
                          6,453
                          
                          
                          
                          12,120
                          
                          
                          
                          4,426
                          
                          
                          
                          44,452
                          
                          
                          
                          2,535
                          
                          
                          
                          13,252
                          
                          
                          
                          98,101Travel
                          
                          
                          36,988
                          
                          
                          
                          -
                          
                          
                          
                          6,377
                          
                          
                          
                          17,522
                          
                          
                          
                          10,677
                          
                          
                          
                          58,062
                          
                          
                          
                          6,696
                          
                          
                          
                          33,694
                          
                          
                          
                          170,016Transport
      and shipping
                          
                          
                          2,623
                          
                          
                          
                          -
                          
                          
                          
                          805
                          
                          
                          
                          629
                          
                          
                          
                          -
                          
                          
                          
                          3,405
                          
                          
                          
                          50
                          
                          
                          
                          151
                          
                          
                          
                          7,6631,453,184
                          
                          
                          
                          12,529
                          
                          
                          
                          1,084,107
                          
                          
                          
                          1,110,282
                          
                          
                          
                          130,643
                          
                          
                          
                          7,997,357
                          
                          
                          
                          597,710
                          
                          
                          
                          950,832
                          
                          
                          
                          13,336,644Bal.,
      beginning of year
                          
                          
                          3,344,413
                          
                          
                          
                          1,450,400
                          
                          
                          
                          120,853
                          
                          
                          
                          4,220,148
                          
                          
                          
                          434,628
                          
                          
                          
                          2,775,679
                          
                          
                          
                          504,474
                          
                          
                          
                          152,143
                          
                          
                          
                          13,002,738Less
      amounts written off
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          (1,102,184
                          )
                          
                          
                          -
                          
                          
                          
                          (1,102,184
                          )Balance,
      end of year
                          
                          $
                          4,797,597
                          
                          
                          $
                          1,462,929
                          
                          
                          $
                          1,204,960
                          
                          
                          $
                          5,330,430
                          
                          
                          $
                          565,271
                          
                          
                          $
                          10,773,036
                          
                          
                          $
                          -
                          
                          
                          $
                          1,102,975
                          
                          
                          $
                          25,237,198





(Batopilas)
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  Sierra
      de
                  
                  
                  
                  
                  
                  Cinco
      deDon
      Fippi
                  
                  
                  Guigui
                  
                  
                  Lagartos
      NW
                  
                  
                  Lagartos
      SE
                  
                  
                  Ramirez
                  
                  
                  Adargas
                  
                  
                  Mayo
                  
                  
                  Sello
                  
                  
                  Other
                  
                  
                  TotalAcquisition
      costs ofmineral
      rightsBal.,
      beginning of year
                  
                  $
                  1,422,672
                  
                  
                  $
                  1,571,172
                  
                  
                  $
                  50,032
                  
                  
                  $
                  -
                  
                  
                  $
                  527,645
                  
                  
                  $
                  432,061
                  
                  
                  $
                  428,610
                  
                  
                  $
                  28,143
                  
                  
                  $
                  124,344
                  
                  
                  $
                  4,584,679Incurred
      during year
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  273,091
                  
                  
                  
                  -
                  
                  
                  
                  181,838
                  
                  
                  
                  77,709
                  
                  
                  
                  399,253
                  
                  
                  
                  931,891Less
      amounts written off
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (432,061
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (13,102
                  )
                  
                  
                  (445,163
                  )Balance,
      end of year
                  
                  $
                  1,422,672
                  
                  
                  $
                  1,571,172
                  
                  
                  $
                  50,032
                  
                  
                  $
                  -
                  
                  
                  $
                  800,736
                  
                  
                  $
                  -
                  
                  
                  $
                  610,448
                  
                  
                  $
                  105,852
                  
                  
                  $
                  510,495
                  
                  
                  $
                  5,071,407Deferred
      exploration costsCamp
      costs
                  
                  $
                  126,424
                  
                  
                  $
                  439
                  
                  
                  $
                  1,596
                  
                  
                  $
                  65,246
                  
                  
                  $
                  2,814
                  
                  
                  $
                  -
                  
                  
                  $
                  76,692
                  
                  
                  $
                  14,942
                  
                  
                  $
                  9,112
                  
                  
                  $
                  297,265Drilling
                  
                  
                  477,758
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,367,777
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,048,855
                  
                  
                  
                  385,505
                  
                  
                  
                  -
                  
                  
                  
                  3,279,895Geochemical
                  
                  
                  54,735
                  
                  
                  
                  -
                  
                  
                  
                  299
                  
                  
                  
                  51,220
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  54,195
                  
                  
                  
                  8,316
                  
                  
                  
                  -
                  
                  
                  
                  168,765Geological
                  
                  
                  398,558
                  
                  
                  
                  8,469
                  
                  
                  
                  7,517
                  
                  
                  
                  169,436
                  
                  
                  
                  31,323
                  
                  
                  
                  -
                  
                  
                  
                  229,781
                  
                  
                  
                  47,994
                  
                  
                  
                  43,852
                  
                  
                  
                  936,930Geophysical
                  
                  
                  117,382
                  
                  
                  
                  50,890
                  
                  
                  
                  36,666
                  
                  
                  
                  206,199
                  
                  
                  
                  205,468
                  
                  
                  
                  875
                  
                  
                  
                  56,175
                  
                  
                  
                  36,606
                  
                  
                  
                  -
                  
                  
                  
                  710,261Gov't
      fees and licenses
                  
                  
                  6,495
                  
                  
                  
                  12,320
                  
                  
                  
                  73,381
                  
                  
                  
                  128,604
                  
                  
                  
                  35,500
                  
                  
                  
                  882
                  
                  
                  
                  58,327
                  
                  
                  
                  3,105
                  
                  
                  
                  96,767
                  
                  
                  
                  415,381Site
      administration
                  
                  
                  27,449
                  
                  
                  
                  1,136
                  
                  
                  
                  831
                  
                  
                  
                  18,085
                  
                  
                  
                  658
                  
                  
                  
                  -
                  
                  
                  
                  14,897
                  
                  
                  
                  2,842
                  
                  
                  
                  1,061
                  
                  
                  
                  66,959Travel
                  
                  
                  51,445
                  
                  
                  
                  226
                  
                  
                  
                  563
                  
                  
                  
                  13,110
                  
                  
                  
                  9,735
                  
                  
                  
                  -
                  
                  
                  
                  23,283
                  
                  
                  
                  5,164
                  
                  
                  
                  1,406
                  
                  
                  
                  104,932Transport
      and shipping
                  
                  
                  1,322
                  
                  
                  
                  627
                  
                  
                  
                  -
                  
                  
                  
                  3,110
                  
                  
                  
                  -
                  
                  
                  
                  1,681
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  6,7401,261,568
                  
                  
                  
                  74,107
                  
                  
                  
                  120,853
                  
                  
                  
                  2,022,787
                  
                  
                  
                  285,498
                  
                  
                  
                  3,438
                  
                  
                  
                  1,562,205
                  
                  
                  
                  504,474
                  
                  
                  
                  152,198
                  
                  
                  
                  5,987,128Bal.,
      beginning of year
                  
                  
                  2,082,845
                  
                  
                  
                  1,376,293
                  
                  
                  
                  -
                  
                  
                  
                  2,197,361
                  
                  
                  
                  149,130
                  
                  
                  
                  314,778
                  
                  
                  
                  1,213,474
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  7,333,881Less
      amounts written off
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (318,216
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (55
                  )
                  
                  
                  (318,271
                  )Balance,
      end of year
                  
                  $
                  3,344,413
                  
                  
                  $
                  1,450,400
                  
                  
                  $
                  120,853
                  
                  
                  $
                  4,220,148
                  
                  
                  $
                  434,628
                  
                  
                  $
                  -
                  
                  
                  $
                  2,775,679
                  
                  
                  $
                  504,474
                  
                  
                  $
                  152,143
                  
                  
                  $
                  13,002,738










(a)
            Don
      Fippi (Batopilas) Property


The
Company has a 100% interest in the Don Fippi mining concessions located in the
Batopilas, Chihuahua district of Mexico, subject to a royalty of 4.5% of the Net
Smelter returns obtained from the property. To December 31, 2008, the Company
has incurred $4,797,597 in exploration costs on the property.





(b)           Guigui
Property


The
Company has a 100% interest in mining concessions located in the Santa Eulalia
(Guigui), Chihuahua district of Mexico, subject to a royalty of 2.5% of the Net
Smelter returns obtained from the property. To December 31, 2008, the Company
has incurred $1,462,929 in exploration costs on the property.





(c)           Lagartos
Properties


The
Company has acquired a 100% interest in exploration concessions on mining claims
(Lagartos) on the Fresnillo trend to the northwest and southeast of the
Juanicipio property. This exploration concession enables the Company to explore
the mining claim covered by the concession to December 2009, subject to the
Company paying any applicable annual tax or other regulatory
charges.





During
the year ended December 31, 2008, the Company entered into an option agreement
to acquire a 100% interest in certain mining concessions internal to the
Lagartos SE property. The Company is obligated to make scheduled cash payments
totalling US$500,000 (of which $ 36,458 (US$30,000) has been paid) to June 10,
2011.





To
December 31, 2008, the Company has incurred $1,204,960 in exploration costs on
the Lagartos NW property and $5,330,430 in exploration costs on the Lagartos SE
property.





(d)           Sierra
Ramirez Property


Under a
2003 agreement, as later amended in 2006, the Company has an option to acquire a
100% interest in certain mining concessions located in the Sierra Ramirez
district in Durango, Mexico. Under the amended terms, the Company will issue
Minera Rio Tinto S.A. de C.V. 20,000 common shares ($55,000) of the Company
(issued) and make scheduled cash payments totalling US$1,300,000 (of which
US$375,000 has been paid or accrued) to December 14, 2010, with a final payment
of US$650,000 of which up to US$500,000 may be paid in the common shares of the
Company.  The Company also paid a finder’s fee of 25,000 common shares
($25,746) of the Company in relation to this property.  To December
31, 2008, the Company has incurred $565,271 in exploration costs on the
property.





During
the year ended December 31, 2007, the Company entered into five separate option
agreements to acquire a 100% interest in certain mining concessions all of which
are internal to the Sierra Ramirez property. The Company is obligated to make
scheduled cash payments totalling US$5,537,325 (of which $485,749 (US$415,625)
has been paid) to December 31, 2013.





(e)           Adargas
Property


On
February 14, 2004, the Company entered into an option agreement to acquire a
100% interest in the Adargas property. During the period ended June 30, 2007 the
Company terminated its option agreement, and consequently, total deferred
acquisition and exploration costs of $750,277 were written-off.





(f)           Cinco
de Mayo Property


On
February 26, 2004, the Company entered into an option agreement to acquire a
100% interest in the Cinco de Mayo property (the “Cinco de Mayo Property”),
subject to a 2.5% net smelter returns royalty. Under the terms of the agreement,
as later amended, the Company was obligated to make scheduled cash and share
payments together worth US$1,000,000 (US$650,000 in cash and share payments
made) and incur certain exploration expenditures totalling US$1,000,000 by July
26, 2009 (incurred). To December 31, 2008, the Company paid $661,721(US$550,000)
in cash, issued 165,670 common shares at a value of $266,630 and completed
approximately $10,773,036 in exploration costs.





During
the year ended December 31, 2008, the Company acquired a 100% interest in
certain mining concessions internal to the Cinco de Mayo property from two
separate vendors. The Company made a one-time payment of $445,065 (US$350,000)
for these mining concessions.





(g)
            Sello
      Property


On
December 8, 2006, the Company entered into an agreement to acquire a 100%
interest in the Sello and Sello Uno claims located in Zacatecas State, by making
scheduled option payments totalling US$1,000,000 plus applicable value added tax
over a three year period (of which $52,816 (US$50,000) has been paid to March
31, 2008). During the current year the Company entered into an agreement to
acquire a 100% interest in the El Oro claims located in Zacatecas State, by
making scheduled option payments totalling US$125,000 plus applicable value
added tax over one year (of which $66,019 (US$62,500) was paid to March 31,
2008). It was decided in April 2008 that the Company would terminate these
option agreements, and consequently, total deferred acquisition and exploration
costs of $1,221,019 were written-off as of June 30, 2008.





(h)           Other Properties


During
the years ending December 31, 2006 to December 31, 2008, the Company optioned
other exploration concessions on several mining claims in Mexico. To December
31, 2008, the Company has paid $1,065,563 in acquisition costs. The Company is
obligated to make additional scheduled cash payments totalling US$2,180,000 to
October 31, 2013 if it plans to maintain these concessions.





The other
properties consist of the Zacatecas claims, the La Lorena claims, the Nuevo
Mundo claims, the Camino Duro claims, and the Salemex claim options. During the
year ended December 31, 2008, the Company completed approximately $812,814 in
exploration costs including $458,376 in drilling costs on the La Lorena claims.
Another $138,018 in exploration costs were spent on the remaining other
properties.





8.           SHARE
CAPITAL





(a)           Issued
and outstanding





At
December 31, 2008, there were 49,155,566 shares outstanding.





During
the year ended December 31, 2008, 1,137,000 share purchase warrants were
exercised for proceeds of $11,370,000 and 1,064,370 stock options were exercised
for cash proceeds of $1,482,195.





During
the year ended December 31, 2007, 2,883,486 share purchase warrants were
exercised for proceeds of $5,994,656 and 382,100 stock options were exercised
for cash proceeds of $811,362.





