MAG
      Silver Corp.(An exploration state company)Consolidated Financial StatementsFor the year ended December 31, 2009Dated: March 25, 2010














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

















































|                                                                        |                                                            |  |  |                                                        
|----------------------------------------------------------------------- | ---------------------------------------------------------- |  |  | -------------------------------------------------------
|VANCOUVER OFFICE
Suite 770
800 West Pender Street
Vancouver, BC V6C 2V6 | 604 630 1399
phone
866 630 1399
toll free
604 681 0894
fax |  |  | TSX:MAG
NYSE-A:MVG
www.magsilver.com
info@magsilver.com





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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, 2009 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, 2009.



The Company's internal control over financial reporting as of December 31, 2009 has been audited by Deloitte & Touché LLP, Independent Registered Chartered Accountants who also audited the Company's Consolidated Financial Statements as at and for the year ended December 31, 2009. Deloitte & Touché LLP as stated in their report, that immediately precedes the Company's audited consolidated financial statements for the year ended December 31, 2009, expressed an unqualified opinion on the effectiveness of the Company's internal control over financial reporting.







/s/
"Daniel MacInnis"

/s/
"Frank Hallam"

Daniel MacInnis

Frank Hallam

Chief Executive Officer

Chief Financial Officer



March 25, 2010







---



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, 2009 and 2008 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, 2009 and the cumulative period from incorporation April 21, 1999 to December 31, 2009. 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). Those standards require that we plan and perform an 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, 2009 and 2008 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2009 and the cumulative period from incorporation April 21, 1999 to December 31, 2009 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, 2009, 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 25, 2010 expressed an unqualified opinion on the Company's internal control over financial reporting.





/s/ "Deloitte & Touche LLP"

Independent Registered Chartered Accountants

Vancouver, Canada

March 25, 2010







































---



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, 2009, 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, 2009, 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 at and for the year ended December 31, 2009 and the cumulative period from incorporation April 21, 1999 to December 31, 2009 of the Company and our report dated March 25, 2010 expressed an unqualified opinion on those financial statements.



/s/ "Deloitte & Touche LLP"

Independent Registered Chartered Accountants

Vancouver, Canada



March 25, 2010







---







|                                                      |  |  |  |               |  |              
|----------------------------------------------------- |  |  |  | ------------- |  | -------------
|MAG SILVER CORP.                                      |  |  |  |               |  |              
|(An exploration stage company)                        |  |  |  |               |  |              
|Consolidated Balance Sheets                           |  |  |  |               |  |              
|                                                      |  |  |  |               |  |              
|(expressed in Canadian dollars)                       |  |  |  |               |  |              
|                                                      |  |  |  | Dec. 31, 2009 |  | Dec. 31, 2008
|ASSETS                                                |  |  |  |               |  |              
|                                                      |  |  |  |               |  |              
|CURRENT                                               |  |  |  |               |  |              
|Cash and cash equivalents                             |  |  |  | $ 26,803,652  |  | $ 52,262,561 
|Accounts receivable (Note 3)                          |  |  |  | 2,033,518     |  | 2,339,204    
|Interest receivable                                   |  |  |  | 9,116         |  | 81,934       
|Marketable securities (Note 4)                        |  |  |  | 13,399        |  | 4,116        
|Prepaid expenses                                      |  |  |  | 91,300        |  | 110,151      
|TOTAL CURRENT ASSETS                                  |  |  |  | 28,950,985    |  | 54,797,966   
|EQUIPMENT AND LEASEHOLDS (Note 5)                     |  |  |  | 149,070       |  | 66,539       
|INVESTMENT IN MINERA JUANICIPIO S.A. DE C.V. (Note 6) |  |  |  | 8,610,350     |  | 8,166,747    
|MINERAL RIGHTS (Note 7)                               |  |  |  | 7,509,214     |  | 6,879,060    
|DEFERRED EXPLORATION COSTS (Note 7)                   |  |  |  | 37,433,919    |  | 25,237,198   
|TOTAL ASSETS                                          |  |  |  | $ 82,653,538  |  | $ 95,147,510 
|                                                      |  |  |  |               |  |              
|LIABILITIES                                           |  |  |  |               |  |              
|                                                      |  |  |  |               |  |              
|CURRENT                                               |  |  |  |               |  |              
|Accounts payable and accrued liabilities              |  |  |  | $ 1,076,606   |  | $ 1,503,417  
|                                                      |  |  |  |               |  |              
|SHAREHOLDERS' EQUITY                                  |  |  |  |               |  |              
|                                                      |  |  |  |               |  |              
|Share capital (Note 8)                                |  |  |  |               |  |              
|Authorized - unlimited common shares,                 |  |  |  |               |  |              
|without par value                                     |  |  |  |               |  |              
|Issued and outstanding at Dec. 31, 2009 - 49,316,569  |  |  |  |               |  |              
|common shares Dec. 31, 2008 - 49,155,566)             |  |  |  | 107,614,849   |  | 107,023,016  
|Contributed surplus                                   |  |  |  | 11,177,518    |  | 9,583,860    
|Accumulated other comprehensive loss                  |  |  |  | (1,790,132)   |  | (1,027,690)  
|Deficit                                               |  |  |  | (35,425,303)  |  | (21,935,093) 
|TOTAL SHAREHOLDERS' EQUITY                            |  |  |  | 81,576,932    |  | 93,644,093   
|TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY            |  |  |  | $ 82,653,538  |  | $ 95,147,510 
|                                                      |  |  |  |               |  |              
|CONTINUING OPERATIONS (Note 1)                        |  |  |  |               |  |              
|RELATED PARTY TRANSACTIONS (Note 13)                  |  |  |  |               |  |              
|COMMITMENTS (Note 14)                                 |  |  |  |               |  |              
|                                                      |  |  |  |               |  |              
|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.



---









|                                                       |  |                |  |               |  |               |  |               
|------------------------------------------------------ |  | -------------- |  | ------------- |  | ------------- |  | --------------
|                                                       |  |                |  |               |  |               |  |               
|                                                       |  |                |  |               |  |               |  |               
|Consolidated Statements of Loss and Comprehensive Loss |  |                |  |               |  |               |  |               
|(expressed in Canadian dollars)                        |  |                |  |               |  |               |  |               
|                                                       |  |                |  |               |  |               |  |               
|                                                       |  |                |  |               |  |               |  | Cumulative    
|                                                       |  |                |  |               |  |               |  | amount from   
|                                                       |  |                |  |               |  |               |  | April 21,     
|                                                       |  | Year ended     |  | Year ended    |  | Year ended    |  | 1999 to       
|                                                       |  | December 31,   |  | December 31,  |  | December 31,  |  | December 31,  
|                                                       |  | 2009           |  | 2008          |  | 2007          |  | 2009          
|                                                       |  |                |  |               |  |               |  |               
|EXPENSES                                               |  |                |  |               |  |               |  |               
|Accounting and audit                                   |  | $ 456,761      |  | $ 415,647     |  | $ 319,896     |  | $ 1,849,554   
|Amortization                                           |  | 73,670         |  | 39,945        |  | 13,909        |  | 176,125       
|Bank charges and interest                              |  | 3,285          |  | 3,343         |  | 2,466         |  | 32,441        
|Filing and transfer agent fees                         |  | 196,025        |  | 148,886       |  | 405,844       |  | 978,123       
|Foreign exchange loss (gain)                           |  | 619,805        |  | (96,596)      |  | 260,598       |  | 860,616       
|Legal                                                  |  | 3,048,507      |  | 884,000       |  | 232,980       |  | 4,687,447     
|Management and consulting fees                         |  | 1,984,515      |  | 1,528,630     |  | 778,228       |  | 5,549,839     
|Mineral property costs written off                     |  | 3,718,518      |  | 1,221,019     |  | 763,434       |  | 5,702,971     
|Property investigation expense                         |  | 148,200        |  | 7,432         |  | 43,464        |  | 203,947       
|Shareholder relations                                  |  | 714,809        |  | 404,776       |  | 354,075       |  | 2,014,786     
|Stock compensation expense                             |  | 1,804,464      |  | 2,539,011     |  | 5,256,566     |  | 12,875,989    
|Telephone and office                                   |  | 733,112        |  | 506,332       |  | 389,980       |  | 2,542,906     
|Travel                                                 |  | 287,045        |  | 235,144       |  | 243,422       |  | 1,331,343     
|Other write-offs                                       |  | -              |  | -             |  | -             |  | 255,093       
|                                                       |  | 13,788,716     |  | 7,837,569     |  | 9,064,862     |  | 39,061,180    
|LOSS BEFORE THE FOLLOWING                              |  | (13,788,716)   |  | (7,837,569)   |  | (9,064,862)   |  | (39,061,180)  
|INTEREST INCOME                                        |  | 298,506        |  | 1,964,680     |  | 915,604       |  | 3,635,877     
|NET LOSS FOR THE YEAR                                  |  | $ (13,490,210) |  | $ (5,872,889) |  | $ (8,149,258) |  | $ (35,425,303)
|                                                       |  |                |  |               |  |               |  |               
|OTHER COMPREHENSIVE LOSS                               |  |                |  |               |  |               |  |               
|CURRENCY TRANSLATION ADJUSTMENT                        |  | (771,725)      |  | (304,458)     |  | (716,778)     |  | (1,792,961)   
|UNREALIZED GAIN (LOSS) ON                              |  |                |  |               |  |               |  |               
|MARKETABLE SECURITIES                                  |  | 9,283          |  | (6,454)       |  | -             |  | 2,829         
|COMPREHENSIVE LOSS FOR THE YEAR                        |  | $ (14,252,652) |  | $ (6,183,801) |  | $ (8,866,036) |  | $ (37,215,435)
|                                                       |  |                |  |               |  |               |  |               
|BASIC AND DILUTED                                      |  |                |  |               |  |               |  |               
|LOSS PER SHARE                                         |  | $ (0.27)       |  | $ (0.12)      |  | $ (0.19)      |  |               
|                                                       |  |                |  |               |  |               |  |               
|WEIGHTED AVERAGE NUMBER                                |  |                |  |               |  |               |  |               
|OF SHARES OUTSTANDING - BASIC                          |  | 49,254,440     |  | 48,791,348    |  | 42,411,815    |  |               

















See accompanying notes to the consolidated financial
statements





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See accompanying notes to the consolidated financial
statements





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|                                                 |  |                |  |               |  |               |  |               
|------------------------------------------------ |  | -------------- |  | ------------- |  | ------------- |  | --------------
|                                                 |  |                |  |               |  |               |  |               
|                                                 |  |                |  |               |  |               |  |               
|Consolidated Statements of Cash Flows            |  |                |  |               |  |               |  |               
|(expressed in Canadian dollars)                  |  |                |  |               |  |               |  |               
|                                                 |  |                |  |               |  |               |  | Cumulative    
|                                                 |  |                |  |               |  |               |  | amount from   
|                                                 |  |                |  |               |  |               |  | April 21,     
|                                                 |  | Year ended     |  | Year ended    |  | Year ended    |  | 1999 to       
|                                                 |  | December 31,   |  | December 31,  |  | December 31,  |  | December 31,  
|                                                 |  | 2009           |  | 2008          |  | 2007          |  | 2009          
|OPERATING ACTIVITIES                             |  |                |  |               |  |               |  |               
|Net loss for the year                            |  | $ (13,490,210) |  | $ (5,872,889) |  | $ (8,149,258) |  | $ (35,177,175)
|Items not involving cash:                        |  |                |  |               |  |               |  |               
|Other write-offs                                 |  | -              |  | -             |  | -             |  | 255,093       
|Amortization                                     |  | 73,670         |  | 39,945        |  | 13,909        |  | 176,125       
|Mineral property costs written off (Note 7)      |  | 3,718,518      |  | 1,221,019     |  | 763,434       |  | 5,702,971     
|Non-cash stock compensation expense              |  | 1,804,464      |  | 2,539,011     |  | 5,256,566     |  | 12,875,989    
|                                                 |  |                |  |               |  |               |  |               
|Changes in operating assets and liabilities      |  |                |  |               |  |               |  |               
|Accounts receivable                              |  | 305,686        |  | (1,692,177)   |  | (373,992)     |  | (2,033,518)   
|Interest receivable                              |  | 72,818         |  | 91,374        |  | (58,081)      |  | (9,116)       
|Prepaid expenses                                 |  | 18,851         |  | (60,483)      |  | (8,703)       |  | (91,300)      
|Accounts payable and accrued liabilities         |  | 3,189          |  | 605,237       |  | (52,188)      |  | 906,606       
|                                                 |  | (7,493,014)    |  | (3,128,963)   |  | (2,608,313)   |  | (17,394,325)  
|                                                 |  |                |  |               |  |               |  |               
|INVESTING ACTIVITIES                             |  |                |  |               |  |               |  |               
|Purchase of equipment and leasehold improvements |  | (156,201)      |  | (84,368)      |  | (4,693)       |  | (327,868)     
|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                      |  | (1,215,328)    |  | (2,522,844)   |  | (3,620,630)   |  | (10,319,978)  
|Mineral rights                                   |  | (2,156,057)    |  | (2,025,488)   |  | (819,789)     |  | (5,515,078)   
|Deferred exploration costs                       |  | (14,819,336)   |  | (12,976,644)  |  | (5,760,230)   |  | (40,923,248)  
|Other                                            |  | -              |  | -             |  | -             |  | (252,420)     
|                                                 |  | (18,346,922)   |  | (17,619,914)  |  | (10,205,342)  |  | (57,819,801)  
|                                                 |  |                |  |               |  |               |  |               
|FINANCING ACTIVITIES                             |  |                |  |               |  |               |  |               
|Issue of share capital                           |  | 381,027        |  | 12,864,131    |  | 69,454,032    |  | 101,890,906   
|Issue of special warrants                        |  | -              |  | -             |  | -             |  | 375,000       
|                                                 |  | 381,027        |  | 12,864,131    |  | 69,454,032    |  | 102,265,906   
|(DECREASE) INCREASE IN CASH                      |  | (25,458,909)   |  | (7,884,746)   |  | 56,640,377    |  | 27,051,780    
|CASH AND EQUIVALENTS, BEGINNING OF YEAR          |  | 52,262,561     |  | 60,147,307    |  | 3,506,930     |  | -             
|CASH AND EQUIVALENTS, END OF YEAR                |  |                |  |               |  |               |  |               
|(Note 2 (e))                                     |  | $ 26,803,652   |  | $ 52,262,561  |  | $ 60,147,307  |  | $ 27,051,780  
|                                                 |  |                |  |               |  |               |  |               
|Interest paid                                    |  | $ -            |  | $ -           |  | $ -           |  | $ 12,500      
|                                                 |  |                |  |               |  |               |  |               
|Non-cash investing and financing activities:     |  |                |  |               |  |               |  |               
|                                                 |  |                |  |               |  |               |  |               
|Issue of shares in connection with acquisitions  |  | $ -            |  | $ -           |  | $ -           |  | $ 430,000     
|Issue of shares in exchange for mineral property |  |                |  |               |  |               |  |               
|option rights                                    |  | $ -            |  | $ -           |  | $ -           |  | $ 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.



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"









---

MAG SILVER CORP.

(An exploration stage company)

Notes to the Consolidated Financial Statements





2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)



(a)

Principles of consolidation (continued)



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, 2009 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



Effective January 1, 2007, the Company adopted CICA Handbook Sections 3855 Financial Instruments
- Recognition and Measurement; Section 3861 Financial Instruments - Disclosure and Presentation; Section 3865 Hedges; Section 1530 Comprehensive Incomeand Section 3251 Equity. As the Company does not undertake hedging activities, the adoption of Section 3865 currently has no impact.











---

MAG SILVER CORP.

(An exploration stage company)

Notes to the Consolidated Financial Statements





2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)



(d)

Financial instruments (continued)



Financial assets and financial liabilities are recognized when the Company becomes a party to the contractual provisions of the financial instrument. The Company classifies 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 ("OCI"). 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.



The Company has designated its cash and cash equivalents as held-for-trading, which are measured at fair value.  Accounts receivable and other receivables 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.



All of the Company's marketable securities have been designated as available-for-sale, and are reported at fair market value.  Other comprehensive income includes the gains and losses from available-for-sale securities which are not included in net income (loss) until realized, and currency translation adjustments on its net investment in self sustaining foreign operations.





(e)

Cash



Due to the low interest rate on deposits and maintaining resources liquid for the Company's ongoing exploration activities the management has maintained the Company's cash in a high income savings account. The cash balance that the Company holds is entirely liquid.



(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.











---

MAG SILVER CORP.

(An exploration stage company)

Notes to the Consolidated Financial Statements





2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)



(f)

Mineral rights and deferred exploration costs (continued)



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



Equipment is recorded at cost and is amortized at the following annual rates:



Computer equipment

30% declining balance

Field equipment

30% declining balance

Leaseholds

2 year 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.



















---

MAG SILVER CORP.

(An exploration stage company)

Notes to the Consolidated Financial Statements





2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)





(j)

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, 2009, the Company had 3,881,341 (2008
- 3,312,407) 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 diluted earnings per share as their effect would be anti-dilutive.





(k)

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.



(l)

Adoption of new accounting pronouncements



(i)

Credit Risk and the Fair Value of Financial Assets and Financial Liabilities ("EIC-173")



In January 2009, the CICA issued Emerging Issues Committee ("EIC") Abstract 173 - Credit Risk and the Fair Value of Financial Assets and Financial Liabilities ("EIC-173"). EIC-173 provides guidance on how to take into account credit risk of an entity and counterparty when determining the fair value of financial assets and financial liabilities, including derivative instruments. EIC-173 is applicable for the Company's interim and annual consolidated financial statements for its fiscal year ending December 31, 2009, with retroactive application. The adoption of EIC-173 did not result in a material impact on the Company's consolidated financial statements.



(ii)

Mining Exploration Costs ("EIC-174")



In March 2009, the CICA issued EIC Abstract 174 - Mining Exploration Costs ("EIC-174") which supersedes EIC Abstract 126 - Accounting by Mining Enterprises for Exploration Costs ("EIC-126"), to provide additional guidance for mining exploration enterprises on the accounting for capitalization of exploration costs and when an impairment test of these costs is required. EIC 174 is applicable for the Company's interim and annual consolidated financial statements for its fiscal year ending December 31, 2009, with retroactive application. The adoption of EIC
- 174 did not result in a material impact on the Company's consolidated financial statements.









---

MAG SILVER CORP.

(An exploration stage company)

Notes to the Consolidated Financial Statements





2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)



(iii)

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 was effective in the first quarter of 2009, and the Company has evaluated the requirements of this Section and concluded that the impact is not material to the financial statements.



(iv)

Amendment to Financial Instruments
- Disclosures ("Section 3862")



During 2009, CICA Handbook Section 3862, Financial Instruments
- Disclosures ("Section 3862"), was amended to require disclosures about the inputs to fair value measurements, including their classification within a hierarchy that prioritizes the inputs to fair value measurement. The three levels of the fair value hierarchy are:



Level 1
- Valuation based on unadjusted quoted prices in active markets for identical assets or liabilities;

Level 2
- Valuation techniques based on inputs other than quoted prices that are observable for the asset or liability either directly or indirectly; and

Level 3
- Valuation techniques based on inputs that are not based on observable market data.



Refer to notes 4 and 11 for the relevant disclosures.