On
November 27, 2007, the Company closed a brokered private placement for 3,000,000
common shares of the Company at a price of $15.50 per share for gross proceeds
of $46,500,000. The Company paid a 5.0% commission to the underwriters on this
placement. Legal, syndicate, and filing costs totaled an additional
$208,484.





On
February 14, 2007, the Company closed a brokered private placement for 2,550,000
units at $7.25 a unit for gross proceeds of $18,487,500. Each unit was comprised
of one common share and one-half of one common share purchase warrant, with each
whole warrant exercisable for one common share at a price of $10.00 until
February 14, 2008. Of the gross proceeds, $15,999,799 was assigned to the common
shares included in the units and $2,487,701 to the warrants. The Company paid a
6.0% cash commission to the underwriters on this placement. Legal, syndicate,
and filing costs totaled an additional $127,902.





On
February 14, 2007, the Company closed a non-brokered private placement for
195,000 units, while a further 15,000 units were closed February 15, 2007 for a
total of 210,000 at $7.25 a unit for gross proceeds of $1,522,500. Each unit is
comprised of one common share and one-half of one common share purchase warrant,
with each whole warrant exercisable for one common share at a price of $10.00
until February 14, 2008 (and in some cases February 15, 2008).  Of the
gross proceeds, $1,317,630 was assigned to the common shares included in the
units and $204,870 to the warrants. The Company paid a 6.0% finder’s fee on this
placement comprised of $91,350 in cash.




(b)           Stock
options





The
Company has entered into Incentive Stock Option Agreements (“Agreements”) with
directors, officers and employees. The maximum number of stock options which may
be granted is limited to 10% of the issued and outstanding
shares.  The Company has proposed an amendment to the existing plan
for approval by Shareholders at the upcoming Annual General and Special Meeting
which includes fixing the maximum number of stock options which may be granted
to 4,921,056 (10% of the current issued and outstanding common shares of the
Company).  For more information on the current Stock Option Plan or
the Amendments to the Stock Option Plan go to www.sedar.com.





The
following table summarizes options outstanding at December 31,
2008:





Number
                  
                  
                  Weighted
      average
                  
                  
                  Weightedoutstanding
      at
                  
                  
                  remaining
                  
                  
                  averageExercise
                  
                  
                  Dec.
      31,
                  
                  
                  contractual
      life
                  
                  
                  exerciseprice
                  
                  
                  2008
                  
                  
                  (years)
                  
                  
                  price$
                  1.00
                  
                  
                  
                  60,000
                  
                  
                  
                  1.92
                  
                  
                  
                  1.001.06
                  
                  
                  
                  525,000
                  
                  
                  
                  1.05
                  
                  
                  
                  1.061.14
                  
                  
                  
                  15,000
                  
                  
                  
                  1.76
                  
                  
                  
                  1.142.00
                  
                  
                  
                  50,000
                  
                  
                  
                  2.46
                  
                  
                  
                  2.002.46
                  
                  
                  
                  145,000
                  
                  
                  
                  2.56
                  
                  
                  
                  2.463.00
                  
                  
                  
                  505,000
                  
                  
                  
                  2.10
                  
                  
                  
                  3.003.12
                  
                  
                  
                  18,000
                  
                  
                  
                  2.67
                  
                  
                  
                  3.123.56
                  
                  
                  
                  13,000
                  
                  
                  
                  2.22
                  
                  
                  
                  3.564.04
                  
                  
                  
                  152,830
                  
                  
                  
                  2.25
                  
                  
                  
                  4.045.36
                  
                  
                  
                  477,500
                  
                  
                  
                  2.95
                  
                  
                  
                  5.367.56
                  
                  
                  
                  35,000
                  
                  
                  
                  3.07
                  
                  
                  
                  7.567.62
                  
                  
                  
                  50,000
                  
                  
                  
                  4.73
                  
                  
                  
                  7.628.80
                  
                  
                  
                  200,000
                  
                  
                  
                  3.15
                  
                  
                  
                  8.809.40
                  
                  
                  
                  45,000
                  
                  
                  
                  3.25
                  
                  
                  
                  9.4010.01
                  
                  
                  
                  241,202
                  
                  
                  
                  4.50
                  
                  
                  
                  10.0112.91
                  
                  
                  
                  279,875
                  
                  
                  
                  4.12
                  
                  
                  
                  12.9113.75
                  
                  
                  
                  25,000
                  
                  
                  
                  3.77
                  
                  
                  
                  13.7514.15
                  
                  
                  
                  425,000
                  
                  
                  
                  3.79
                  
                  
                  
                  14.1514.70
                  
                  
                  
                  50,000
                  
                  
                  
                  3.59
                  
                  
                  
                  14.703,312,407
                  
                  
                  
                  2.81
                  
                  
                  $
                  6.59


At
December 31, 2008 a total of 3,269,907 of the outstanding share options were
exercisable, having a weighted average remaining contractual life of 2.80 years
and a weighted average exercise price of $6.55.





At the
date the Agreements are entered into, the exercise price of each option is set
no lower than the fair value of the common shares at the date of
grant.





The following table summarizes
the Company’s options:





Period
      ended
                  
                  
                  Weighted
                  
                  
                  Period
      ended
                  
                  
                  WeightedDec.
      31,
                  
                  
                  average
                  
                  
                  Dec.
      31,
                  
                  
                  average2008
                  
                  
                  exercise
                  
                  
                  2007
                  
                  
                  exerciseprice
                  
                  
                  
                  
                  
                  priceBalance
      outstanding,beginning
      of year
                  
                  
                  3,805,700
                  
                  
                  $
                  4.44
                  
                  
                  
                  3,352,800
                  
                  
                  $
                  2.31Activity
      during the periodOptions
      granted
                  
                  
                  578,765
                  
                  
                  
                  11.23
                  
                  
                  
                  835,000
                  
                  
                  
                  11.93Options
      forfeited
                  
                  
                  (7,688
                  )
                  
                  
                  11.75
                  
                  
                  
                  -
                  
                  
                  
                  -Options
      exercised
                  
                  
                  (1,064,370
                  )
                  
                  
                  1.39
                  
                  
                  
                  (382,100
                  )
                  
                  
                  2.12Balance
      outstanding,end
      of period
                  
                  
                  3,312,407
                  
                  
                  $
                  6.59
                  
                  
                  
                  3,805,700
                  
                  
                  $
                  4.44


During
the year ended December 31, 2008, the Company granted 578,765 stock options, of
which 7,688 were later cancelled, (December 31, 2007 – 835,000 granted and nil
cancelled). The Company has recorded $2,539,011 (December 31, 2007 - $5,256,566)
of compensation expense relating to stock options vested to employees and
consultants in the year ended December 31, 2008.





For the
year ended December 31, 2008, stock-based compensation expense was determined
using an option pricing model assuming no dividends are to be paid, a weighted
average volatility of the Company’s share price of 49%, an annual risk free
interest rate of 3.37% and on expected remaining term to expiry of three
years.  (December 31, 2007 – assuming: no dividends are to be paid, a
weighted average volatility of the Company’s share price of 81.5%, an annual
risk free interest rate of 4.27% and an expected remaining term to expiry of
three years.)





(c)           Share
purchase warrants




WeightedaverageNumber
                  
                  
                  exerciseof
      warrants
                  
                  
                  priceBalance
      at December 31, 2006
                  
                  
                  2,640,486
                  
                  
                  
                  1.35Issued
      in connection with issuance of commonshares
                  
                  
                  1,380,000
                  
                  
                  
                  10.00Exercised
      and converted into common shares
                  
                  
                  (2,883,486
                  )
                  
                  
                  2.08Balance
      at December 31, 2007
                  
                  
                  1,137,000
                  
                  
                  $
                  10.00Exercised
      and converted into common shares
                  
                  
                  (1,137,000
                  )
                  
                  
                  10.00Balance
      at December 31, 2008
                  
                  
                  -
                  
                  
                  $
                  -


9.           CAPITAL
RISK MANAGEMENT





The
Company’s objectives in managing its liquidity and capital are to safeguard the
Company’s ability to continue as a going concern and to provide financial
capacity to meet its strategic objectives. The capital structure of the Company
consists of equity attributable to common shareholders, comprising of issued
share capital, common share purchase warrants, contributed surplus, accumulated
other comprehensive loss and accumulated deficit.





The
Company manages the capital structure and makes adjustments to it in light of
changes in economic conditions and the risk characteristics of the underlying
assets. To maintain or adjust the capital structure, the Company may attempt to
issue new shares, issue new debt, acquire or dispose of assets.





In order
to facilitate the management of its capital requirements, the Company prepares
annual expenditure budgets that are updated as necessary depending on various
factors, including successful capital deployment and general industry
conditions. The annual and updated budgets are approved by the Board of
Directors. The Company does not pay out dividends.





As at
December 31, 2008, the Company does not have any long-term debt and is not
subject to any externally imposed capital requirements.





The
Company expects its current capital resources will be sufficient to carry its
exploration and development plans and operations through its current operating
period.





10.           FINANCIAL
RISK MANAGEMENT





The
Company’s operations consist of the acquisition, exploration and development of
district scale projects in the Mexican silver belt. The Company examines the
various financial risks to which it is exposed and assesses the impact and
likelihood of occurrence. These risks may include credit risk, liquidity risk,
currency risk, interest rate risk and other price risks. Where material, these
risks are reviewed and monitored by the Board of Directors.





(a)           Credit
risk





Counterparty
credit risk is the risk that the financial benefits of contracts with a specific
counterparty will be lost if a counterparty defaults on its obligations under
the contract. This includes any cash amounts owed to the Company by those
counterparties, less any amounts owed to the counterparty by the Company where a
legal right of set-off exists and also includes the fair values of contracts
with individual counterparties which are recorded in the financial
statements.





(i)           Trade
credit risk


The
Company is in the exploration stage and has not yet commenced commercial
production or sales. Therefore, the Company is not exposed to significant credit
risk and overall, the Company’s credit risk has not changed significantly from
the prior year.





(ii)           Cash
and cash equivalents


In order
to manage credit and liquidity risk the Company’s policy is to invest only in
highly rated investment grade instruments that have maturities of three months
or less. Limits are also established based on the type of investment, the
counterparty and the credit rating. At year end there were no cash
equivalents.





(iii)         Derivative
financial instruments


As at
December 31, 2008, the Company has no derivative financial instruments. MAG may
in the future enter into derivative financial instruments in order to manage
credit risk. Only derivative financial instruments with highly rated investment
grade counterparties will be considered.







At
year end the Company had a receivable of $2,190,188 from the Mexican government
for value added tax. Although full recovery is expected by management,
recoveries to date have been intermittent.


The
Company’s maximum exposure to credit risk on its Mexican operations at December
31, 2008 is as follows:





Dec.
      31, 2008
                          
                          
                          Dec.
      31, 2007Cash
                          
                          $
                          414,359
                          
                          
                          $
                          2,409,429Accounts
      Receivable
                          
                          
                          2,294,571
                          
                          
                          
                          596,713$
                          2,708,930
                          
                          
                          $
                          3,006,142


(b)           Liquidity
risk





The
Company has in place a planning and budgeting process to help determine the
funds required to support the Company's normal operating requirements and its
exploration and development plans. The annual budget is approved by the Board of
Directors. The Company ensures that there are sufficient cash balances to meet
its short-term business requirements.





The
Company's overall liquidity risk has not changed significantly from the prior
year.





(c)           Currency
risk





The
Company’s functional currency is the Canadian dollar and therefore the Company's
net earnings and other comprehensive earnings are impacted by fluctuations in
the value of foreign currencies in relation to the Canadian dollar. The
Company's foreign currency exposures comprise limited amounts of cash and cash
equivalents and accounts payable and accrued liabilities denominated in Mexican
pesos and United States dollars. Several of the Company’s options to acquire
properties in Mexico may result in option payments by the Company denominated in
Mexican pesos or in United States dollars. The Company does not use any
derivative instruments to reduce its exposure to fluctuations in foreign
exchange rates.  Appreciation
in the Mexican peso or the United States dollar against the Canadian dollar will
increase our cost of operations. A decrease in the United States dollar or the
Mexican peso against the Canadian dollar will result in a loss on our books to
the extent we hold funds in either currency. The Company is also exposed to
inflation risk in Mexico.





The most
significant foreign exchange impact on the Company’s net income is the
translation of foreign currency based earnings into Canadian dollars in each
reporting period. All of the Company’s foreign subsidiaries report their
operating results in currencies other than the Canadian dollar. Therefore,
exchange rate movements in the Mexican peso relative to the Canadian dollar will
impact the consolidated results of the Mexican operations in Canadian dollar
terms.





The
sensitivity of the Company's net loss and other comprehensive loss for the year
ended December 31, 2008 due to changes in the exchange rate for the Mexican peso
in relation to the Canadian dollar is summarized in the following table
expressed as the increase in the net loss and comprehensive loss for each 10%
appreciation in the Canadian dollar:





Net
      Loss
                
                
                $                                1,853,288Other
      comprehensive loss
                
                
                507,662Comprehensive
      loss
                
                
                $                                2,360,950




A 10%
depreciation in the Canadian dollar against the Mexican peso would have a
similar decrease in net loss.





(d)           Interest
rate risk





The
Company’s interest revenue earned on cash and cash equivalents and on short term
investments is exposed to interest rate risk. A continued decrease in interest
rates as was seen at the end of 2008 would result in lower interest income in
2009.