(m)

Recent Accounting Pronouncements



(i)

Convergence with International Financial Reporting Standards



Canadian public companies will be required to prepare their financial statements in accordance with International Financial Reporting Standards ("IFRS"), as issued by the International Accounting Standards Board, for financial years beginning on or after January 1, 2011 ("Changeover Date").  Effective January 1, 2011, the Company will adopt IFRS as the basis for preparing its consolidated financial statements. The Company will issue its financial results for the quarter ended March 31, 2011 prepared on an IFRS basis and provide comparative data on an IFRS basis as required.













---

MAG SILVER CORP.

(An exploration stage company)

Notes to the Consolidated Financial Statements





2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)



(ii)

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.



3.

ACCOUNTS RECEIVABLE

|                                            |  |               |  |              
|------------------------------------------- |  | ------------- |  | -------------
|                                            |  | Dec. 31, 2009 |  | Dec. 31, 2008
|Goods and services tax recoverable          |  | $ 45,239      |  | $ 44,633     
|Mexican value added tax ("IVA") recoverable |  | 1,493,337     |  | 2,190,188    
|Other                                       |  | 494,942       |  | 104,383      
|                                            |  | $ 2,033,518   |  | $ 2,339,204  
|                                            |  |               |  |              





4.

MARKETABLE SECURITIES



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).



At December 31, 2009, the Company holds the following marketable securities:



|                              |                  |          |                                  |               
|----------------------------- | ---------------- | -------- | -------------------------------- | --------------
|Available-for-sale securities | Number of
Shares | Cost ($) | Accumulated Unrealized
Gains ($) | Fair
Value ($)
|Fresnillo PLC                 | 1,000            | 10,570   | 2,829                            | 13,399        











At December 31, 2008, the Company had 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, 2009 the Company recognized an unrealized gain of $9,283 (2008
- loss of $6,454) on the above marketable securities designated as available-for-sale instruments in other comprehensive income. Overall the Company has an accumulated unrealized gain of $2,829.











---

MAG SILVER CORP.

(An exploration stage company)

Notes to the Consolidated Financial Statements





5.

EQUIPMENT AND LEASEHOLDS



|                   |                   |  |              |  |          
|------------------ | ----------------- |  | ------------ |  | ---------
|                   | December 31, 2009
|                   |                   |  | Accumulated  |  | Net book 
|                   | Cost              |  | depreciation |  | value    
|                   |                   |  |              |  |          
|Computer equipment | $ 133,367         |  | $ 63,123     |  | $ 70,244 
|Field equipment    | 150,744           |  | 71,918       |  | 78,826   
|                   | $ 284,111         |  | $ 135,041    |  | $ 149,070
|                   |                   |  |              |  |          







|                       |                       |  |              |  |         
|---------------------- | --------------------- |  | ------------ |  | --------
|                       | December 31,
    2008
|                       |                       |  | Accumulated  |  | Net book
|                       | Cost                  |  | depreciation |  | value   
|                       |                       |  |              |  |         
|Computer equipment     | $ 60,709              |  | $ 33,018     |  | $ 27,691
|Field equipment        | 67,201                |  | 38,135       |  | 29,066  
|Leasehold improvements | 26,084                |  | 16,302       |  | 9,782   
|                       | $ 153,994             |  | $ 87,455     |  | $ 66,539
|                       |                       |  |              |  |         





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



Computer equipment and software

30%

Field equipment

30%



The leasehold improvements were depreciated on a straight-line basis over the two year term of the 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 Penoles, S.A. de C.V. ("Penoles"), the Company granted to Penoles or any of its subsidiaries an option to earn a 56% interest in the Juanicipio Property in Mexico in consideration for Penoles conducting US$5,000,000 of exploration on the property over four years and Penoles purchasing US$1,000,000 of Common Shares of the Company in two tranches for US$500,000 each.



In mid 2007, Penoles met all of the earn-in requirements of the Agreement.  In December 2007, the Company and Penoles 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, Penoles 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 Penoles, 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.







---

MAG SILVER CORP.

(An exploration stage company)

Notes to the Consolidated Financial Statements





6.

INVESTMENT IN MINERA JUANICIPIO
S.A. DE C.V. (continued)





To capitalize Minera Juanicipio, the Company invested 63.40 million pesos ($6.025 million) into Minera Juanicipio while Penoles 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 Penoles 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 Penoles 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:



[financials002.gif]

Summary of the Audited Statements of Minera Juanicipio



At December 31, 2009 the assets of Minera Juanicipio consisted of cash and short term investments in the amount of 1 million pesos ($80,500), value added taxes recoverable and other receivables in the amount of 4.17 million pesos ($333,800) and mineral, surface rights and exploration expenditures in the amount of 223.27 million pesos ($17.89 million).  Payables to Penoles and other vendors for exploration work amounted to 0.84 million pesos ($67,600) while shareholders equity was 227.59 million pesos ($18.23 million).







---

MAG SILVER CORP.

(An exploration stage company)

Notes to the Consolidated Financial Statements





7.

MINERAL RIGHTS AND DEFERRED EXPLORATION COSTS







|                           |                              |  |             |  |             |  |             |  |             |  |     |  |              |  |     |  |             |  |             
|-------------------------- | ---------------------------- |  | ----------- |  | ----------- |  | ----------- |  | ----------- |  | --- |  | ------------ |  | --- |  | ----------- |  | ------------
|                           | Year ended December 31, 2009
|                           | (Batopilas)                  |  |             |  |             |  |             |  | Sierra de   |  |     |  | Cinco de     |  |     |  |             |  |             
|                           | Don Fippi                    |  | Guigui      |  | Lagartos NW |  | Lagartos SE |  | Ramirez     |  |     |  | Mayo         |  |     |  | Other       |  | Total       
|Acquisition costs of       |                              |  |             |  |             |  |             |  |             |  |     |  |              |  |     |  |             |  |             
|mineral & surface rights   |                              |  |             |  |             |  |             |  |             |  |     |  |              |  |     |  |             |  |             
|Bal., beginning of year    | $ 1,422,672                  |  | $ 1,571,172 |  | $ 50,032    |  | $ 36,458    |  | $ 1,359,747 |  | $ - |  | $ 1,373,416  |  | $ - |  | $ 1,065,563 |  | $ 6,879,060 
|Incurred during period     | -                            |  | 5,398       |  | -           |  | -           |  | 166,156     |  | -   |  | 1,630,305    |  | -   |  | 354,198     |  | 2,156,057   
|Less amounts written off   | -                            |  | -           |  | -           |  | -           |  | (1,525,903) |  | -   |  | -            |  | -   |  | -           |  | (1,525,903) 
|Balance, end of period     | $ 1,422,672                  |  | $ 1,576,570 |  | $ 50,032    |  | $ 36,458    |  | $ -         |  | $ - |  | $ 3,003,721  |  | $ - |  | $ 1,419,761 |  | $ 7,509,214 
|                           |                              |  |             |  |             |  |             |  |             |  |     |  |              |  |     |  |             |  |             
|Deferred exploration costs |                              |  |             |  |             |  |             |  |             |  |     |  |              |  |     |  |             |  |             
|Camp costs                 | $ 28,880                     |  | $ 894       |  | $ -         |  | $ 109,371   |  | $ 66,458    |  | $ - |  | $ 264,037    |  | $ - |  | $ 114,392   |  | $ 584,032   
|Drilling                   | 4,519                        |  | -           |  | -           |  | 2,485,917   |  | 1,131,858   |  | -   |  | 4,782,348    |  | -   |  | 1,314,839   |  | 9,719,481   
|Geochemical                | 3,404                        |  | -           |  | -           |  | 142,911     |  | 96,396      |  | -   |  | 529,893      |  | -   |  | 92,706      |  | 865,310     
|Geological                 | 82,483                       |  | 7,820       |  | 74          |  | 371,674     |  | 241,661     |  | -   |  | 941,905      |  | -   |  | 333,704     |  | 1,979,321   
|Geophysical                | -                            |  | -           |  | -           |  | -           |  | -           |  | -   |  | 336,220      |  | -   |  | 756         |  | 336,976     
|Gov't fees and licenses    | 12,181                       |  | 41,083      |  | 100,862     |  | 97,528      |  | 53,125      |  | -   |  | 143,442      |  | -   |  | 132,772     |  | 580,993     
|Site administration        | 6,335                        |  | 115         |  | -           |  | 20,082      |  | 12,399      |  | -   |  | 41,624       |  | -   |  | 20,443      |  | 100,998     
|Travel                     | 14,908                       |  | 532         |  | -           |  | 25,154      |  | 16,580      |  | -   |  | 45,596       |  | -   |  | 27,269      |  | 130,039     
|Transport and shipping     | 4,407                        |  | -           |  | -           |  | 18,772      |  | 8,867       |  | -   |  | 43,029       |  | -   |  | 17,111      |  | 92,186      
|                           | 157,117                      |  | 50,444      |  | 100,936     |  | 3,271,409   |  | 1,627,344   |  | -   |  | 7,128,094    |  | -   |  | 2,053,992   |  | 14,389,336  
|Bal., beginning 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  
|Less amounts written off   | -                            |  | -           |  | -           |  | -           |  | (2,192,615) |  | -   |  | -            |  | -   |  | -           |  | (2,192,615) 
|Balance, end of period     | $ 4,954,714                  |  | $ 1,513,373 |  | $ 1,305,896 |  | $ 8,601,839 |  | $ -         |  | $ - |  | $ 17,901,130 |  | $ - |  | $ 3,156,967 |  | $ 37,433,919
|                           |                              |  |             |  |             |  |             |  |             |  |     |  |              |  |     |  |             |  |             









|                           |                              |  |             |  |             |  |             |  |             |  |     |  |              |  |             |  |             |  |             
|-------------------------- | ---------------------------- |  | ----------- |  | ----------- |  | ----------- |  | ----------- |  | --- |  | ------------ |  | ----------- |  | ----------- |  | ------------
|                           | Year ended December 31, 2008
|                           | (Batopilas)                  |  |             |  |             |  |             |  | Sierra de   |  |     |  | Cinco de     |  |             |  |             |  |             
|                           | Don Fippi                    |  | Guigui      |  | Lagartos NW |  | Lagartos SE |  | Ramirez     |  |     |  | Mayo         |  | Sello       |  | Other       |  | Total       
|Acquisition costs of       |                              |  |             |  |             |  |             |  |             |  |     |  |              |  |             |  |             |  |             
|mineral rights             |                              |  |             |  |             |  |             |  |             |  |     |  |              |  |             |  |             |  |             
|Bal., beginning of year    | $ 1,422,672                  |  | $ 1,571,172 |  | $ 50,032    |  | $ -         |  | $ 800,736   |  | $ - |  | $ 610,448    |  | $ 105,852   |  | $ 510,495   |  | $ 5,071,407 
|Incurred during year       | -                            |  | -           |  | -           |  | 36,458      |  | 559,011     |  | -   |  | 762,968      |  | 12,983      |  | 555,068     |  | 1,926,488   
|Less 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 |  | $ 6,879,060 
|                           |                              |  |             |  |             |  |             |  |             |  |     |  |              |  |             |  |             |  |             
|Deferred exploration costs |                              |  |             |  |             |  |             |  |             |  |     |  |              |  |             |  |             |  |             
|Camp costs                 | $ 92,205                     |  | $ -         |  | $ 22,855    |  | $ 79,831    |  | $ 19,892    |  | $ - |  | $ 322,858    |  | $ 13,429    |  | $ 65,541    |  | $ 616,611   
|Drilling                   | 913,389                      |  | -           |  | 778,171     |  | 537,063     |  | -           |  | -   |  | 6,084,484    |  | 485,327     |  | 458,376     |  | 9,256,810   
|Geochemical                | 59,362                       |  | -           |  | 4,623       |  | 45,229      |  | 847         |  | -   |  | 384,988      |  | 13,584      |  | 19,432      |  | 528,065     
|Geological                 | 260,151                      |  | -           |  | 93,775      |  | 209,652     |  | 55,298      |  | -   |  | 807,465      |  | 48,665      |  | 258,769     |  | 1,733,775   
|Geophysical                | 63,829                       |  | -           |  | 8,162       |  | 3,398       |  | 2,063       |  | -   |  | 214,263      |  | -           |  | -           |  | 291,715     
|Gov't fees and licenses    | 9,774                        |  | 12,529      |  | 162,886     |  | 204,838     |  | 37,440      |  | -   |  | 77,380       |  | 27,424      |  | 101,617     |  | 633,888     
|Site administration        | 14,863                       |  | -           |  | 6,453       |  | 12,120      |  | 4,426       |  | -   |  | 44,452       |  | 2,535       |  | 13,252      |  | 98,101      
|Travel                     | 36,988                       |  | -           |  | 6,377       |  | 17,522      |  | 10,677      |  | -   |  | 58,062       |  | 6,696       |  | 33,694      |  | 170,016     
|Transport and shipping     | 2,623                        |  | -           |  | 805         |  | 629         |  | -           |  | -   |  | 3,405        |  | 50          |  | 151         |  | 7,663       
|                           | 1,453,184                    |  | 12,529      |  | 1,084,107   |  | 1,110,282   |  | 130,643     |  | -   |  | 7,997,357    |  | 597,710     |  | 950,832     |  | 13,336,644  
|Bal., beginning of year    | 3,344,413                    |  | 1,450,400   |  | 120,853     |  | 4,220,148   |  | 434,628     |  | -   |  | 2,775,679    |  | 504,474     |  | 152,143     |  | 13,002,738  
|Less 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
|                           |                              |  |             |  |             |  |             |  |             |  |     |  |              |  |             |  |             |  |             







---

MAG SILVER CORP.

(An exploration stage company)

Notes to the Consolidated Financial Statements





7.

MINERAL RIGHTS AND DEFERRED EXPLORATION COSTS (continued)



(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, 2009, the Company has incurred $4,954,714 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, 2009, the Company has incurred $1,513,373 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.



To December 31, 2009, the Company has incurred $1,305,896 in exploration costs on the Lagartos NW property and $8,601,839 in exploration costs on the Lagartos SE property.



(d)

Sierra Ramirez Property

Under a 2003 agreement, as later amended in 2006, the Company had an option to acquire a 100% interest in certain mining concessions located in the Sierra Ramirez district in Durango, Mexico.  To December 31, 2009, the Company has incurred $2,192,615 in exploration costs on the property.  Based on exploration to date management is of the view that the results to date do not support the capitalised value of this property.  The Company wrote down acquisition and deferred exploration costs of $3,718,518 relating to the Sierra Ramirez property during the year. The Company is in the process of cancelling all option agreements with this property.











































---

MAG SILVER CORP.

(An exploration stage company)

Notes to the Consolidated Financial Statements





7.

MINERAL RIGHTS AND DEFERRED EXPLORATION COSTS (continued)



(e)

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 and incur exploration expenditures totalling US$1,000,000 by July 26, 2009.  To December 31, 2009 the Company has paid $1,057,575 (US$900,000) in cash, issued 165,670 common shares at a value of $266,630 and has completed $17,901,130 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.



During the year ended December 31, 2009, the Company acquired a 100% interest in certain mining concessions internal or adjacent to the Cinco de Mayo property from three separate vendors. The Company made a one-time payment of $445,198 for these mining concessions.



During the year ended December 31, 2009, the Company purchased surface rights in the Cinco de Mayo area for $789,253.



(f)

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.  During 2008 the Company entered into an agreement to acquire a 100% interest in the El Oro claims located adjacent to the Sello property.  Based on results the Company terminated these option agreements in 2008 and wrote off total deferred acquisition and exploration costs of $1,221,019.



(g)

Other Properties

At December 31, 2009, the Company has capitalized $1,419,761 in acquisition costs on other properties in Mexico.  The Company is obligated to make additional scheduled cash payments totalling US$2,710,000 to July 14, 2014 if it wishes to maintain its acquisition rights under the referred option agreements as well as incur approximately another $US2,800,000 in exploration expenditures on the San Ramone claims by July 14, 2013.



The other properties consist of the Zacatecas claims, the La Lorena claims, the Nuevo Mundo claims, the Camino Duro claims, the Salemex claim options and the San Ramone claim options. During the period ended December 31, 2009, the Company completed approximately $2,053,992 in
exploration costs including $1,014,751 in drilling and other exploration costs on the Salemex claims, $437,748 on the Nuevo Mundo claims, and $478,852 on the San Ramon claims. Another $122,641 in exploration costs was spent on the remaining other properties.

















---

MAG SILVER CORP.

(An exploration stage company)

Notes to the Consolidated Financial Statements





8.

SHARE CAPITAL



(a)

Issued and outstanding



At December 31, 2009, there were 49,316,569 shares outstanding.



During the year ended December 31, 2009, 161,003 stock options were exercised for cash proceeds of $381,027.



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. At the Annual General and Special Meeting of the Shareholders held on March 24, 2009 the Shareholders approved the Amended and Restated Stock Option Plan (the
"Plan") which fixed the maximum number of stock options that may be granted to 4,921,056.













---

MAG SILVER CORP.

(An exploration stage company)

Notes to the Consolidated Financial Statements





8.

SHARE CAPITAL (Continued)



(b)

Stock options (continued)



The following table summarizes the Company's options:



|                         |            |  |                  |  |             |  |                  |  |            |  |         
|------------------------ | ---------- |  | ---------------- |  | ----------- |  | ---------------- |  | ---------- |  | --------
|                         | Year ended |  | Weighted         |  | Year ended  |  | Weighted         |  | Year ended |  | Weighted
|                         | Dec. 31,   |  | average          |  | Dec. 31,    |  | average          |  | Dec. 31,   |  | average 
|                         | 2009       |  | exercise 
 price |  | 2008        |  | exercise 
 price |  | 2007       |  | price   
|Balance outstanding,     |            |  |                  |  |             |  |                  |  |            |  |         
|beginning of year        | 3,312,407  |  | $ 6.59           |  | 3,805,700   |  | $ 4.44           |  | 3,352,800  |  | $ 2.31  
|Activity during the year |            |  |                  |  |             |  |                  |  |            |  |         
|Options granted          | 761,125    |  | 5.68             |  | 578,765     |  | 11.23            |  | 835,000    |  | 11.93   
|Options forfeited        | (31,188)   |  | 13.50            |  | (7,688)     |  | 11.75            |  | -          |  | -       
|Options exercised        | (161,003)  |  | 2.37             |  | (1,064,370) |  | 1.39             |  | (382,100)  |  | 2.12    
|Balance outstanding,     |            |  |                  |  |             |  |                  |  |            |  |         
|end of year              | 3,881,341  |  | $ 6.53           |  | 3,312,407   |  | $ 6.59           |  | 3,805,700  |  | $ 4.44  
|                         |            |  |                  |  |             |  |                  |  |            |  |         
|                         |            |  |                  |  |             |  |                  |  |            |  |         





The following table summarizes options outstanding and exercisable at December 31, 2009:



|         |  | outstanding at |  | remaining        |  | average 
|-------- |  | -------------- |  | ---------------- |  | --------
|Exercise |  | December 31,   |  | contractual life |  | exercise
|price    |  | 2009           |  | (years)          |  | price   
|$ 1.00   |  | 60,000         |  | 0.92             |  | $ 1.00  
|1.06     |  | 460,000        |  | 0.05             |  | 1.06    
|2.00     |  | 50,000         |  | 1.46             |  | 2.00    
|2.46     |  | 127,000        |  | 1.56             |  | 2.46    
|3.00     |  | 487,500        |  | 1.10             |  | 3.00    
|3.12     |  | 11,000         |  | 1.67             |  | 3.12    
|3.56     |  | 13,000         |  | 1.22             |  | 3.56    
|4.04     |  | 130,030        |  | 1.25             |  | 4.04    
|5.32     |  | 223,617        |  | 4.48             |  | 5.32    
|5.36     |  | 462,500        |  | 1.95             |  | 5.36    
|5.54     |  | 327,822        |  | 4.31             |  | 5.54    
|5.90     |  | 25,000         |  | 4.85             |  | 5.90    
|6.32     |  | 183,983        |  | 4.96             |  | 6.32    
|7.56     |  | 35,000         |  | 2.07             |  | 7.56    
|7.62     |  | 50,000         |  | 3.73             |  | 7.62    
|8.80     |  | 200,000        |  | 2.15             |  | 8.80    
|9.40     |  | 45,000         |  | 2.25             |  | 9.40    
|10.01    |  | 240,264        |  | 3.50             |  | 10.01   
|12.91    |  | 274,625        |  | 3.12             |  | 12.91   
|14.15    |  | 425,000        |  | 2.79             |  | 14.15   
|14.70    |  | 50,000         |  | 2.59             |  | 14.70   
|         |  | 3,881,341      |  | 2.38             |  | $ 6.53  
|         |  |                |  |                  |  |         









---

MAG SILVER CORP.