11.           FAIR
VALUE DISCLOSURES





The
carrying values of cash and cash equivalents, marketable securities and accounts
payable reported in the consolidated balance sheet approximate their respective
fair values.





12.           SEGMENTED
INFORMATION





The
Company operates in one segment, being the exploration of mineral properties in
Mexico. Substantially all of the Company’s long term assets are located in
Mexico and the Company’s executive and head office is located in
Canada.





13.           RELATED
PARTY TRANSACTIONS





For the
year ended December 31, 2008, a private company controlled by an officer of the
Company received $170,424 in compensation for consulting services (2007 -
$163,840). During the year ended December 31, 2008, the officer became an
employee of the Company and received $72,085 in compensation as salary and bonus
for management services (2007 - $Nil).





The
Company paid or accrued non-executive directors fees of $305,750 during the year
ended December 31, 2008 (2007 - $138,895).





The
Company is party to a Field Services Agreement, whereby it has contracted
exploration services in Mexico with MINERA CASCABEL S.A. de C.V. (“Cascabel”)
and IMDEX Inc. (“Imdex”).  As of January 2006, these companies have a
common director with the Company.  During the period ended December
31, 2008, the Company accrued or paid Cascabel and Imdex consulting,
administration and travel fees totaling $194,590 (2007 - $134,720) and
exploration costs totaling $2,504,237 (2007 - $1,312,826) under the Field
Services Agreement.





During
the year ended December 31, 2003, the Company entered into an office
services agreement with Platinum Group Metals Ltd., a company with two common
directors and common officer. During the year ended December 31, 2008, the
Company accrued or paid Platinum Group Metals Ltd. $135,777 under the office
service agreement (2007 - $136,374).





During
the year ended December 31, 2007, the Company entered into a new two year
office lease agreement with Anthem Works Ltd. (“Anthem”), a company with a
common director.  During the year ended December 31, 2008, the Company
accrued or paid Anthem $83,556 under the office lease agreement (2007 -
$79,312).





These
transactions were incurred in the normal course of business and are measured at
the exchange amount which was the consideration established and agreed to by the
noted parties.





14.           CONTINGENCIES
AND COMMITMENTS





The
Company’s minimum payments under its office lease agreement which was entered
into during the year ended December 31, 2007, are as follows:


2009
            
            
            64,9172010
            
            
            -$
            64,917




15.
            INCOME
      TAXES





The
provision for income taxes reported differs from the amounts computed by
applying statutory Canadian federal and provincial tax rates to the loss before
tax provision due to the following:


2008
                  
                  
                  2007
                  
                  
                  2006Statutory
      tax rates
                  
                  
                  31.00
                  %
                  
                  
                  34.12
                  %
                  
                  
                  34.12
                  %Recovery
      of income taxes computed at statutory rates
                  
                  $
                  1,820,596
                  
                  
                  $
                  2,771,112
                  
                  
                  $
                  1,319,273Non-deductible
      expenses
                  
                  
                  (790,232
                  )
                  
                  
                  (1,780,305
                  )
                  
                  
                  (804,815
                  )Lower
      effective tax rate on loss in foreign jurisdictions
                  
                  
                  (42,223
                  )
                  
                  
                  (48,648
                  )
                  
                  
                  (7,443
                  )Change
      in valuation allowance
                  
                  
                  (832,445
                  )
                  
                  
                  (1,601,926
                  )
                  
                  
                  (397,481
                  )Other
                  
                  
                  (155,696
                  )
                  
                  
                  659,767
                  
                  
                  
                  (109,534
                  )Future
      income tax recovery
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -





The
approximate tax effect of each item that gives rise to the Company’s future
income tax assets at December 31, 2008 and 2007 are as follows:




2008
                
                
                2007Canadian
      operating loss carryforwards
                
                $
                2,616,778
                
                
                $
                2,025,892Mexican
      operating loss carryforwards
                
                
                8,646,430
                
                
                
                3,278,237Canadian
      capital losses carried forward
                
                
                65,629
                
                
                
                39,125Share
      issuance costs and other
                
                
                749,501
                
                
                
                928,651Total
      future income tax assets
                
                
                12,078,338
                
                
                
                6,271,905Less
      valuation allowance
                
                
                (3,962,500
                )
                
                
                (3,130,055
                )Net
      future income tax assets
                
                
                8,115,838
                
                
                
                3,141,850Future
      income tax liabilityExcess
      of book value of mineral rights and deferredexploration
      costs over tax values
                
                
                (8,115,838
                )
                
                
                (3,141,850
                )Net
      future income tax assets
                
                $
                -
                
                
                $
                -





At
December 31, 2008, the Company has non-capital loss carryforwards aggregating
$10,064,000, which expire over the period between 2009 and 2028, available to
offset future taxable income and capital loss carryforwards of $252,000, which
are available only to offset future capital gains for Canadian tax purposes and
may be carried forward indefinitely.





At
December 31, 2008, the Company has tax loss carryforwards in Mexico aggregating
$30,880,000, which expire between 2012 and 2018, available to offset future
taxable income.







16.           DIFFERENCES
BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES





These
consolidated financial statements have been prepared in accordance with Canadian
GAAP, which differs in certain respects from US GAAP and from practices
prescribed by the United States Securities and Exchange Commission
(“SEC”).





Consolidated
Balance Sheets





The
significant measurement differences between Canadian GAAP and U.S. GAAP with
respect to the Company’s consolidated balance sheets as at December 31, 2008 and
2007 are as follows:




As
      at December 31
                
                2008
                
                
                2007Total
      assets under Canadian GAAP
                
                
                95,147,510
                
                
                
                85,061,932Adjustment
      to exploration expenditures (a)
                
                
                (25,237,198
                )
                
                
                (13,002,738
                )Cumulative
      adjustment to mineral and surface rights (b)
                
                
                (601,000
                )
                
                
                (601,000
                )Adjustment
      to investment in JVV (c)
                
                
                (1,296,023
                )
                
                
                (1,263,075
                )Total
      assets under US GAAP
                
                
                68,013,289
                
                
                
                70,195,119Total
      liabilities under Canadian and US GAAP
                
                
                1,503,417
                
                
                
                637,180Shareholders'
      equity under Canadian GAAP
                
                
                93,644,093
                
                
                
                84,424,752Cumulative
      mineral properties adjustment (a)
                
                
                (25,237,198
                )
                
                
                (13,002,738
                )Cumulative
      adjustment to mineral and surface rights (b)
                
                
                (601,000
                )
                
                
                (601,000
                )Cumulative
      share of loss in significantly influencedinvestment
      (c)
                
                
                (1,822,207
                )
                
                
                (1,746,642
                )Cumulative
      adjustment to accumulated othercomprehensive
      income (c)
                
                
                526,184
                
                
                
                483,567Shareholders'
      equity under US GAAP
                
                
                66,509,872
                
                
                
                69,557,939Total
      liabilities and shareholders' equity underUS
      GAAP
                
                
                68,013,289
                
                
                
                70,195,119








Consolidated
Statement of Loss and Comprehensive Loss




Cumulativeamount
      fromApril
      21,1999
      toDecember
      31,Years
      ended December 31
              
              2008
              
              2007
              
              2006
              
              2008Net
      loss under Canadian GAAP
              
              (5,872,889)
              
              (8,149,258)
              
              (3,866,567)
              
              (21,935,093)Deferred
      exploration costs (a)
              
              (12,234,460)
              
              (5,668,857)
              
              (3,896,404)
              
              (25,237,198)Amortization
      of mineral rights (a)
              
              -
              
              -
              
              -
              
              (601,000)Equity
      in significantly influencedinvestment
      (c)
              
              (75,565)
              
              378,409
              
              (99,057)
              
              (1,822,207)Compensation
      expense (d)
              
              -
              
              -
              
              -
              
              (600,000)Stock-based
      compensation foremployees
      and directors (d)
              
              -
              
              -
              
              -
              
              482,659Net
      loss under US GAAP
              
              (18,182,914)
              
              (13,439,706)
              
              (7,862,028)
              
              (49,712,839)Other
      comprehensive income underCanadian
      GAAP
              
              (310,912)
              
              (716,778)
              
              -
              
              (1,027,690)Adjustment
      to other comprehensiveLoss
      under US GAAP (c)
              
              42,617
              
              483,567
              
              -
              
              526,184Comprehensive
      loss under US GAAP
              
              (18,451,209)
              
              (13,672,917)
              
              (7,862,028)
              
              (50,214,345)Basic
      and diluted loss per share underUS
      GAAP
              
              $             (0.38)
              
              $             (0.32)
              
              $             (0.21)









Consolidated
Statement of Cash Flows





Cumulativeamount
      fromApril
      21,1999
      toDecember
      31,Years
      ended December 31
                
                2008
                
                
                2007
                
                
                2006
                
                
                2008Operating
      activitiesOperating
      activities underCanadian
      GAAP
                
                $
                (3,128,963
                )
                
                $
                (2,608,313
                )
                
                $
                (1,827,348
                )
                
                $
                (10,149,439
                )Reclassification
      of deferred explorationcosts
      (a)
                
                
                (12,976,644
                )
                
                
                (5,760,230
                )
                
                
                (3,896,504
                )
                
                
                (26,103,912
                )Operating
      activities under US GAAP
                
                $
                (16,105,607
                )
                
                $
                (8,368,543
                )
                
                $
                (5,723,852
                )
                
                $
                (36,253,351
                )Investing
      activitiesInvesting
      activities underCanadian
      GAAP
                
                $
                (17,619,914
                )
                
                $
                (10,205,342
                )
                
                $
                (4,445,297
                )
                
                $
                (39,472,879
                )Reclassification
      of deferredexploration
      costs (a)
                
                
                12,976,644
                
                
                
                5,760,230
                
                
                
                3,896,504
                
                
                
                26,103,912Investing
      activities under US GAAP
                
                $
                (4,643,270
                )
                
                $
                (4,445,112
                )
                
                $
                (548,793
                )
                
                $
                (13,368,967
                )Financing
      activityFinancing
      activity underCanadian
      and US GAAP
                
                $
                12,864,131
                
                
                $
                69,454,032
                
                
                $
                2,219,382
                
                
                $
                101,884,879








(a)            Exploration
expenditures





Canadian
GAAP allows exploration costs to be capitalized during the search for a
commercially mineable body of ore.  Under US GAAP, exploration
expenditures can only be deferred subsequent to the establishment of
economically exploitable reserves.  For US GAAP purposes the Company
therefore expensed its exploration expenditures.





(b)           Mineral
and surface rights acquisition costs





Previously,
under US GAAP, the costs of acquisition of mineral property rights were
generally classified as intangible assets and were amortized over their useful
life, which in the case of a mineral right on a property without proven and
probable reserves, was the lesser of the period to expiry of the right and the
estimated period required to develop or further explore the mineral
assets.  Under Canadian GAAP, costs of acquiring mineral rights are
generally considered as tangible property.  As a result, for US GAAP
purposes, the Company had previously amortized the cost of the mining rights
acquired in prior years on a straight line basis over the period that further
exploration was expected to occur on the properties which varied from 15 months
to 31 months.  In 2004 the Financial Accounting standards
Board in the U.S. concluded that mineral rights have the characteristics of
tangible assets and issued EITF 04-02, Whether Mineral Rights are Tangible
or Intangible Assets.  The effect of this new standard is that
mineral rights are no longer required to be amortized to the extent they are
considered tangible assets until such date as they are commercially
exploited.  The Company adopted this standard effective
January 1, 2004 on a prospective basis and is therefore no longer
amortizing the cost of acquiring mineral property rights.





(c)           Equity
in significantly influenced investment





Under
Canadian GAAP, the investment in the Juanicipio Joint Venture is accounted for
under the equity method for which there is no material difference from US GAAP,
except that the underlying results of operations are adjusted to conform with US
GAAP prior to the calculation of the Company’s share of equity income
(loss).  The significant conforming adjustment to the operating
results relates to the accounting for mineral exploration expenditures. The
adjustment to earnings for US GAAP purposes also impacts the cumulative
translation adjustment recorded in accumulated other comprehensive
income.





(d)           Accounting
for stock-based compensation





On
January 1, 2006, the Company adopted Statement of Financial Accounting Standards
No. 123 (revised 2004), “Share-Based Payment” (SFAS 123 (R)), which requires the
recognition of compensation expense for all share-based payment awards. SFAS 123
(R) requires the Company to measure the cost of services received in exchange
for an award of equity instruments based on the grant-date fair value of the
award. The cost of such award will be recognized over the period during which
services are provided in exchange for the award, generally the vesting period.
The Company adopted SFAS 123 (R) using the modified prospective transition
method. Under this method, compensation expense recognition provisions are
applicable to new awards and to any awards modified, repurchased or cancelled
after the adoption date. Additionally, for any unvested awards outstanding at
the adoption date, compensation cost is recognized over the remaining service
period. Forfeitures are estimated at the time of grant and revised, if
necessary, in subsequent periods if actual forfeitures differ from those
estimates. Prior periods are not restated for comparative purposes.