(An exploration stage company)

Notes to the Consolidated Financial Statements





8.

SHARE CAPITAL (Continued)



(b)

Stock options (continued)



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.



During the year ended December 31, 2009, the Company granted 761,125 stock options, (2008
- 578,765, of which 7,688 were later forfeited). The Company has recorded $1,804,465 (2008 - $2,539,011) of compensation expense relating to stock options vested to employees and consultants in the year ended December 31, 2009.



For the year ended December 31, 2009, stock-based compensation expense was determined using an option pricing model assuming no dividends are to be paid (2008
- no dividends paid), a weighted average volatility of the Company's share price of 61% (2008
- 49%), an annual risk free interest rate of 2.04% (2008 - 3.37%) and
expected lives of three years, (2008 - expected lives of three years).



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, 2009, 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.











---

MAG SILVER CORP.

(An exploration stage company)

Notes to the Consolidated Financial Statements





10.

FINANCIAL RISK MANAGEMENT (Continued)



(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 December 31, 2009 there were no cash equivalents.



(iii)

Derivative financial instruments

As at December 31, 2009, 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.



(iv)

Mexican value added tax

At year end the Company had a receivable of $1,493,337 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 at December 31, 2009 is as follows:



|                    |  |              |  |                  
|------------------- |  | ------------ |  | -----------------
|                    |  | Dec. 31,2009 |  | Dec. 31,
    2008
|Cash                |  | $ 30,925     |  | $ 414,359        
|Accounts Receivable |  | 1,493,337    |  | 2,294,571        
|                    |  | $ 1,524,262  |  | $ 2,708,930      
|                    |  |              |  |                  





(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.







---

MAG SILVER CORP.

(An exploration stage company)

Notes to the Consolidated Financial Statements





10.

FINANCIAL RISK MANAGEMENT (Continued)



(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, 2009 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                 |  | $        
    1,800,582
|Other comprehensive loss |  | 605,601                
|Comprehensive loss       |  | $       
    2,406,183 



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 is exposed to interest rate risk. A continued decrease in interest rates as was seen at the end of 2009 would result in lower interest income in 2010.



























---

MAG SILVER CORP.

(An exploration stage company)

Notes to the Consolidated Financial Statements





11.

FINANCIAL INSTRUMENTS AND FAIR VALUE DISCLOSURES



The Company's financial instruments include cash and cash equivalents, accounts receivable, interest receivable, marketable securities, and accounts payable and accrued liabilities. The carrying values of cash and cash equivalents, accounts receivable, interest receivable, and accounts payable and accrued liabilities reported in the consolidated balance sheet approximate their respective fair values due to the relatively short-term nature of these instruments.



Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value hierarchy establishes three levels to classify the inputs to valuation techniques used to measure fair value. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices in markets that are not active, quoted prices for similar assets or liabilities in active markets, inputs other than quoted prices that are observable for the asset or liability (for example, interest rate and yield curves observable at commonly quoted intervals, forward pricing curves used to value currency and commodity contracts and volatility measurements used to value option contracts), or inputs that are derived principally from or corroborated by observable market data or other means. Level 3 inputs are unobservable (supported by little or no market activity). The fair value hierarchy gives the highest priority to Level 1 inputs and the lowest priority to Level 3 inputs.



The fair value of available-for-sale securities is determined based on a market approach reflecting the closing price of each particular security at the balance sheet date. The closing price is a quoted market price obtained from the exchange that is the principal active market for the particular security, and therefore available-for-sale securities are classified within Level 1 of the fair value hierarchy.



There were no financial instruments fair valued within Levels 2 or 3 of the fair value hierarchy as at December 31, 2009.



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.







































---

MAG SILVER CORP.

(An exploration stage company)

Notes to the Consolidated Financial Statements





13.

RELATED PARTY TRANSACTIONS



The Company paid or accrued non-executive directors fees of $258,750 during the year ended December 31, 2009 (2008 - $305,750).



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.



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, these companies have a common director with the Company.  During the year ended December 31, 2009, the Company accrued or paid Cascabel and Imdex consulting, administration and travel fees totaling $291,871 (2008 - $194,590) and exploration costs totaling $2,982,276 (2008 - $2,504,237) 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 period ended December 31, 2009, the Company accrued or paid Platinum Group Metals Ltd. $135,751 under the office service agreement (2008 - $135,777).



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, 2009, the Company accrued or paid Anthem $87,444 under the office lease agreement (2008 - $83,556).



The office services agreement with Platinum Group Metals Ltd. and the office lease with Anthem Works Ltd. were terminated with effect at December 31, 2009 and the Company is operating as of January 1, 2010 from premises leased from an arm's length third party and is providing its own office services.



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.

COMMITMENTS



The Company's minimum payments under its five year office lease agreement which was entered into during the year ended December 31, 2009, are as follows:



2010150,6022011156,2092012156,2092013160,5562014160,556$784,132
























---

MAG SILVER CORP.

(An exploration stage company)

Notes to the Consolidated Financial Statements





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:



|                                                          |  |                     |  |                      |  |                      
|--------------------------------------------------------- |  | ------------------- |  | -------------------- |  | ---------------------
|                                                          |  | 2009                |  | 2008                 |  | 2007                 
|                                                          |  |                     |  |                      |  |                      
|Statutory tax rates                                       |  | 30.00%              |  | 31.00%               |  | 34.12%               
|                                                          |  |                     |  |                      |  |                      
|Recovery of income taxes computed at statutory rates      |  | $ 4,047,063         |  | $ 1,820,596          |  | $ 2,771,112          
|Non-deductible expenses                                   |  | (732,440)           |  | (790,232)            |  | (1,780,305)          
|Lower effective tax rate on loss in foreign jurisdictions |  | (91,466)            |  | (42,223)             |  | (48,648)             
|Change in valuation allowance                             |  | (2,596,426)         |  | (832,445)            |  | (1,601,926)          
|Other                                                     |  | (626,731)           |  | (155,696)            |  | 659,767              
|Income tax recovery                                       |  | $            
    - |  | $             
    - |  | $              
    -
|                                                          |  |                     |  |                      |  |                      







The approximate tax effect of each item that gives rise to the Company's future income tax assets at December 31, 2009 and 2008 are as follows:



|                                                    |                     |  |                     
|--------------------------------------------------- | ------------------- |  | --------------------
|                                                    | 2009                |  | 2008                
|Canadian operating loss carryforwards               | $   3,657,703       |  | $   2,616,778       
|Mexican operating loss carryforwards                | 13,263,426          |  | 8,646,430           
|Canadian capital losses carried forward             | 31,553              |  | 65,629              
|Cumulative eligible capital                         | 599,290             |  | -                   
|Share issuance costs and other                      | 459,267             |  | 749,501             
|Total future income tax assets                      | 18,011,239          |  | 12,078,338          
|Less valuation allowance                            | (6,558,926)         |  | (3,962,500)         
|Net future income tax assets                        | 11,452,312          |  | 8,115,838           
|Future income tax liability                         |                     |  |                     
|Excess of book value of mineral rights and deferred |                     |  |                     
|exploration costs over tax values                   | (11,452,312)        |  | (8,115,838)         
|Net future income tax assets                        | $                 - |  | $                  -



At December 31, 2009, the Company has non-capital loss carryforwards aggregating $14,631,000, which expire over the period between 2010 and 2029, 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, 2009, the Company has tax loss carryforwards in Mexico aggregating $42,869,000, which expire between 2013 and 2020, available to offset future taxable income.































---

MAG SILVER CORP.

(An exploration stage company)

Notes to the Consolidated Financial Statements





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, 2009 and 2008 are as follows:





|                                                        |  |              |  |             
|------------------------------------------------------- |  | ------------ |  | ------------
|                                                        |  |             
|As at December 31                                       |  | 2009         |  | 2008        
|                                                        |  |              |  |             
|Total assets under Canadian GAAP                        |  | 82,653,538   |  | 95,147,510  
|Adjustment to exploration expenditures (a)              |  | (37,433,919) |  | (25,237,198)
|Cumulative adjustment to mineral and surface rights (b) |  | (601,000)    |  | (601,000)   
|Adjustment to investment in JVV (c)                     |  | (1,171,441)  |  | (1,296,023) 
|Total assets under US GAAP                              |  | 43,447,178   |  | 68,013,289  
|                                                        |  |              |  |             
|Total liabilities under Canadian and US GAAP            |  | 1,076,606    |  | 1,503,417   
|                                                        |  |              |  |             
|Shareholders' equity under Canadian GAAP                |  | 81,576,932   |  | 93,644,093  
|Cumulative mineral properties adjustment (a)            |  | (37,433,919) |  | (25,237,198)
|Cumulative adjustment to mineral and surface rights (b) |  | (601,000)    |  | (601,000)   
|Cumulative share of loss in significantly influenced    |  |              |  |             
|investment (c)                                          |  | (1,875,120)  |  | (1,822,207) 
|Cumulative adjustment to accumulated other              |  |              |  |             
|comprehensive income (c)                                |  | 703,679      |  | 526,184     
|Shareholders' equity under US GAAP                      |  | 42,370,572   |  | 66,509,872  
|Total liabilities and shareholders' equity under        |  |              |  |             
|US GAAP                                                 |  | 43,447,178   |  | 68,013,289  
|                                                        |  |              |  |             



























---

MAG SILVER CORP.

(An exploration stage company)

Notes to the Consolidated Financial Statements





16.

DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY

ACCEPTED ACCOUNTING PRINCIPLES (Continued)



Consolidated Statement of Loss and Comprehensive Loss



|                                       |  |              |  |              |  |              |  | Cumulative
    amount from
    April 21, 1999 to
    December 31,
|-------------------------------------- |  | ------------ |  | ------------ |  | ------------ |  | -----------------------------------------------------------------
|Years ended December 31                |  | 2009         |  | 2008         |  | 2007         |  | 2009                                                             
|                                       |  |              |  |              |  |              |  |                                                                  
|Net loss under Canadian GAAP           |  | (13,490,210) |  | (5,872,889)  |  | (8,149,258)  |  | (35,425,303)                                                     
|Deferred exploration costs (a)         |  | (12,196,721) |  | (12,234,460) |  | (5,668,857)  |  | (37,433,919)                                                     
|Amortization of mineral rights (b)     |  | -            |  | -            |  | -            |  | (601,000)                                                        
|Equity in significantly influenced     |  |              |  |              |  |              |  |                                                                  
|investment (c)                         |  | (52,913)     |  | (75,565)     |  | 378,409      |  | (1,875,120)                                                      
|Compensation expense (d)               |  | -            |  | -            |  | -            |  | (600,000)                                                        
|Stock-based compensation for           |  |              |  |              |  |              |  |                                                                  
|employees and directors (d)            |  | -            |  | -            |  | -            |  | 482,659                                                          
|Net loss under US GAAP                 |  | (25,739,844) |  | (18,182,914) |  | (13,439,706) |  | (75,452,683)                                                     
|Other comprehensive income under       |  |              |  |              |  |              |  |                                                                  
|Canadian GAAP                          |  | (762,442)    |  | (310,912)    |  | (716,778)    |  | (1,790,132)                                                      
|Adjustment to other comprehensive      |  |              |  |              |  |              |  |                                                                  
|Loss under US GAAP (c)                 |  | 177,495      |  | 42,617       |  | 483,567      |  | 703,679                                                          
|Comprehensive loss under US GAAP       |  | (26,324,791) |  | (18,451,209) |  | (13,672,917) |  | (76,539,136)                                                     
|                                       |  |              |  |              |  |              |  |                                                                  
|Basic and diluted loss per share under |  |              |  |              |  |              |  |                                                                  
|US GAAP                                |  | $ (0.53)     |  | $ (0.38)     |  | $ (0.32)     |  |                                                                  
|                                       |  |              |  |              |  |              |  |                                                                  







































---

MAG SILVER CORP.

(An exploration stage company)

Notes to the Consolidated Financial Statements





16.

DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY

ACCEPTED ACCOUNTING PRINCIPLES (Continued)



Consolidated Statement of Cash Flows



|                                         |  |                 |  |               |  |               |  |              
|---------------------------------------- |  | --------------- |  | ------------- |  | ------------- |  | -------------
|                                         |  |                 |  |               |  |               |  | Cumulative   
|                                         |  |                 |  |               |  |               |  | amount from  
|                                         |  |                 |  |               |  |               |  | April 21,    
|                                         |  |                 |  |               |  |               |  | 1999 to      
|                                         |  |                 |  |               |  |               |  | December 31, 
|Years ended December 31                  |  | 2009            |  | 2008          |  | 2007          |  | 2009         
|Operating activities                     |  |                 |  |               |  |               |  |              
|Operating activities under               |  |                 |  |               |  |               |  |              
|Canadian GAAP                            |  | $  (7,493,014)  |  | $ (3,128,963) |  | $ (2,608,313) |  | $(17,642,453)
|Reclassification of deferred exploration |  |                 |  |               |  |               |  |              
|costs (a)                                |  | (14,819,336)    |  | (12,976,644)  |  | (5,760,230)   |  | (40,923,248) 
|Operating activities under US GAAP       |  | $(22,312,350)   |  | $(16,105,607) |  | $ (8,368,543) |  | $(58,565,700)
|                                         |  |                 |  |               |  |               |  |              
|Investing activities                     |  |                 |  |               |  |               |  |              
|Investing activities under               |  |                 |  |               |  |               |  |              
|Canadian GAAP                            |  | $(18,346,922)   |  | $(17,619,914) |  | $(10,205,342) |  | $(57,819,801)
|Reclassification of deferred             |  |                 |  |               |  |               |  |              
|exploration costs (a)                    |  | 14,819,336      |  | 12,976,644    |  | 5,760,230     |  | 40,923,248   
|Investing activities under US GAAP       |  | $  (3,527,586)  |  | $ (4,643,270) |  | $ (4,445,112) |  | $(16,896,554)
|                                         |  |                 |  |               |  |               |  |              
|Financing activity                       |  |                 |  |               |  |               |  |              
|Financing activity under                 |  |                 |  |               |  |               |  |              
|Canadian and US GAAP                     |  | $       381,027 |  | $  12,864,131 |  | $  69,454,032 |  | $102,265,906 





(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













---

MAG SILVER CORP.

(An exploration stage company)

Notes to the Consolidated Financial Statements





16.

DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (Continued)



standards Board in the U.S. concluded that mineral rights have the characteristics of tangible 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 for U.S. GAAP purposes, the FASB issued ASC 815 guidance on Accounting for derivative instruments and hedging activities for Share-Based Payment, which requires the recognition of compensation expense for all share-based payment awards. The guidance 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 the guidance 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 ASC 815, 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.























---

MAG SILVER CORP.

(An exploration stage company)

Notes to the Consolidated Financial Statements





16.

DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (Continued)



e)

Uncertain tax positions



Effective January 1, 2007, the Company adopted for U.S. GAAP purposes, the FASB issued ASC 740-10 guidance on Accounting for Uncertainty in Income Taxes.  This guidance 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. This adoption had no impact on the Company's consolidated financial statements prepared under U.S. GAAP. The Company has not de-recognized any tax benefits or recognized any changes in the classification of tax liabilities during the year ended December 31, 2009.



f)

Fair value measurements



In September 2006, the FASB issued ASC 820-10 guidance on Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. This guidance 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 this guidance.



g)

Recent U.S. Accounting Pronouncements

(i)

FASB Accounting Standard Codification ("ASC") No. 805, Business Combinations ("ASC 805")



ASC 805, Business Combinations improves the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial reports about a business combination and its effects. This Statement establishes principles and requirements for how the acquirer recognizes and measures the identifiable assets acquired, liabilities assumed, and any noncontrolling interest in the acquiree; recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. This Statement applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008.Since ASC 805 will only be applicable to future business combinations, it will not have a significant effect on the Company's financial position, results of operations or cash flows prior to such acquisitions.













---

MAG SILVER CORP.

(An exploration stage company)

Notes to the Consolidated Financial Statements





16.

DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (Continued)



(ii)

FASB Accounting Standard Codification ("ASC") No. 810, Consolidation ("ASC    810")



In December 2007, the FASB issued ASC 810,
"Consolidation". ASC 810 establishes accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. This Standard clarifies that a non-controlling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. ASC 810 changes the way the consolidated earnings (loss) statement is presented by requiring consolidated net earnings (loss) to be reported including the amounts attributable to both the parent interest and the non-controlling interest. The Standard requires disclosure on the face of the consolidated statement of operations of the amounts of consolidated net earnings (loss) attributable to the parent interest and to the non-controlling interest. ASC 810 is effective for fiscal periods, and interim periods within those fiscal years, beginning on or after December 15, 2008. The Company expects that the adoption of ASC 810 will not have significant effect on the Company's financial position, results of operations or cash flows.



(iii)

FASB Accounting Standard Codification ("ASC") No. 815, Derivatives and Hedging ("ASC 815")



The FASB issued ASC 815, Derivatives and Hedging, which revises disclosure requirements for derivative instruments and hedging activities. It requires disclosure by sellers of credit derivatives, including credit derivatives embedded in a hybrid instrument and requires an additional disclosure about the current status of the payment/performance risk of a guarantee.  The Standard is effective for financial statements issued for years beginning after November 15, 2008 and interim periods within those years. The company is currently assessing the impact of ASC 815 on its future disclosures.



(iv)

FASB Accounting Standard Codification ("ASC") No. 855, Subsequent events ("ASC 855")



The FASB issued ASC 855, Subsequent events, which establishes general standards of accounting for, and disclosure of, events that occur after the balance sheet date but before financial statements are issued or are available to be issued. This Standard is effective for interim or annual periods ending after June 15, 2009 and its adoption had no impact on the Company's financial statements.















---

MAG SILVER CORP.

(An exploration stage company)

Notes to the Consolidated Financial Statements





16.

DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (Continued)



(v)

FASB Accounting Standards Codification ("ASC") No. 105, Generally Accepted Accounting Principles ("ASC 105")



The FASB issued ASC 105, Generally Accepted Accounting Principles, which identifies the source of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities presented in conformity with US GAAP. It is effective for interim and annual periods ending after September 15, 2009. The adoption of this Standard will be applied prospectively.



(vi)

FSAB Accounting Standards Codification ("ASC") 825, Financial Instruments  ("ASC 825")





The FASB issued ASC 825, Financial Instruments, which requires disclosures about fair value of financial instruments in interim financial statements of public companies (rather than just annually), and requires those disclosures in summarized financial information at interim periods. ASC 825 is effective for periods ending after June 15, 2009. The adoption of this Standard had no significant impact of the Company's financial statements.