Prior to
the adoption of SFAS 123 (R), the Company recognized stock-based compensation
using the intrinsic value method prescribed by Accounting Principles Board
Opinion No. 25 (APB 25) “Accounting for Stock Issued to Employees” and applied
the disclosure provisions of SFAS 123, “Accounting for Stock-Based Compensation”
as if the Company had applied the fair value method to measuring stock- based
compensation expense.




e)           Uncertain
tax positions





Effective
January 1, 2007, the Company adopted SFASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes (“FIN 48”). FIN 48 prescribes a
recognition and measurement model for tax positions taken or expected to be
taken in a tax return, and provides guidance on the de-recognition,
classification, interest and penalties, accounting in interim periods,
disclosure, and transition. The adoption of FIN 48 had no impact on the
Company’s consolidated financial statements prepared under U.S.
GAAP.





f)            Fair
value measurements





In
September 2006, the SFASB issued SFAS No. 157 “Fair Value Measurements”, which
defines fair value, establishes a framework for measuring fair value and expands
disclosures about fair value measurements. FAS 157 is effective for financial
statements issued for fiscal years beginning after November 15, 2007, and
interim periods within those fiscal years, and was applicable to the Company
beginning in the first quarter of 2008. Prospective application is required for
the Company. The Company is currently evaluating the impact of SFAS
157.





g)           Recent
U.S. Accounting Pronouncements





i)
            SFAS
      No. 162, The Hierarchy of Generally Accepted Accounting Principles (“SFAS
      162”)


In
      May 2008, the SFASB issued SFASB Statement No. 162, which identifies the
      sources of accounting principles and the framework for selecting the
      principles to be used in the preparation of financial statements of
      nongovernmental entities that are presented in conformity with GAAP. FAS
      162 is effective 60 days following the Security and Exchange Commission’s
      (“SEC”) approval of the Public Company Accounting Oversight Board
      amendments to AU Section 411, “The Meaning of Present Fairlyin Conformity with GAAP.” The Company does not expect the adoption
      of FAS 162 to have and impact on the Company’s consolidated financial
      position, results of operations or cash
flows.








ii)
            SFAS
      No. 141 R, Business Combinations (“SFAS
141R”)


In
November 2007, the FASB issued SFAS 141R which establishes principles and
requirements for how the acquirer of a business recognizes and measures in its
financial statements the identifiable assets acquired, the liabilities assumed,
and any non-controlling interest in the acquiree. SFAS 141R also provides
guidance for recognizing and measuring the goodwill acquired in the business
combination and determines what information to disclose to enable users of the
financial statements to evaluate the nature and financial effects of the
business combination. SFAS 141R is effective for the Company’s fiscal year
beginning January 1, 2009. Management is currently evaluating the requirements
of SFAS No. 141R and has not yet determined the impact on its financial
statements.










iii)
            SFAS
      No. 160, Noncontrolling Interests in Consolidated Financial Statements
      (“SFAS 160”)


In
November 2007, the FASB issued SFAS 160, Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51. SFAS 160 will
change the accounting and reporting for minority interests, which will be
recharacterized as noncontrolling interests and classified as a component of
equity. SFAS 160 is effective for the Company’s


fiscal
year beginning January 1, 2009. SFAS 160 requires retroactive adoption of the
presentation and disclosure requirements for existing minority interests. All
other requirements of SFAS 160 will be applied prospectively. Management is
currently evaluating the requirements of SFAS No. 160 and has not yet determined
the impact on its financial statements.







Consolidated
schedule of share capital since inception




Number
                  
                  
                  Price
                  
                  
                  AmountFor
      cash
                  
                  
                  1,500,000
                  
                  
                  $
                  0.10
                  
                  
                  $
                  150,000Balance,
      December 31, 1999
                  
                  
                  1,500,000
                  
                  
                  
                  
                  
                  
                  
                  150,000For
      cash
                  
                  
                  1,500,000
                  
                  
                  
                  0.16
                  
                  
                  
                  240,222Balance,
      December 31, 2000, 2001, 2002
                  
                  
                  3,000,000
                  
                  
                  
                  
                  
                  
                  
                  390,222For
      cash
                  
                  
                  11,500,000
                  
                  
                  
                  0.50
                  
                  
                  
                  5,109,766Conversion
      of special warrants
                  
                  
                  2,400,000
                  
                  
                  
                  0.16
                  
                  
                  
                  375,000Agent's
      administration
                  
                  
                  10,000
                  
                  
                  
                  0.50
                  
                  
                  
                  5,000For
      finders' fee
                  
                  
                  500,000
                  
                  
                  
                  0.50
                  
                  
                  
                  250,000For
      mineral property
                  
                  
                  200,000
                  
                  
                  
                  0.50
                  
                  
                  
                  100,000Issuance
      to acquire Lexington
                  
                  
                  200,000
                  
                  
                  
                  0.90
                  
                  
                  
                  180,000For
      cash on exercise of warrants
                  
                  
                  5,183,995
                  
                  
                  
                  0.20
      - 0.75
                  
                  
                  
                  3,068,996For
      cash on exercise of stock options
                  
                  
                  100,000
                  
                  
                  
                  0.20
      - 0.50
                  
                  
                  
                  26,000Balance,
      December 31, 2003
                  
                  
                  23,093,995
                  
                  
                  
                  
                  
                  
                  
                  9,504,984For
      mineral property
                  
                  
                  1,358,793
                  
                  
                  
                  0.62
      - 2.00
                  
                  
                  
                  1,578,752For
      cash on exercise of warrants
                  
                  
                  1,236,750
                  
                  
                  
                  0.20
      - 0.75
                  
                  
                  
                  480,562For
      cash on exercise of stock options
                  
                  
                  140,000
                  
                  
                  
                  0.20
      - 0.77
                  
                  
                  
                  68,070Balance,
      December 31, 2004
                  
                  
                  25,829,538
                  
                  
                  
                  
                  
                  
                  
                  11,632,368For
      cash
                  
                  
                  7,201,176
                  
                  
                  
                  0.94
                  
                  
                  
                  6,771,672For
      mineral property
                  
                  
                  1,654,679
                  
                  
                  
                  0.70
      - 0.95
                  
                  
                  
                  1,337,289For
      cash on exercise of warrants
                  
                  
                  1,400,755
                  
                  
                  
                  0.50
      - 0.75
                  
                  
                  
                  1,046,566For
      cash on exercise of stock options
                  
                  
                  105,500
                  
                  
                  
                  0.20
      - 0.50
                  
                  
                  
                  24,290Balance,
      December 31, 2005
                  
                  
                  36,191,648
                  
                  
                  
                  
                  
                  
                  
                  20,812,185For
      cash pursuant to private placement
                  
                  
                  245,716
                  
                  
                  
                  2.35
                  
                  
                  
                  577,433For
      mineral property
                  
                  
                  85,043
                  
                  
                  
                  2.25
      - 2.75
                  
                  
                  
                  204,431For
      cash on exercise of warrants
                  
                  
                  944,503
                  
                  
                  
                  1.35
                  
                  
                  
                  1,275,079For
      cash and contributed surpluson exercise of stock options
                  
                  
                  461,700
                  
                  
                  
                  0.50
      - 4.04
                  
                  
                  
                  564,814Balance,
      December 31, 2006
                  
                  
                  37,928,610
                  
                  
                  
                  
                  
                  
                  
                  23,433,942For
      cash pursuant to private placement
                  
                  
                  5,760,000
                  
                  
                  
                  7.25
      - 15.50
                  
                  
                  
                  59,955,443For
      cash and contributed surplus on exercise of warrants
                  
                  
                  2,883,486
                  
                  
                  
                  1.35
      - 10.00
                  
                  
                  
                  6,468,783For
      cash and contributed surpluson exercise of stock options
                  
                  
                  382,100
                  
                  
                  
                  0.50
      - 9.40
                  
                  
                  
                  1,247,472Balance,
      December 31, 2007
                  
                  
                  46,954,196
                  
                  
                  
                  
                  
                  
                  $
                  91,105,640For
      cash and contributed surplus on exercise of warrants
                  
                  
                  1,137,000
                  
                  
                  
                  10.00
                  
                  
                  
                  13,588,444For
      cash and contributed surpluson exercise of stock options
                  
                  
                  1,064,370
                  
                  
                  
                  0.50
      - 5.36
                  
                  
                  
                  2,328,932Balance,
      December 31, 2008
                  
                  
                  49,155,566
                  
                  
                  
                  
                  
                  
                  
                  107,023,016




logo
            MAG
      SILVER CORP.
              (An
      exploration stage company)
              Annual
      Management Discussion & Analysis
              For the
      year ended
              December 31,
      2008Dated:
      March 13, 2009


































A
copy of this report will be provided to any shareholder who requests
it.


VANCOUVER
      OFFICE
                    Suite
      328
                    550
      Burrard Street
                    Vancouver,
      BC V6C 2B5
                  604
      630 1399 phone
                    866
      630 1399 toll free
                    604
      484 4710 fax
                  
                  
                  TSX:
      MAG
                    NYSE-A:
      MVG
                    www.magsilver.com
                    info@magsilver.com
 
 MAG
SILVER CORP.
 (An
exploration stage company)
  Annual
Management Discussion & Analysis
 For
the year ended December 31, 2008


MAG
Silver Corp. (“we”, “MAG” or the “Company”) is a company focused on the
acquisition, exploration and development of district scale projects located in
the Mexican silver belt.  We are based in Vancouver, British Columbia,
Canada.  Our common shares trade on the Toronto Stock Exchange under
the symbol MAG and on the New York Stock Exchange Alternext US (formerly AMEX)
under the symbol MVG.  The Company is a “reporting issuer” in the
Provinces of British Columbia, Alberta and Ontario.




The
following management discussion and analysis (“MD&A”) of MAG focuses on the
financial condition and results of operations of the Company for the years ended
December 31, 2008 and 2007.  It is prepared as of March 13, 2009 and
should be read in conjunction with the audited consolidated financial statements
for the year ended December 31, 2008 and the audited consolidated financial
statements of the Company for the year ended December 31, 2007, together with
the notes thereto.  All dollar amounts referred to in this MD&A
are expressed in Canadian dollars except where indicated otherwise.





The
global economic environment has deteriorated significantly since the filing of
the Company’s last MD&A dated November 13, 2008.  Lower commodity
prices, currency fluctuations, banking and institutional failures, restricted
credit availability and a general reduction in the availability of equity
financing create a more uncertain environment for the Company’s
securities.  The Company remains financially strong and will monitor
the risks and opportunities of the current environment carefully. Other risks
and uncertainties faced by the Company are listed under “Risks and
Uncertainties” below and under “Risk Factors” in the Company’s Annual
Information Form (“AIF”).




The
Company believes it is a Passive Foreign Investment Company (“PFIC”), as that
term is defined in Section 1297 of the Internal Revenue Code of 1986, as
amended, and believes it will be a PFIC for the foreseeable
future.  Consequently, this classification may result in adverse tax
consequences for U.S. holders of the Company’s Common Shares. For an explanation
of these effects on taxation, U.S. shareholders and prospective U.S. holders of
the Company’s common shares are encouraged to consult their own tax
advisers.





Except
for historical information contained in this MD&A, the following disclosures
are forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995 or are future oriented financial information and
as such are based on an assumed set of economic conditions and courses of
action.  These may include estimates of future production levels,
expectations regarding mine production and development programs and capital
costs, expected trends in mineral prices and statements that describe future
plans, objectives or goals.  There is significant risk that actual
results will vary, perhaps materially, from results projected depending on such
factors as discussed under “Risks and Uncertainties” in this MD&A and other
risk factors and forward-looking statements listed in the Company’s
AIF.  More information about the Company including its AIF and recent
financial reports are available on SEDAR at www.sedar.com and on
SEC’s IDEA website at http://idea.sec.gov.





Unless
otherwise specifically noted herein, all scientific or technical information in
this MD&A, including reserve estimates was based upon information prepared
by or under the supervision of Dr. Peter Megaw, Ph.D., C.P.G., a certified
professional geologistwho is a “Qualified
Person” for purposes of National Instrument 43-101 – Standards of Disclosure for
Mineral Projects (“National Instrument 43-101”).





Cautionary
Note to Investors Concerning Estimates of Indicated Resources





This
MD&A uses the term "Indicated Resources".  MAG advises investors
that although this term is recognized and required by Canadian regulations
(under National Instrument 43-101), the U.S. Securities and Exchange Commission
does not recognize this term. Investors are cautioned not to assume
that any part or all of mineral deposits in this category will ever be converted
into reserves.





Cautionary
Note to Investors Concerning Estimates of Inferred Resources





This
MD&A uses the term "Inferred Resources". MAG advises investors that although
this term is recognized and required by Canadian regulations (under National
Instrument 43-101), the U.S. Securities and Exchange Commission does not
recognize this term. Investors are cautioned not to assume that any part or all
of the mineral deposits in this category will ever be converted into reserves.
In addition, "Inferred Resources" have a great amount of uncertainty as to their
existence, and economic and legal feasibility. It cannot be assumed that all or
any part of an Inferred Mineral Resource will ever be upgraded to a higher
category. Under Canadian rules, estimates of Inferred Mineral Resources may not
form the basis of feasibility or pre-feasibility studies, or economic studies
except for Preliminary Assessment as defined under Canadian National Instrument
43-101. Investors are cautioned
not to assume that part or all of an Inferred Resource exists, or is
economically or legally mineable.





HIGHLIGHTS
      FOR 2008




·
            At
      December 31, 2008, the Company's cash position was $52.26
      million.  The Company’s cash is invested with the Royal Bank of
      Canada in guaranteed investment certificates or in a current
      account.  The Company has no
debt.


·
            For
      the year ended December 31, 2008, the Company incurred $1,926,488 (2007:
      $931,891) in property acquisition costs and $13,336,644 (2007 -
      $5,987,128) in exploration expenditures on 100% held
      properties.