(vii)

FSAB Accounting Standards Codification ("ASC") 325
- Investments - Other  ("ASC 325")



ASC 325, Investments
- Other, is effective for interim and annual reporting periods ending after December 15, 2008. The goal is to achieve a more consistent determination of whether an other-than-temporary impairment has occurred and reemphasizes the objective of an other-than-temporary impairment assessment and the related disclosure requirements in ASC 815. The adoption of this Standard had no impact on the Company's results of operations and financial position.



(viii)

FSAB Accounting Standards Codification ("ASC") 820
- Fair Value Measurements and Disclosures ("ASC 820")



This Standard provides additional guidance to highlight and expands on the factors that should be considered in estimating fair value when there has been a significant decrease in market activity for a financial asset. The Standard is effective for interim and annual periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. In the period of adoption, a reporting entity must disclose any changes in valuation techniques and related inputs resulting from the application of this Standard, and quantify the total effect of the change in valuation techniques and related inputs, if practicable, by major category. The adoption of this Standard had no impact on the Company's results of operations and financial position.







---

MAG SILVER CORP.

(An exploration stage company)

Notes to the Consolidated Financial Statements





16.

DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (Continued)



(ix)

FSAB Accounting Standards Codification ("ASC") 320
- Investments - Debt and Equity disclosures ("ASC 320")



ASC 320 changed (1) the method for determining whether an other-than-temporary impairment exists for debt securities and (2) the amount of an impairment charge to be recorded in earnings. The Standard is effective for interim and annual periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. In the period of adoption, an entity must provide the disclosures required by FASB Statement No. 154, Accounting Changes and Error Corrections, for changes in accounting principles. The adoption of this Standard had no impact on the Company's results of operations and financial position.

















































































---

MAG SILVER CORP.

(An exploration stage company)

Notes to the Consolidated Financial Statements





Consolidated schedule of share capital since inception





|                                                                                      |                   |  |                 |  |              
|------------------------------------------------------------------------------------- | ----------------- |  | --------------- |  | -------------
|MAG SILVER CORP.                                                                      |                   |  |                 |  |              
|(An exploration stage company)                                                        |                   |  |                 |  |              
|Consolidated schedule of share capital since inception                                |                   |  |                 |  |              
|(expressed in Canadian dollars)                                                       |                   |  |                 |  |              
|                                                                                      | Common shares    
|                                                                                      | without par value
|                                                                                      | Number            |  | Price           |  | Amount       
|For cash                                                                              | 1,500,000         |  | $ 0.10          |  | $ 15,000,000 
|Balance, December 31, 1999                                                            | 1,500,000         |  |                 |  | 150,000      
|For cash                                                                              | 1,500,000         |  | 0.16            |  | 240,222      
|Balance, December 31, 2000                                                            | 3,000,000         |  |                 |  | 390,222      
|Balance, December 31, 2001                                                            | 3,000,000         |  |                 |  | 390,222      
|For cash                                                                              | -                 |  | -               |  | -            
|Balance, December 31, 2000, 2001, 2002                                                | 3,000,000         |  |                 |  | 390,222      
|For cash                                                                              | 11,500,000        |  | 0.50            |  | 5,109,766    
|Conversion of special warrants                                                        | 2,400,000         |  | 0.16            |  | 375,000      
|Agent's administration                                                                | 10,000            |  | 0.50            |  | 5,000        
|For finders' fee                                                                      | 500,000           |  | 0.50            |  | 250,000      
|For mineral property                                                                  | 200,000           |  | 0.50            |  | 100,000      
|Issuance to acquire Lexington                                                         | 200,000           |  | 0.90            |  | 180,000      
|For cash on exercise of warrants                                                      | 5,183,995         |  | 0.20 - 0.75     |  | 3,068,996    
|For cash on exercise of stock options                                                 | 100,000           |  | 0.20 - 0.50     |  | 26,000       
|Balance, December 31, 2003                                                            | 23,093,995        |  |                 |  | 9,504,984    
|For mineral properties                                                                | 1,358,793         |  | 0.62 - 2.00     |  | 1,578,752    
|For cash on exercise of warrants                                                      | 1,236,750         |  | 0.20 - 0.75     |  | 480,562      
|For cash on exercise of stock options                                                 | 140,000           |  | 0.20 - 0.77     |  | 68,070       
|Balance, December 31, 2004                                                            | 25,829,538        |  |                 |  | 11,632,368   
|For cash                                                                              | 7,201,176         |  | 0.94            |  | 6,771,672    
|For mineral properties                                                                | 1,654,679         |  | 0.70 - 0.95     |  | 1,337,289    
|For cash on exercise of warrants                                                      | 1,400,755         |  | 0.50 - 0.75     |  | 1,046,566    
|For cash on exercise of stock options                                                 | 105,500           |  | 0.20 - 0.50     |  | 24,290       
|Balance, December 31, 2005                                                            | 36,191,648        |  |                 |  | 20,812,185   
|For cash pursuant to private placement                                                | 245,716           |  | 2.35            |  | 577,433      
|For mineral properties                                                                | 85,043            |  | 2.25 - 2.75     |  | 204,431      
|For cash on exercise of warrants                                                      | 944,503           |  | 1.35            |  | 1,275,079    
|For cash and contributed surpluson 
                   
    exercise of stock options | 461,700           |  | 0.50 -
    4.04 |  | 564,814      
|Balance, December 31, 2006                                                            | 37,928,610        |  |                 |  | 23,433,942   
|For cash pursuant to private placements                                               | 5,760,000         |  | 7.25 - 15.50    |  | 59,955,443   
|For cash and contributed surplus on exercise 
                   
    of warrants     | 2,883,486         |  | 1.35 - 10.00    |  | 6,468,783    
|For cash and contributed surpluson 
                   
    exercise of stock options | 382,100           |  | 0.50 - 9.40     |  | 1,247,472    
|Balance, December 31, 2007                                                            | 46,954,196        |  |                 |  | 91,105,640   
|For cash and contributed surplus on 
                  
    exercise of warrants      | 1,137,000         |  | 10.00           |  | 13,588,444   
|For cash and contributed surpluson 
                  
    exercise of stock options  | 1,064,370         |  | 0.50 - 5.36     |  | 2,328,932    
|Balance, December 31, 2008                                                            | 49,155,566        |  |                 |  | 107,023,016  
|For cash and contributed surpluson 
                  
    exercise of stock options  | 161,003           |  | 1.06 - 5.54     |  | 591,833      
|Balance, December 31, 2009                                                            | 49,316,569        |  |                 |  | $ 107,614,849
|                                                                                      |                   |  |                 |  |              







17.

SUBSEQUENT EVENTS



Subsequent to December 31, 2009, 571,473 common shares were issued pursuant to the exercises of 571,473 stock options at prices between $1.06 and $6.32 per share for aggregate proceeds of $878,911. In March 2010, there were 50,000 incentive stock options granted at a price of $6.87 per share.

































---







































[mda001.jpg]
      MAG SILVER
        CORP.
        (An
        exploration and predevelopment stage company)
        Annual
        Management Discussion & Analysis
        For the year
        ended
        December 31,
        2009Dated: March
        25, 2010














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



























































|                                                                                                                |                                                                                                            |  |  |                                                                            
|--------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------- |  |  | ---------------------------------------------------------------------------
|VANCOUVER
      OFFICE
      Suite
      770
      800
      W. Pender Street
      Vancouver,
      BC V6C 2V6 | 604 630 1399
      phone
      866
      630 1399
      toll
      free
      604
      681-0894
      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, 2009







MAG Silver Corp. ("we", "MAG" or
the "Company") is a mineral exploration and predevelopment company focused
on the acquisition, exploration and development of district scale projects
located within the Mexican silver belt.  The company is based in Vancouver,
British Columbia, Canada.  Our common shares trade on the Toronto Stock
Exchange under the symbol MAG and on the NYSE Amex under the symbol MVG.
 The Company is a "reporting issuer" in the Provinces of British
Columbia, Alberta and Ontario and is a "reporting foreign issuer" in the
USA.



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, 2009 and 2008.
 It is prepared as of March 25, 2010 and should be read in conjunction with
the audited consolidated financial statements for the year ended December 31,
2009 and the audited consolidated financial statements of the Company for the
year ended December 31, 2008, together with the notes thereto.  All dollar
amounts referred to in this MD&A are expressed in Canadian dollars except
where indicated otherwise.

The Company believes it is a
Passive Foreign Investment Company ("PFIC"), as that term is defined in
Section 1297 of the U.S. 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.



In December of 2008, London Stock Exchange
listed Fresnillo plc announced an intention to make a hostile bid for all of the
outstanding shares of MAG.  Fresnillo, an insider by virtue of its
ownership of 19.8% of MAG, was in the unique position of also being the majority
owner and operator of the joint venture company Minera Juanicipio S.A. DE C.V.
("Minera Juanicipio").  On June 18, 2009, in connection with
MAG's formal application to the Ontario Securities Commission ("OSC") to
compel Fresnillo to produce critical information needed to complete the
independent valuation report for the non-Fresnillo shareholders of the Company
as required by Multilateral Instrument 61-101, the OSC ordered Fresnillo to
provide discovery of documents and email records that were germane to
Fresnillo's repeated assertions that critical documents concerning Fresnillo's
regional development plans adjacent to the Juanicipio joint venture property and
other information required in connection with the independent valuation of MAG
and repeatedly requested by the independent valuator do not exist.  Within
two working days of this order Fresnillo withdrew its intention to make a
hostile bid, obviating the need to comply with the OSC order.