·
            The
      Company has budgeted an aggregate $17.0 million in 2009 for the Juanicipio
      Joint Venture and high-priority targets on four of its wholly-owned
      properties in Mexico.  A 25,000 metre drilling program is
      scheduled for Juanicipio while a further 30,000 metres of diamond drilling
      is planned for the Company’s wholly-owned
  projects.


·
            On
      December 1, 2008, the Company was advised of the intention of Fresbal
      Investments Ltd., a subsidiary of its joint venture partner, Fresnillo
      plc, to make an unsolicited take-over bid for all of the Company's
      outstanding common shares not currently held by Fresnillo and its
      affiliates at an offer price of US$4.54 cash per share. Fresnillo, an
      insider by virtue of its approximately 19.83% interest in the Company,
      triggered the requirement for a formal valuation by an independent
      valuator under the supervision of an independent committee of the
      Company's board of directors.  On February 1, 2009 the Company
      announced that the valuation had been suspended after the independent
      committee determined that a proper valuation could not be completed
      without critical information which is in the sole possession or control of
      Fresnillo and which Fresnillo has refused or neglected to provide to MAG
      or the valuator.  Fresnillo has asked the Ontario Securities
      Commission ("OSC") to review this decision.  A determination by
      the OSC is still pending.





SELECTED
ANNUAL INFORMATION AND FINANCIAL PERFORMANCE





The
following table summarizes selected financial data for the Company’s three most
recently completed financial years.  The information set forth below
should be read in conjunction with the consolidated audited financial statements
and related notes thereto.





Year
      ended
                  Dec.
      31, 2008
                
                
                Year
      ended
                  Dec.
      31, 2007
                
                
                Year
      ended
                  Dec.
      31, 2006Revenues(1)
                
                $
                1,964,680
                
                
                $
                915,604
                
                
                $
                208,593Net
      Loss(2)
                
                $
                (5,872,889
                )
                
                $
                (8,149,258
                )
                
                $
                (3,866,567
                )Net
      Loss per Share
                
                $
                (0.12
                )
                
                $
                (0.19
                )
                
                $
                (0.10
                )Total
      Assets
                
                $
                95,147,510
                (3)
                
                $
                85,061,932
                (3)
                
                $
                18,930,558
                (3)Long
      Term Debt
                
                Nil
                
                
                Nil
                
                
                NilDividends
                
                Nil
                
                
                Nil
                
                
                Nil





Notes:


(1)
            The
      Company’s only source of revenue during the years ending December 31, 2006
      to 2008 was interest revenue from GIC’s held by the
      Company.  The amount of interest revenue earned correlates
      directly to the amount of cash on hand during the year
      referenced.





(2)
            Excluding
      the stock compensation expense which totalled $2,539,011in 2008,
      $5,256,566 in 2007 and $2,341,159 in 2006, the Company’s net loss has been
      increasing during the years ending December 31, 2006 to 2008 due to
      several factors.   When one removes the effect of stock
      compensation expense from the recorded annual net loss, the amounts become
      $3,333,878; $2,892,692 and $1,525,408 for 2008, 2007 and 2006
      respectively.  The general year-on-year increase in this
      modified loss value is explained by the growth in the Company and its
      activities as described under “Financial Performance”
    below.





(3)
            Total
      assets have been increasing year-on-year primarily as a result of the
      Company’s cash balance, interest revenue and continued investment in
      mineral properties.  At the end of 2008, the Company held
      $52,262,561 in cash and cash equivalents compared to $60,147,307 at
      December 31, 2007 and $3,506,930 at December 31,
  2006.





The
Company’s revenues are higher for 2008 compared to 2007 due to interest earned
on larger cash balances throughout the entire year.  The net loss for
2008 is lower than in the prior year due to lower filing and transfer agent
fees, a gain in foreign exchange and lower stock based compensation calculated
on options granted during the year.  Stock based compensation expense
is a non-cash charge which decreased in 2008 primarily due to lower volatility
in the Company’s share price.





The
Company has not declared or paid dividends on its common shares.  The
Company has no intention of paying dividends on its common shares in the near
future, as it anticipates that all available funds will be used to finance the
growth of its business.




FINANCIAL PERFORMANCE




At
December 31, 2008, the Company had cash and cash equivalents on hand of
$52,262,561 versus $60,147,307 for the period ended December 31,
2007.  The Company’s cash and cash equivalents are largely due to a
financing completed late in 2007 and warrant exercises completed early in
2008.  On November 27, 2007, the Company closed a bought deal private
placement of 3.0 million common shares of the Company at a price of $15.50 per
share for gross proceeds of $46.5 million.  In February 2008 all
outstanding warrants were exercised for gross proceeds of $11.37
million.





After
deducting interest earned for the year ended December 31, 2008 of $1,964,680
compared to interest earned of $915,604 for the year ended December 31, 2007,
the operating loss for the year ended December 31, 2008 was $5,872,889 compared
to an operating loss for the same period in 2007 of $8,149,258.





The
current year loss includes a mineral property write-off of $1,221,019 (2007:
$763,434) and $2,539,011 (2007: 5,256,566) as a non-cash charge for stock
compensation expense. In 2008 the Company wrote off $1,221,019 in respect of its
Sello property due to the Company’s decision to terminate its option agreements
in respect of this property.  Excluding the mineral property write-off
and stock compensation expenses, the net loss for 2008 would be $2,112,859
(2007: $2,129,258).  See Notes 7 and 8(b) to the Company’s December
31, 2008 audited financial statements for additional details.





Stock
compensation expense is one of the Company’s largest administration
expenses.  The fair value of all stock-based compensation for the
Company is estimated using the Black-Scholes-Merton option valuation model and
is recorded in operations or capitalized against properties over the vesting
period of the options.  This option pricing model uses various data
inputs such as: if dividends are paid, the weighted average volatility of the
Company’s shares price, an annual risk-free interest rate, an expected term of
the option, as well as the market price of the Company’s shares.  As
the Company’s share price decreased from a high of the $16 range in 2007 to the
$5 range in 2008, the calculated fair value of options granted in 2007 also
decreased compared to options granted in 2008.





General
and administrative expenses for the year ended December 31, 2008, not including
mineral property write-offs or stock compensation expenses, amounted to
$4,077,539 (2007: $3,044,862).  Increases occurred in audit and
accounting fees (2008: $415,647 versus 2007: $319,896) due to regulatory
compliance work in Canada and the United States and as a result of management’s
decision to implement quarterly review engagements by the Company’s
auditors.  The Company is also required to comply with Sarbanes-Oxley
legislation in the United States resulting in additional costs for the review,
assessment and documentation of the Company’s internal and disclosure controls
as well as costs relating to an independent review and assessment of the
Company’s findings.  Filing and transfer agent fees decreased in the
period (2008: $148,866 versus 2007: $405,844) as 2007 included $345,554 in
application and listing fees for the Company’s advancement to the Toronto Stock
Exchange and its listing on the American Stock Exchange..  Telephone
and office expenses in the aggregate amount of $506,332 for 2008 (2007:
$389,980) increased due to higher activity levels and an increase in office
rental costs.  Management and consulting fees increased to $1,528,630
(2007: $778,228) due to the hiring of additional employees and an increase in
the number of directors in late 2007, resulting in higher non-executive
directors fees and higher salaries and bonuses paid in 2008.





During
the year ended December 31, 2008 the Company entered into new or amended
employment agreements with three officers and three key
employees.  These new or amended agreements include change of control
provisions.  Should a change of control of the Company occur in the
next two years, the change of control compensation for these six employees would
amount to an aggregate of approximately $1.5 million.  During the year
ended December 31, 2008, the Company also entered into retention agreements with
five directors of the Company.  These agreements include change of
control provisions.  Should a change of control of the Company occur
in the next two years, as at December 31, 2008, the change of control
compensation for these five directors would amount to an aggregate of
approximately $160,000.





Other
smaller items account for the balance of general and administrative costs for
the period.  The Company occupies office space and receives
administrative services on a contract basis.





REVIEW
OF OPERATION AND PROJECTS





During
the year ended December 31, 2008, the Company incurred $1,926,488 in property
acquisition costs (2007: $931,891).  Exploration expenditures for the
same period amounted to $13,336,644 (2007: $5,987,128).  Exploration
results to date have warranted expanded drilling programs on the Cinco de Mayo
property (see property reviews below), accounting for most of the increase in
exploration expenditures for the current period.





The
following discussion is a summary of, and an update to, disclosure in
documentation filed with regulatory agencies and available for viewing under
MAG’s profile on the SEDAR website at www.sedar.com and on
SEC’s IDEA website at http://idea.sec.gov.





Juanicipio
Property





The
Company holds 44% of Minera Juanicipio S.A. DE C.V. (“Minera Juanicipio”) which
owns and operates the Juanicipio property located in the Fresnillo District,
Zacatecas State, Mexico.  Fresnillo plc holds the remaining 56%
interest in the joint venture.  The Juanicipio property comprises
three key silver veins: the Valdecañas Vein, the Juanicipio Vein and the Encino
Vein.





A total
26,050 metres of diamond drilling was completed on the Valdecañas Vein and 2,810
metres on the Juanicipio Vein in 2008. The drill program continued to yield high
grade returns.  A total of 57 bore holes have been completed on the
property since drilling began in 2003 through December 31,
2008.  Collectively these intersections combined to show the high
grade silver gold zone to have a vertical height of almost 500 metres and have
established a strike length for this zone of approximately 1,500
metres.  The holes drilled in 2008 helped to fill in the central
portion of the eastern half of the Valdecañas Vein where there had previously
been a significant gap between drill intercepts.  They also began to
fill in areas to the west at depth.  Most of the holes reported in
2008 were outside of the 2008 initial inferred resource estimate for the
Valdecañas Vein.





Results
from two holes in 2008, holes 17P and 18P, confirmed the continuity and the
presence of a second high grade vein on the Juanicipio property named the
Juanicipio Vein.  A re-interpretation of drilling results in 2008 also
indicated the presence of an antithetic vein to the Valdecañas Vein named the
Encino Vein.  Such vein geometry is not uncommon in the Fresnillo
district and the Encino Vein has the potential to add significant tonnage to the
currently known deposit.  This newly interpreted high grade silver
vein will be one of several drilling targets to be further delineated in
2009.





Remaining
untested areas with the potential for additional new resource ounces include the
down-dip area of the western part of the Valdecañas Vein on sections G, I and F
and the up-dip area of the eastern part of the Valdecañas Vein in the vicinity
of sections R, S and T.   Many of these areas will be drilled as
a part of the 2009 drill campaign on the property.





On June
18, 2008, Minera Juanicipio announced a resource estimate for the Valdecañas
Vein. The total inferred resource estimate was 237.8 million ounces of
silver.  In addition to the silver, the resource estimate also
contains inferred resources of 480,000 ounces of gold and almost 1 billion
pounds of combined lead and zinc (457,700 tonnes).  Details of this
resource estimate can be found in the Company’s press release dated June 18,
2008 which is available www.sedar.com and
http://idea.sec.gov.





SRK
Consulting (Canada), Inc. (“SRK”) was commissioned by MAG to prepare an updated
technical report for the Valdecañas deposit.  National Instrument
43-101 is a rule developed by the Canadian Securities Administrators which
established standards for certain public disclosure of scientific and technical
information concerning mineral projects. The requirements of National Instrument
43-101 are not the same as those of the SEC.





A 2009
exploration program agreed to by the Juanicipio Joint Venture includes 25,000
metres of drilling to further define the Valdecañas Vein and to extend the
Juanicipio and Encino veins and test of prospective targets. At the time of
writing, four drills were turning on Juanicipio.  The Company expects
to contribute US $1.76 million as its 44% of the cost of the 2009 exploration
program for the Juanicipio Joint Venture.





An
updated National Instrument 43-101 compliant resource estimate was completed in
March 2009 by Scott Wilson Roscoe Postle Associates Inc. (the “Updated Resource
Estimate”).  The Updated Resource Estimate confirms Valdecañas as a
world class deposit, with the first Indicated Resource for the Valdecañas Vein
(including the Hanging Wall Vein) of 2.95 million tonnes of 879 grams per tonne
(g/t) silver, 2.22 g/t gold, 2.39% lead and 4.15% zinc.  The Inferred
Resource (Valdecañas, Footwall and Hanging Wall Veins and the Stockwork Zone)
reports 7.21 million tonnes of 458 grams g/t silver, 1.54 g/t gold, 1.89% lead
and 3.14% zinc.





The total
contained metals in the Indicated Resource are 83 million ounces of silver,
210,000 ounces of gold and 155 million pounds of lead and 269 million pounds of
zinc. The Inferred Resources contain an additional 106 million ounces of silver,
356,000 ounces of gold and 301 million pounds of lead and 498 million pounds of
zinc.





A
description of the methodology used for the Updated Resource Estimate and full
details thereof can be found in the Company’s press releases dated February 24,
2009 and March 4, 2009, both of which are available on SEDAR at www.sedar.com and on
the SEC’s IDEA website at http://idea.sec.gov.





Qualified
Person


The
updated mineral resources for the Juanicipio Joint Venture disclosed in the
discussion above have been estimated by Dr. William Roscoe, P.Eng and Mr. David
Ross, P.Geo., both employees of Scott Wilson RPA and independent of
MAG.  By virtue of their education and relevant experience Dr. Roscoe
and Mr. Ross are "Qualified Persons" for the purpose of National Instrument
43-101.  The mineral resources have been classified in accordance with
CIM Definition Standards for Mineral Resources and Mineral Reserves (December
2005).  Dr. Roscoe, P.Eng., and Mr. Ross, P.Geo. have read and
approved the contents of this MD&A as it pertains to the March 2009 mineral
resource estimate by Scott Wilson Roscoe Postle Associates Inc.  A
National Instrument 43-101 technical report documenting the mineral resource
estimate will be filed on SEDAR before April 10, 2009.





The
Company has advanced Minera Juanicipio a cumulative cash total of $8,429,689 for
its 44% of acquisition and exploration costs to December 31, 2008 (2007 -
$6,025,018).  From the total advanced to December 31, 2007 the Company
received an amount of $2,509,553 back as a repayment from Minera Juanicipio for
the Company’s contribution of mineral rights.  Costs incurred by the
Company prior to the formation of Minera Juanicipio in December 2007 were
comprised of acquisition costs of $919,458 and exploration costs of
$2,230,216.  None of these costs or advances discussed herein takes into
account subsequent currency translation adjustments.





Cinco
de Mayo Property




The Cinco
de Mayo property is located approximately 190 kilometres north of the city of
Chihuahua, in northern Chihuahua Sate, Mexico. Cinco de Mayo is the most
advanced of MAG’s five Carbonate Replacement Deposit (“CRD”) style
targets.  Approximately 44,553 metres were drilled at Cinco de Mayo in
2008.  Historically to December 31, 2008 the Company has drilled
approximately 55,556 metres on the property.  The Company is currently
undertaking a preliminary resource calculation for the project.




Drilling
in 2008 intersected widespread and high grades of silver/lead/zinc
mineralization and exploration to date has defined a coherent massive sulphide
sheet, or manto, of at least 2,000 metres strike length that remains open,
suggesting the presence of a large system characteristic of many of the large
CRD mines in the Chihuahua Trough. MAG’s focus is to determine the overall
extent of the CRD system and drilling will be split between following the José
Manto towards its source, and seeking both the source and additional
mineralization centres elsewhere on the property.





Highlights
from 2008 drilling included six holes reported on July 8, 2008, Holes 29 and 35
through 39, which extended the José Manto to an area of at least 300 metres by
400 metres and mineralization in outlying Hole 32 suggested an extension of an
additional 600 metres to the southeast. The best new intercept was Hole 08-39,
which cut 3.46 metres of 612 grams per tonne (g/t) silver (17.8 opt), 11.59%
lead and 13.20% zinc: including 2.36 metres of 772 g/t silver (22.5 opt), 13.42%
lead and 16.39% zinc.





Assay
results reported on September 18, 2008 from an additional 15 diamond drill holes
(08-40 to 08-54), ten of which encountered mineralization, confirmed extension
of the José Manto to a strike length of at least 2,000 metres, which remains
open along strike and to the southwest. Returns were notable for high grades of
zinc and lead, along with the high grade silver; latest results also show
significant gold values, with Hole 08-48 returning 1.50 metres of 6.89 g/t (0.20
opt) gold, 370 g/t (10.8 opt) silver, 19.15% lead and 9.46% zinc. The latest
holes also contain appreciable amounts of scheelite (tungsten) bearing skarn,
suggesting proximity to the source of the mineralization.





The
company continues to refine its geological model, employing a variety of
geophysical methods to “see through” the alluvial cover and improve drill target
vectoring. Gravity and induced polarization surveys completed in late spring and
early fall proved to be effective techniques that complement the airborne
surveys which successfully spotted the original discovery hole in late
2007.




Drilling
continues in 2009 with 3 rigs currently turning as part of a proposed 15,000
metre drill operation to follow up on last year’s significant
intersections.





The
Company spent $7,997,357 in exploration costs at Cinco de Mayo in 2008 (2007;
$1,562,205).  The Company has spent historical totals of $10,773,036
in exploration costs $1,373,416 in acquisition costs at Cinco de Mayo to
December 31, 2008.  Exploration programs at Cinco de Mayo by the
Company for 2008 were budgeted for approximately $2.4
million.  However, results warranted accelerated and expanded
programs. The Company’s budgeted exploration programs at Cinco de Mayo for 2009
are approximately $4,000,000.





The
Batopilas (Don Fippi) Property





The
100%-owned Batopilas project area covers 4,800 hectares in the historic
Batopilas Silver District in southwestern Chihuahua, which produced some 300
million ounces of silver between 1632 and 1912. The Batopilas land package,
assembled in 2003 by MAG, represents 94% of the Batopilas Native Silver District
and the first-ever consolidation of the district’s 70-plus mines and mineral
occurrences. Drilling to date has returned numerous high-grade silver intercepts
and encountered widespread lower grade silver lead and zinc
mineralization.





The first
half of 2008 was active with a total of eight holes successfully drilled for a
total of 3,721 metres between January and late June, 2008. An additional hole
was abandoned after three attempts to set casing totaling 103 metres failed to
engage bedrock. Three kilometres of trenching/road building and sampling were
also completed in the Animas Area.





The 2008
drill program was designed to address three major objectives: (1) test geologic
concepts developed from the 2007 mapping program, most importantly the link
between mineralization and district zoning with respect to a major dike and vein
confluence (the Asterisk) on the south flank of Animas Ridge; (2) test
geophysical targets generated by the 2007 airborne Mag-EM survey; and (3)
prepare the holes for a proposed pulse electromagnetic down hole
survey.





Results
were highlighted by returns from Hole BA08-21 in the Animas Ridge area which
encountered a broad zone of silver-lead-zinc mineralization, a total core length
of 61.2 metres grading 20.5 g/t silver, 0.66% lead and 0.84% zinc.





Drill
testing in the 2008 program proved to be consistent with a new geologic model
being developed by the Company. Overall, mineralization, structural density and
diking appear to increase to the SW, which strongly supports the model
interpretation that a major intrusion center with radial diking and mineralized
veining that may be the center of district zoning.  The results of the
2008 program combined with past results strongly suggest that additional
exploration be directed towards the south side of the Las Animas
ridge.





Work on
the property was largely curtailed in the third-quarter period and remained so
for the balance of the year, partly as a cost-saving measure, and also to allow
time for revaluation of data and planning future programs on this large, complex
project.





The
Company spent $1,453,184 in exploration costs at Batopilas in 2008 (2007:
$1,261,568) and has spent historical totals of $4,797,597 in exploration costs
and $1,422,672 in acquisition costs to December 31, 2008.  The
Company’s budgeted exploration programs at Batopilas for 2009 are approximately
$200,000.





Lagartos Land
Package





The
Company owns a 135,000 hectare land package called Lagartos surrounding the
Juanicipio property. Two claim groups, Lagartos NW and Lagartos SE, northwest
and southeast of the Juanicipio Joint Venture, lay along the “Fresnillo Silver
Trend”, a large regional structural zone hosting the world class Guanajuato,
Zacatecas and Fresnillo epithermal silver-gold vein districts.





At
Lagartos NW, a 5,000-metre drill program was conducted early in 2008, designed
to test the depth of the alluvial cover on the eastern boundary of the claim
block. Test drilling indicated that the depth of the alluvial cover exceeds 800
metres, not at all practical to consider further exploration in this
area.  Focus then turned to Lagartos SE. The Company’s holdings cover
the eastern and western extensions of the major past producing vein sets such as
the Veta Grande and the Mala Noche Veins.





Initial
surface reconnaissance work at Lagartos SE located a series of previously worked
veins on the eastern side of the Zacatecas district and sampling returned high
grade silver. Subsequent geological and geophysical work identified six drill
targets that were part of a 4,000 metre drill program which commenced in late
October 2008. As of February 2009, two drills were still turning. Results are
pending.





The
Company spent $2,194,389 in exploration costs on the combined Lagartos land
package in 2008 (2007: $2,143,640) and has spent historical totals of $6,535,390
in exploration costs and $86,490 in acquisition costs to December 31,
2008.  The Company’s budgeted exploration programs at Lagartos for
2009 are approximately $1,300,000.





Guigui
Property





Guigui is
a 100%-owned 4,500-hectare property in the Santa Eulalia Mining District, home
to the world’s largest CRD camp, producing nearly 450 million ounces of silver
and substantial amounts of lead and zinc over the nearly 300-year period from
1702-2001.





Past work
on the property has included airborne electromagnetic and magnetic surveys which
combined with a substantial database accumulated since 2006 will inform planning
of future exploration. However, only minimal work was done on maintaining the
Guigui project during 2008.





The
Company spent $12,529 in exploration costs on the Guigui property in 2008 (2007:
$74,107) and has spent historical totals of $1,462,929 in exploration costs and
$1,571,172 in acquisition costs to December 31, 2008.  The Company’s
budgeted exploration programs at Guigui for 2009 are approximately
$135,000.




Sierra
de Ramirez Property





Sierra
Ramirez is another large 100%-owned CRD prospect (65 square kilometres) within
the Sierra Ramirez District in eastern Durango State, approximately 80
kilometres west of the famous Providencia-Concepcion del Oro, Zacatecas
District. Historically, this district has produced high-grade silver ores (1-3
kg/t) from Spanish colonial times to the 1960s.





Work to
date since 2004 has included district-scale mapping and sampling, magnetic and
electromagnetic surveying, and structural and geological mapping completed in
the current year. Scheduled drilling for 2008 was delayed up until year-end due
to budgetary and market considerations.





However,
subsequent to year-end, drilling began at Sierra Ramirez as part of the 2009
exploration program approved by the Board, focused on MAG’s most immediately
prospective projects. At the time of writing, two drills were turning at Sierra
Ramirez.





The
Company spent $130,643 in exploration costs on the Sierra de Ramirez property in
2008 (2007: $285,498) and has spent historical totals of $565,271 in exploration
costs and $1,359,747 in acquisition costs to December 31, 2008.  The
Company’s budgeted exploration programs at Sierra de Ramirez for 2009 are
approximately $870,000.





Other
Properties





Five new
100% owned projects have been established in the last few years.  Most
of these projects are in the early exploration stage.  Notable amongst
these five new properties are:





Salemex
Property


The
Salemex property comprises three claim blocks optioned in June and November of
2008 covering 8,663 hectares in the state of Chihuahua. A CRD prospect, Salemex
is located within the Santa Eulalia Mining District, the world’s leading CRD
producer, and approximately 30 kilometres north of Grupo Mexico’s San Antonio
Mine. During the fourth-quarter 2008, drill targets were prepared for the
property and by January 2009, two drills were turning. Results are
pending.  The Company’s budgeted exploration programs at Salamex for
2009 are approximately $885,000.





Nuevo Mundo


The Nuevo
Mundo property is in the eastern Zacatecas State and is geologically located
along the structural trend known to host CRDs and all of our CRD projects
(Sierra Ramirez, Guigui and Cinco de Mayo). It is also not far from Peñasquito
and ties onto the eastern boundary of the Camino Rojo gold discovery of Canplats
Resources. Reconnaissance work has been carried out and results are
pending.  The Company’s budgeted exploration programs at Nuevo Mundo
for 2009 are approximately $165,000.





La
Lorena


The La
Lorena property is located just north of the Guanajuato Silver Mining District
within the Fresnillo Silver Trend and was identified from field work as a
Juanicipio look-alike and staked in early 2008. Lorena displays similar surface
alteration and trace element geochemistry is of the same magnitude that defined
the active structures drilled at Juanicipio and Valdecañas. A past producing
kaolin (clay) pit forms the centre of the target and clearly marks the top of a
hydrothermal system common to the genesis of the majority of the producing veins
of the Fresnillo Silver Trend. Several areas have been targeted for
follow-up.  Drilling was initiated in late October 2008 and 3,151
metres had been drilled to December 31, 2008. Results were
inconclusive.  The Company’s budgeted exploration programs at La
Lorena for 2009 are approximately $140,000.





OUTLOOK





The
Company continues to explore its properties in Mexico and, although the
Company’s working capital position remains strong, the Company will execute its
business plan cautiously into 2009.  Given the intended takeover bid
announced by Fresnillo plc in December 2008, the Company is pursuing an
aggressive exploration program in early 2009 in order to establish as much value
as possible in the Company’s non-Juanicipio land package.  The Company
has assessed the carrying values of its mineral properties as a result of
current market conditions.  Based on current and expected metals
prices and cost structures, management has determined that the values of the
Company’s mineral properties have not been impaired at this time. However,
should current market conditions and commodity prices worsen and/or persist for
a prolonged period of time, an impairment of mineral properties may be
required.





In
January 2009, Fresnillo and MAG approved a 2009 exploration program based on the
recommendation of Minera Juanicipio’s Technical Committee totaling US $4.0
million and an engineering budget of US $500,000 for Minera
Juanicipio.  To March 4, 2009, the Company has advanced approximately
US $7.3 million in total to Minera Juanicipio.





MAG has
approved an exploration budget of its own for approximately $17.0 million for
2009. Of this amount, $2.50 million (approx. US$1.98 million) is allotted for
the Company’s 44% share of Minera Juanicipio’s 2009 total budget of US$4.0
million for exploration plus US$500,000 for preliminary
exploration.  The balance of approximately $14.5 million is earmarked
for ten MAG-owned properties in Mexico.  Planned expenditures include
the diamond drilling of almost 30,000 metres of core on five separate
properties, air and ground based geophysical surveys, trenching, road building,
mapping, sampling, geological modeling, surface rights acquisitions, taxes and
land payments and overhead costs.  Diamond drilling is expected to
continue on the "José Manto" at Cinco de Mayo where MAG is outlining a new and
potentially significant sulphide silver/lead/zinc carbonate replacement
discovery. Drilling is also planned for 2009 at Sierra Ramirez/El Pavo, Lagartos
SE and Salemex. Drilling at Juanicipio by operator Fresnillo plc is expected to
continue at roughly the same level in 2009 as it did in 2008 at approximately
25,000 metres.  Presently, MAG has three drills operating at Cinco de
Mayo and two drills at each of Lagartos SE and Sierra Ramirez.  Single
drills are turning at Salamex and Neuvo Mundo.  At Juanicipio, four
drills in total are operating.





OUTSTANDING
SHARE DATA





The
Company’s authorized capital consists of an unlimited number of common shares
without par value.  As at March 13, 2009, the following common shares
and stock options were outstanding:








Number
      of
              Exercise
              RemainingShares
              Price
      ($)
              Life
      (mos/years)Capital
      Stock
              49,210,566Stock
      Options
              3,253,407
              $1.06
      - $14.70
              12
      mos to 5 yearsDiluted
              52,463,973





SUMMARY
OF QUARTERLY RESULTS





The
following table sets forth selected quarterly financial information for each of
the last eight (8) quarters:





Quarter
      Ending
                  
                  Revenue(1)
                  
                  
                  Net
      Loss(2)
                  
                  
                  Net
      Loss per shareDecember
      31, 2008
                  
                  $
                  313,847
                  
                  
                  $
                  (1,610,743
                  )
                  
                  $
                  (0.04
                  )September
      30, 2008
                  
                  $
                  446,078
                  
                  
                  $
                  (381,128
                  )
                  
                  $
                  (0.01
                  )June
      30, 2008
                  
                  $
                  545,586
                  
                  
                  $
                  (1,091,881
                  )
                  
                  $
                  (0.02
                  )March
      31, 2008
                  
                  $
                  659,169
                  
                  
                  $
                  (2,789,137
                  )
                  
                  $
                  (0.05
                  )December
      31, 2007
                  
                  $
                  387,939
                  
                  
                  $
                  (3,364,017
                  )
                  
                  $
                  (0.07
                  )September
      30, 2007
                  
                  $
                  211,108
                  
                  
                  $
                  (351,375
                  )
                  
                  $
                  (0.01
                  )June
      30, 2007
                  
                  $
                  200,002
                  
                  
                  $
                  (2,181,524
                  )
                  
                  $
                  (0.05
                  )March
      31, 2007
                  
                  $
                  116,555
                  
                  
                  $
                  (2,252,342
                  )
                  
                  $
                  (0.06
                  )





Notes:


(1)
            The
      Company’s primary source of revenue during the quarters listed above was
      interest revenue from GIC’s held by the Company.  The amount of
      interest revenue earned correlates directly to the amount of cash on hand
      during the period referenced.





(2)
            Net
      losses by quarter are often materially affected by the timing and
      recognition of large non-cash expenses or write-offs.  When
      adjusting these non-cash charges the results for the quarters listed show
      a more consistent trend, with a general growth in expenses over time that
      is consistent with the Company’s increased exploration and corporate
      activities over the periods as described above at “Financial
      Performance”.





FOURTH
QUARTER




During
the fourth-quarter period ended December 31, 2008, three drills were turning on
the Juanicipio property. These drills targeted the Valdecañas Vein on a 100 by
100 metre grid in a program designed to upgrade resource figures from inferred
to indicated as part of an updated 43-101 compliant resource estimate scheduled
for completion in early 2009. Several more high-grade intercepts were returned
in later 2008, further confirming continuity of  the high-grade
bonanza zone; Hole NE in the central portion of the Valdecañas Vein returned
1,338 g/t (39.0 opt), 3.56 g/t gold, 1.63% lead and 7.37% zinc over a true width
of 3.37 metres.





Additionally,
the discovery of a new high-grade vein, called the Encino Vein, was reported as
the result of a reinterpretation of a hole drilled in 2007 (returning 1,843 g/t
(53.7 opt) silver, 4.43 g/t gold, 3.54% lead and 5.96% zinc over a true width of
3.41 metres). This hole was initially labeled as a down-dip extension of the
Valdecañas Vein. Subsequent nearby intercepts of the Valdecañas Vein indicate
that the Encino is a separate north-dipping vein about 200 metres above the
south dipping Valdecañas. Such closely-spaced vein sets with opposing dips are
common in the Fresnillo Silver District and the Encino discovery represents
significant new exploration potential, with the Valdecañas remaining open
down-dip, the Encino open along strike in both directions, and its intersection
with the Valdecañas providing a highly prospective target.





In
December 2008, a meeting of the Technical Committee of Minera Juanicipio (owned
44% MAG and 54% by Fresnillo) was convened and a budget for 25,000 metres of
drilling on the Juanicipio property was approved.   This approved
drilling program resulted in an exploration budget of US$4.0 million in 2009 for
Minera Juanicipio.  In January 2009, the Board of Directors of Minera
Juanicipio approved this exploration budget and further approved a US$500,000
budget for preliminary engineering studies.





During
the fourth-quarter, drilling activity on the 100% owned Cinco de Mayo property
in northern Chihuahua State was reduced from three rigs to two. This
was a cost-saving measure in response to the dramatic market downturn in the
final quarter of 2008.





Assay
results from nine holes drilled on the Cinco de Mayo property during the period,
focused on establishing the district-scale extent, zoning and geological
controls on mineralization in what is emerging as a large Carbonate Replacement
system, were reported in December. Highlights included high-grade intercepts
of  487 g/t (14.2 opt) silver, 8.97% lead and 16.45% zinc over 5.57
metres, and 236.6 g/t (6.9 opt) silver, 1.19 g/t gold, 2.23% lead and 13.35%
zinc over 2.52 metres. Results continued to demonstrate the expected transition
from the massive sulphides of the José Manto to higher temperature
silver-lead-zinc (gold) mineralization and alteration styles leading towards the
system's source.





At the
100% owned Lagartos SE property, the Company’s holdings cover the eastern and
western extensions of the major past producing vein sets such as the Veta Grande
and the Mala Noche Veins.  Initial surface reconnaissance work at
Lagartos SE located a series of previously worked veins on the eastern side of
the Zacatecas district and sampling returned high grade silver. Subsequent
geological and geophysical work identified six drill targets that were part of a
4,000 metre drill program which commenced in late October 2008. As of February
2009, two drills were still turning. Results are pending.





La Lorena
is located just north of the Guanajuato Silver Mining District within the
Fresnillo Silver Trend and was identified from field work as a Juanicipio
look-alike and staked in early 2008. Drilling, to total 3,000 metres, was
initiated in late October and 1,081 metres had been drilled to the end of
October. Drilling continues and results are pending.





Proposed
Fresnillo Offer





On
October 15, 2008, the Company announced that it had established a Special
Committee of the Board of Directors to consider strategic alternatives in
response to the acquisition by Fresnillo plc of 19.83% of the Company's shares.
On December 1, 2008, the Company was advised of the intention by a subsidiary of
Fresnillo plc to make an unsolicited take-over bid for all of the outstanding
shares of the Company not already owned by Fresnillo and its affiliates at a
price US$4.54 per share.  This price represents a discount of
approximately 4.5% to the closing price of the common shares on the NYSE
Alternext on the day preceding Fresnillo's announcement.  As a result
of Fresnillo's share ownership, it is considered an insider of the Company under
applicable securities laws.  Accordingly, a valuation is required to
be obtained at Fresnillo’s expense under the supervision of an Independent
Committee of the Company's directors.





The
independent valuation process was commenced in December 2008 with the formation
of an independent committee of directors and the hiring of TD Securities and
Scott Wilson Roscoe Postle Associates as independent valuator and independent
technical advisor, respectively.  On February 1, 2009, the Company's
Independent Committee suspended the valuation after determining that a proper
valuation could not be completed without critical information which is in the
sole possession or control of Fresnillo and which Fresnillo refused or neglected
to provide to the Company or the Independent Valuator.  Fresnillo has
since asked the OSC to review this decision to suspend the valuation and the
matter is still pending.





LIQUIDITY
AND CAPITAL RESOURCES




At March
13, 2009 the Company had 49,210,566 issued and outstanding common
shares.  At December 31, 2008 the Company had 49,155,566 common shares
issued and outstanding.  The Company issued a total of 2,201,370
common shares during the year ended December 31, 2008 for cash proceeds of
$12,864,131 (2007: 9,025,586 for cash proceeds of $69,454,032). In the years
ended December 31, 2008 and 2007 there were no shares issued for mineral
properties.  Cash proceeds are to be spent on mineral property
acquisitions, exploration and development as well as for general working capital
purposes. The Company’s primary source of capital has been from the sale of
equity.  At December 31, 2008 the Company had cash and cash
equivalents on hand of $52,262,561 (2007: $60,147,307). The primary use of cash
during the period was for mineral property acquisition and exploration
expenditures of $15,263,132 (2007: $6,919,019) and investment in the Juanicipio
project of $2,522,844 (2007: $3,620,630), management and consulting fees of
$1,528,630 (2007: $778,228) and other general and administrative expenses of
$2,548,909 (2007: $2,266,634). The Company had $53,294,549 in working capital as
at December 31, 2008 compared to $60,380,130 at December 31, 2007.





Current
liabilities of the Company at December 31, 2008 amounted to $1,503,417 (2007:
$637,180), mostly attributable to accrued exploration (drilling)
expenses.





The
Company currently has sufficient working capital to maintain all of its
properties and planned programs for a period in excess of two
years.  In management’s opinion, the Company is able to meet its
ongoing current obligations as they become due. Based on exploration results,
the Company will select certain properties to complete purchase arrangements
on.The Company
expects to raise equity capital as it is needed.  However, there is no
assurance that additional funding will be available to the Company and it may
again become dependent upon the efforts and resources of its directors and
officers for future working capital. Management refers the reader to Notes 9 and
10 of the annual financial statements for the year ended December 31,
2008.





In the
normal course of business, the Company enters into transactions for the purchase
of supplies and services denominated in Mexican Pesos. The Company also has cash
and certain liabilities denominated in United States dollars. As a result, the
Company is subject to foreign exchange risk from fluctuations in foreign
exchange rates.





Contractual
Obligations




The
following table discloses the contractual obligations of the Company for
optional mineral property acquisition payments, optional exploration work and
committed lease obligations for office rent and equipment:







(Property
expenditures in U.S. dollars, as per agreement)




Option
      Payments and Exploration Expenditures
                
                Total
                
                
                Less
      than
                  1
      year
                
                
                1-3
      Years
                
                
                3-5
      Years
                
                More
      than
                  5
      yearsSierra
      Ramirez Property (1)
                
                $
                6,021,700
                
                
                $
                493,750
                
                
                $
                2,427,950
                
                
                $
                3,100,000
                
                NilCinco
      de Mayo Property (2)
                
                $
                350,000
                
                
                
                350,000
                
                
                Nil
                
                
                Nil
                
                NilSalemex
      Property
                
                $
                2,180,000
                
                
                $
                220,000
                
                
                $
                660,000
                
                
                $
                1,300,000
                
                NilOther
      Properties
                
                $
                470,000
                
                
                
                50,000
                
                
                $
                420,000
                
                
                Nil
                
                NilTotal
      (US $)
                
                $
                9,021,700
                
                
                $
                1,113,750
                
                
                $
                3,507,950
                
                
                $
                4,400,000
                
                Nil





Notes:


(1)
            Of
      the final payment in the amount of US$650,000 for the original property
      option, due January 14, 2011, up to US$500,000 may be paid in common
      shares of the Company.  In 2007 and 2008, the Company acquired
      options on five other mineral rights packages surrounding the original
      block, resulting in the combined optional payments shown for the Sierra
      Ramirez Property.




(2)
            Comprised
      of US$350,000 in option payments. Half of the remaining $350,000 option
      payment may be paid in common shares at a deemed price per share equal to
      the average trading price of MAG’s common shares for 30 calendar days
      prior to the date of the
payment.








Other
Items





The
Company is unaware of any undisclosed liabilities or legal actions against the
Company and the Company has no legal actions or cause against any third party at
this time other than as follows.





In
November 2008, the Company notified Fresnillo of various concerns arising under
the Shareholders Agreement dated October 10, 2005 which governs the Minera
Juanicipio joint venture (the "Shareholders Agreement").  One such
concern is that Fresnillo is attempting to acquire control of the Company on an
unsolicited basis in breach of the provisions of the Shareholders
Agreement.  MAG has now triggered the dispute resolution provisions of
the Shareholders Agreement with the result that, if matters are not resolved
with Fresnillo, the disputes are expected to be referred to
arbitration.





The
Company is unaware of any condition of default under any debt, regulatory,
exchange related or other contractual obligation.





Subsequent
to December 31, 2008 the Company issued 55,000 common shares between $1.06 and
$5.36 on the exercise of stock options for proceeds of $153,800.





ADDITIONAL
DISCLOSURE





Trend
Information




Other
than the obligations under the Company's property option agreements, there are
no demands, commitments, events or uncertainties that will result in, or that
are reasonably likely to result in, the Company's liquidity either increasing or
decreasing at present or in the foreseeable future.  The Company will
require sufficient capital in the future to meet its acquisition payments and
other obligations under property option agreements for those properties it
considers worthy to incur continued holding and exploration costs
upon.  The need to make such payments is a “Trend” as it is unlikely
that all such obligations will be eliminated from the Company’s future business
activities.  The Company intends to utilize cash on hand in order to
meet its obligations under property option agreements until at least March 31,
2010.





The scale
and scope of the Juanicipio project could require development capital in the
years ahead exceeding the Company’s on hand cash resources.  It is
unlikely that the Company will generate sufficient operating cash flow to meet
these ongoing obligations in the foreseeable future. Accordingly the Company may
need to raise additional capital by issuance of equity in the
future.  At this time the Company has no plan or intention to issue
any equity or any debt in order to raise capital.




RISKS
AND UNCERTAINTIES





The
Company’s securities should be considered a highly speculative investment and
investors should carefully consider all of the information disclosed in the
Company’s Canadian and U.S. regulatory filings prior to making an investment in
the Company, including the risk factors discussed under the heading “Risk
Factors” in the Company’s annual information form available on SEDAR at www.sedar.com and
http://idea.sec.gov/idea.





Since mid
calendar 2008 there has been a negative trend with regard to the market for
metal commodities and related products as a result of global economic
uncertainty, reduced confidence in financial markets, bank failures and credit
availability concerns.  These macro-economic events have negatively
affected the mining and minerals sectors in general.  The Company’s
market capitalization has been significantly reduced.  Although these
circumstances may improve over the longer term, the short term impact upon the
Company’s liquidity and its ability to raise the capital required to execute its
business plans going forward will be negative.  As a result the
Company will consider its business plans and options carefully going forward
into 2009.  The Company’s intends to preserve its cash balances where
possible.





At
December 31, 2008, the Company had a receivable of $2,190,188 from the Mexican
government for value added tax (“IVA”).  Although full recovery is
expected by management, recoveries to date have been
intermittent.  The Company has discussed its outstanding IVA
receivables with the Mexican authorities and there is no reason to believe these
amounts will not be received in the current year.





Off-Balance
Sheet Arrangements




The
Company has no off-balance sheet arrangements.





Related
Party Transactions





For the
year ended December 31, 2008, a private company controlled by Gordon Neal, an
officer of the Company received $170,424 (2007: $163,840) in compensation for
consulting services.  During the year ended December 31, 2008, the Mr.
Neal became an employee of the Company and received $72,085 (2007: $Nil) in
compensation as salary and bonus for management services.





The
Company paid or accrued non-executive directors fees of $300,750 (2007: 138,895)
during the year ended December 31, 2008 (2007: $138,895).





The
Company is party to a Field Services Agreement, whereby it has contracted
exploration services in Mexico with MINERA CASCABEL S.A. DE C.V. (“Cascabel”)
and IMDEX Inc. (“Imdex”).  Since January 2006, Peter Megaw, has been a
director of MAG and a director of Cascabel and Imdex.  During the year
ended December 31, 2008 the Company accrued or paid Cascabel and Imdex
consulting, administration and travel fees totaling $194,500 (2007: $134,720)
and exploration costs totaling $2,504,237 (2007: $1,312,826) under the Field
Services Agreement.





During
the year ended December 31, 2007, the Company entered into a new two year
office lease agreement with Anthem Works Ltd. (“Anthem”).  Eric
Carlson is a director of MAG and Anthem.  During the year ended
December 31, 2008, the Company accrued or paid Anthem $83,556 (2007: $79,312)
under the office lease agreement.





During
the year ended December 31, 2003, the Company entered into an office
services agreement with Platinum Group Metals Ltd.  R. Michael Jones
is a director of MAG and Platinum Group Metals Ltd.  During the year
ended December 31, 2008, the Company accrued or paid Platinum Group Metals Ltd.
$135,777 (2007: $136,374) under the office services agreement.





These
transactions were incurred in the normal course of business and are measured at
the exchange amount which was the consideration established and agreed to by the
noted parties.





CRITICAL
ACCOUNTING ESTIMATES




The
preparation of financial statements in conformity with Canadian GAAP requires
Management to make estimates and assumptions that affect the reported amount of
assets and liabilities and disclosure of contingent liabilities at the date of
the financial statements, and the reported amounts of revenues and expenditures
during the reporting period. Management has identified (i) mineral property
acquisition and exploration deferred costs (ii) provision for reclamation and
closure, (iii) future income tax provision and (iv) stock based compensation as
the main estimates for the following discussion. Please refer to Note 2 of the
Company’s Audited consolidated financial statements for a description of all of
the significant accounting policies.





Under
Canadian GAAP, the Company defers all costs relating to the acquisition and
exploration of its mineral properties. Any revenues received from such
properties are credited against the costs of the property. When commercial
production commences on any of the Company’s properties, any previously
capitalized costs would be charged to operations using a unit-of-production
method. The Company reviews when events or changes in circumstances indicate the
carrying values of its properties to assess their recoverability and when the
carrying value of a property exceeds the estimated net recoverable amount,
provision is made for impairment in value.





The
existence of uncertainties during the exploration stage and the lack of
definitive empirical evidence with respect to the feasibility of successful
commercial development of any exploration property does create measurement
uncertainty concerning the estimate of the amount of impairment to the value of
any mineral property. The Company relies on its own or independent estimates of
further geological prospects of a particular property and also considers the
likely proceeds from a sale or assignment of the rights before determining
whether or not impairment in value has occurred.





Reclamation
and closure costs have been estimated based on the Company’s interpretation of
current regulatory requirements, however changes in regulatory requirements and
new information may result in revisions to estimates. The Company recognizes the
fair value of liabilities for reclamation and closure costs in the period in
which they are incurred. A corresponding increase to the carrying amount of the
related assets is generally recorded and depreciated over the life of the
asset.





The
future income tax provision is based on the liability method. Future taxes arise
from the recognition of the tax consequences of temporary differences by
applying enacted or substantively enacted tax rates applicable to future years
to differences between the financial statement carrying amounts and the tax
bases of certain assets and liabilities. The Company records a valuation
allowance against any portion of those future income tax assets that it believes
will, more likely than not, fail to be realized.





For its
2005 fiscal year, The Company adopted CICA Handbook Section 3870 – Stock-Based
Compensation and other Stock-Based Payments, which requires the fair value
method of accounting for stock options. Under this method, the Company is
required to recognize a charge to the income statement based on an
option-pricing model based on certain assumptions. For the year ended December
31, 2008 the assumptions were as follows; no dividends were paid, a weighted
average volatility of the Company’s share price of 49%, a weighted average
annual risk free rate of 3.37 per cent and an expected life of three years. The
resulting weighted average option pricing resulted in an expense for stock
options in the year ended December 31, 2008 of $2,539,011 (2007 -
$5,256,566).





CHANGES
IN ACCOUNTING POLICIES




On
January 1, 2008, the Company adopted four new presentation and disclosure
standards that were issued by the Canadian Institute of Chartered Accountants:
Handbook Section 1535, Capital Disclosures ("Section 1535"), Handbook Section
3031, Inventories – (“Section 3031”), Handbook Section 3862, Financial
Instruments - Disclosures ("Section 3862") and Handbook Section 3863, Financial
Instruments - Presentation ("Section 3863").





(i)           Capital
disclosures – Section 1535





Section
1535, Capital Disclosures, establishes disclosure requirements regarding an
entity’s capital, including (i) an entity’s objectives, policies, and processes
of managing capital; (ii) quantitative data about what the entity regards as
capital; (iii) whether the entity has complied with any externally imposed
capital requirements; and (iv) if it has not complied, the consequences of such
non-compliance. The new standard has had no impact on the consolidated financial
position or results of operations for the year ended December 31,
2008.





(ii)           Inventories
– Section 3031





Section
3031, Inventories, provides more guidance on the measurement and disclosure
requirements for inventories. Specifically, the new pronouncement requires
inventories to be measured at the lower of cost or net realizable value, and
provides guidance on the determination of cost and its subsequent recognition as
an expense, including any write-down to net realizable value. The new standard
has had no impact on the consolidated financial position or results of
operations for the year ended December 31, 2008.





(iii)           Financial
instruments – Sections 3862 and 3863





Section
3862, Financial Instruments – Disclosures and Section 3863 Financial Instruments
– Presentation replace Section 3861 Financial Instruments – Disclosure and
Presentation. These new sections revise and enhance disclosure requirements
while leaving presentation requirements unchanged. These new sections place
increased emphasis on disclosures about the nature and extent of risks arising
from financial instruments and how the entity manages those risks. The new
standards have had no impact on the consolidated financial position or results
of operations for the year ended December 31, 2008. Refer to the additional
sensitivity disclosure in Note 10 of the audited consolidated financial
statements for the year ended December 31, 2008.





(iv)           Business
Combinations





In
January 2009, the CICA issued Section 1582, Business Combinations, Section 1601,
Consolidations, and Section 1602, Non-controlling Interest. These new standards
are harmonized with International Financial Reporting Standards (“IFRS”).
Section 1582 specifies a number of changes, including: an expanded definition of
a business, a requirement to measure all business acquisitions at fair value, a
requirement to measure non-controlling interests at fair value, and a
requirement to recognize acquisition-related costs as expenses. Section 1601
establishes the standards for preparing consolidated financial statements.
Section 1602 specifies that non-controlling interests be treated as a separate
component of equity, not as a liability or other item outside of equity. The new
standards will become effective in 2011 but early adoption is permitted. The
Company is evaluating the attributes of early adoption of this standard and its
potential effects if events or transactions occurred that this standard applies
to.





(v)           Goodwill
and Intangible Assets





In
February 2008, the CICA issued Section 3064, Goodwill and Intangible
Assets, replacing Section 3062, Goodwill and Other Intangible
Assets and Section 3450, Research and Development
Costs. The new pronouncement establishes standards for the recognition,
measurement, presentation, and disclosure of goodwill subsequent to its initial
recognition and of intangible assets by profit-oriented enterprises. Standards
concerning goodwill are unchanged from the standards included in the previous
Section 3062. This Section is effective in the first quarter of 2009, and the
Company is currently evaluating the impact of the adoption of this new Section
on its consolidated financial statements.





(vi)           Convergence
with International Financial Reporting Standards





In
February 2008, the Canadian Accounting Standards Board confirmed that publicly
accountable enterprises will be required to adopt IFRS for fiscal years
beginning on or after January 1, 2011, with earlier adoption permitted.
Accordingly, the conversion to IFRS will be applicable to the Company’s
reporting no later than in the first quarter of 2011, with restatement of
comparative information presented. The conversion to IFRS will impact the
Company’s accounting policies, information technology and data systems, internal
control over financial reporting, and disclosure controls and procedures. The
transition may also impact business activities, such as foreign currency
activities, certain contractual arrangements, capital requirements and
compensation arrangements. The Company is currently evaluating the future impact
of IFRS on its financial statements and will continue to invest in training and
additional resources to ensure a timely conversion.





RECONCILIATION
BETWEEN CANADIAN AND UNITED STATES GAAP





The
Company’s differences between Canadian and United States Generally Accepted
Accounting Principles are set out in Note 16 of the audited Consolidated Annual
Financial Statements for the year ended December 31, 2008.





CORPORATE
GOVERNANCE




The
Company maintains a set of disclosure controls and procedures designed to ensure
that information required to be disclosed in filings made pursuant to
Multilateral Instrument 52-109 is recorded, processed, summarized and reported
in the manner specified by the relevant securities laws applicable to the
Company.  The consolidated Company operates in both Canada and Mexico
and work is ongoing to improve and modernize these controls and to ensure that
they remain consistently applied in both jurisdictions.  The Chief
Executive Officer and the Chief Financial Officer have evaluated, or caused to
be evaluated under their supervision, the effectiveness of the Company’s
disclosure control procedures as of December 31, 2007 and December 31,
2008 and quarterly during 2008 through inquiry, review, and testing, as
well as by drawing upon their own relevant experience.  The Company
retained an independent third party specialist in 2008 to assist in the
assessment of its disclosure control procedures.  The Chief Executive
Officer and the Chief Financial Officer have concluded that the Company’s
disclosure control procedures are effective.





The
Company also maintains a system of internal controls over financial reporting,
as defined by Multilateral Instrument 52-109 - Certificationof Disclosure in Issuers’ Annual and
Interim Filings in order to provide reasonable assurance that assets are
safeguarded and financial information is accurate and reliable and in accordance
with Canadian GAAP.  The Company retained an independent third party
specialist in 2006, 2007 and 2008 to assist in the assessment of its internal
control procedures.  The Board of Directors approves the financial
statements and ensures that management discharges its financial
responsibilities. The Board’s review is accomplished principally through the
audit committee, which is composed of independent non-executive directors. The
audit committee meets periodically with management and auditors to review
financial reporting and control matters. The Board of Directors has also
appointed a compensation committee composed of non-executive directors whose
recommendations are followed with regard to executive compensation. From time to
time the board may also form special sub-committees, which must investigate and
report to the Board on specific topics.





The Chief
Executive Officer and Chief Financial Officer have evaluated, or caused to be
evaluated under their supervision, the effectiveness of the Company’s normal
control over financial reporting as of December 31, 2008 and have concluded that
the Company’s internal control over financial reporting is
effective.  There have been no changes in internal control over
financial reporting during the year ended December 31, 2008 that have materially
affected, or are reasonably likely to materially affect, the Company’s internal
control over financial reporting.





Subsequent
Information





Subsequent
events are described elsewhere in relation to relevant sections of this
document.