During Fresnillo's hostile bid attempt,
MAG initiated arbitration proceedings with the International Court of
Arbitration of the International Chamber of Commerce pursuant to the dispute
resolution provisions contained in the Minera Juanicipio Shareholders Agreement.
 It has always been MAG's position that an unsolicited hostile bid by
Fresnillo is prohibited by the terms of the Shareholders Agreement.
 Accordingly, MAG is seeking a ruling as to whether or not Fresnillo may
acquire or attempt to acquire control of MAG without the consent of MAG's
board in breach of the standstill provisions contained in the Shareholders
Agreement, and is also seeking relief in relation to other alleged violations by
Fresnillo as operator under the Shareholders Agreement, including claims for
damages and other orders arising from Fresnillo's conduct.  The
arbitration process is presently in progress.



In response to Fresnillo's intended
hostile bid, MAG chose to accelerate its own 2009 exploration program with the
aim of unlocking additional shareholder value from its own portfolio of
exploration properties.  Results of the 2009 program indicate that Lagartos
SE and Cinco de Mayo projects have been advanced with significant drill results
and are worthy of further exploration work going forward.  At Cinco de Mayo
an extensive, near surface, molybdenum and gold mineralized zone has been
discovered and work continues to expand and delineate the Pozo Seco moly/gold
zone.



On August 19, 2009 independent engineering
firm Wardrop, a Tetra Tech Company, ("Wardrop") delivered a NI 43-101
scoping study on the Valdecanas Vein. Commissioned by Minera Juanicipio, this
preliminary economic assessment for a standalone operation demonstrated very
positive economics, even without taking into account the benefit of potential
regional synergies from developments completed and/or recently announced on the
adjoining property owned by Fresnillo.



See "Review of Operations and Projects"
below for more detail on the Company's exploration activities.





2/19



---

MAG
SILVER CORP.

(An
exploration stage company)

Annual
Management Discussion & Analysis

For the year ended
December 31, 2009







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 most recently filed 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 EDGAR website at www.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") and or prepared by or under the supervision of Dan
MacInnis P. Geo., 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 and Inferred 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.



This MD&A also uses the terms
"Inferred Resources" and "Indicated Resources". MAG advises
investors that although these terms are recognized and required by Canadian
regulations (under National Instrument 43-101 -- Standard of Disclosure for
Mineral Projects), the U.S. Securities and Exchange Commission ("SEC") does
not recognize these terms. Investors are cautioned that "inferred
resources" have a great amount of uncertainty as to their existence, and
great uncertainty as to their 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, except in rare cases. Investors are cautioned not to assume that
part or all of an inferred resource exists, or is economically or legally
mineable.  Investors are further cautioned not to assume that any part or
all of an indicated mineral resource will be converted into reserves.



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, 2009 | Year ended
      Dec. 31, 2008 | Year ended
      Dec. 31, 2007
|Revenues(1)        | $298,506                       | $1,964,680                     | $915,604                      
|Net Loss(2)        | ($13,490,210)                  | ($5,872,889)                   | ($8,149,258)                  
|Net Loss per Share | ($0.27)                        | ($0.12)                        | ($0.19)                       
|Total Assets(3)    | $82,653,538                    | $95,147,510                    | $85,061,932                   
|Long Term Debt     | Nil                            | Nil                            | Nil                           
|Dividends          | Nil                            | Nil                            | Nil                           





Notes:

(1)

The
Company's only source of revenue during the years ending December 31, 2007 to
2009 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 and prevailing interest rates.



(2)

By
excluding non-cash expenses which are non GAAP disclosure, such as the stock
compensation expense which totalled $1,804,465 in 2009, $2,539,011in
2008, and $5,256,566 in 2007, the Company's net loss has been increasing
during the years ending December 31, 2007 to 2009 due to several factors.
  Excluding the effect of stock compensation expense from the recorded
annual net loss, the amounts become $11,685,745; $3,333,878; and $2,892,692 for
2009, 2008, and 2007 respectively.  Stock based compensation expense is a
non-cash charge.  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 decreased from December 31, 2008 to 2009 primarily as a result of the
Company's lower cash balance.  Cash was disbursed for accelerated
exploration programs and continued investment in mineral properties as described
below.  At the end of 2009, the Company held $26,803,652 in cash and cash
equivalents compared to $52,262,561 at December 31, 2008 and $60,147,307 at
December 31, 2007.











3/19



---

MAG
SILVER CORP.

(An
exploration stage company)

Annual
Management Discussion & Analysis

For the year ended
December 31, 2009







MAG chose to accelerate its own 2009
exploration program with the aim of unlocking additional shareholder value from
its own portfolio of exploration properties in response to Fresnillo's
intended hostile bid.



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, 2009, the Company had cash
and cash equivalents on hand of $26,803,652 versus $52,262,561 at December 31,
2008.  The Company's reserves of cash and cash equivalents originate from
financings completed in 2007 and warrant exercises completed early in 2008.



Net of interest earned for the year ended
December 31, 2009 of $298,506 and $1,964,680 for the year ended December 31,
2008, the Company's operating loss amounted to $13,490,210 for the year ended
December 31, 2009 as compared to $5,872,889 in 2008. The 2009 loss includes
mineral property write-offs of $3,718,518 (2008: $1,221,019) and a non-cash
charge for stock compensation expense of $1,804,465 (2008: $2,539,011).
 Excluding the mineral property write-off and stock compensation expenses
the net loss for 2009 would be $7,967,228 (2008: $2,112,859).  The Company's
defensive efforts against Fresnillo's intended hostile bid for the Company in
2009 increased several cost areas, including higher legal costs of $3,048,507
(2008: $884,000), AGM and proxy solicitation costs of $219,854 ($96,960 in
2008), travel costs of $287,045 (2008: $235,144), telephone communication costs
of $733,112 (2008: $506,332) and shareholder relations expense of $714,809
(2008: $404,776).  Management and consulting fees increased to $1,984,515
(2008: $1,528,630) due to the hiring of additional employees, increased
salaries, bonuses paid and an increase in board and committee meetings in 2009
resulting in higher non-executive directors fees.  Due to the devaluation
in the Mexican peso during 2009, the Company also recorded a loss on foreign
exchange in the amount of $619,805 as opposed to a gain of $96,596 in 2008.



As a result of Fresnillo's intended
hostile bid announced in late 2008, MAG was exposed to substantial professional
and administrative costs, particularly for take-over defense and the protracted
proceedings in front of the OSC.  The Company has also experienced
substantial and ongoing costs related to the initiation of arbitration
proceedings with the International Chamber of Commerce in Paris as prescribed by
the terms of the Minera Juanicipio Shareholders Agreement.  The Company is
seeking a ruling as to whether or not Fresnillo may acquire control of the
Company on a hostile basis in breach of the standstill provisions contained in
the Shareholders Agreement governing Minera Juanicipio and is also seeking
relief in relation to other alleged violations by Fresnillo as operator under
the Shareholders Agreement.  The arbitration proceeding with Fresnillo is
ongoing and there will be associated legal and administrative costs going
forward.  The costs associated with this proceeding are expected to be
significantly lower than the legal and administrative costs experienced in the
2009 fiscal year.





4/19



---

MAG
SILVER CORP.

(An
exploration stage company)

Annual
Management Discussion & Analysis

For the year ended
December 31, 2009





During the year ended December 31, 2009
the Company entered into two new employee agreements and during 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 before June
30, 2010, the change of control compensation for these eight employees would
amount to an aggregate of approximately $1.49 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 before June
30, 2010 the change of control compensation for these five directors would
amount to an aggregate of approximately $97,000.



REVIEW OF
OPERATION AND PROJECTS



During the year ended December 31, 2009,
the Company incurred $2,156,057 in property acquisition costs (2008:
$1,926,488).  Exploration expenditures for the same period amounted to
$14,389,336 (2008: $13,336,644).  The increased exploration expenditures
for the period reflect accelerated efforts throughout 2009 to advance MAG's
100% owned properties.  Drilling on these properties (Cinco de Mayo,
Salemex, Sierra Ramirez, Lagartos SE, San Ramone and Nuevo Mundo) totaled 72,810
metres.



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 EDGAR website at www.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 two known and key silver veins/structures: the Valdecanas
Vein and the Juanicipio Vein.



A total 19,833 metres of diamond drilling
was completed on the Juanicipio Joint Venture to early December 2009.  Of
that total, 11,700 metres were drilled on the Valdecanas Vein, 5,611 metres on
the Juanicipio Vein and finally 2,478 metres drilled on other structural or vein
targets. The drill program continued to yield high grade silver, gold, lead and
zinc returns.  Since drilling began in 2003, a total of 79 bore holes have
been completed through to December 31, 2009.  Collectively these
intersections combined to show the high grade silver/gold zone to have a
vertical height of almost 450 metres and have established a strike length for
this zone of approximately 1,700 metres.



In August 2009, Wardrop Engineering Inc.,
a Tetra Tech Company, ("Wardrop") as independent engineers mandated by
Minera Juanicipio, delivered a report entitled, Valdecanas Project - Scoping
Study, a NI 43-101 Technical Report (available on SEDAR at www.sedar.com
and on SEC's EDGAR website at www.sec.gov
or detailed in a press release dated September 14, 2009).   This
preliminary economic assessment demonstrated that the project clearly exhibits
excellent and positive economics and the report recommended that the project be
advanced to a pre-feasibility study.



Assay and geological results from the
Valdecanas drilling generally confirmed the geometry and nature of the bonanza
zone, with drilling at the top of the zone returning some insignificant results
and near the bottom of the zone high gold and base metal values that are
consistent with the low sulphidation epithermal (bonanza) zone model.
 Drill results previously disclosed may be found on SEDAR at www.sedar.com
and on SEC's EDGAR website at www.sec.gov
or detailed in press releases on the company website at www.magsilver.com.
 The drilling to date will also provide information enabling the upgrading
of a significant portion of the inferred resource estimate to indicated
resource.  In late 2009 drill results indicated that the Encino Vein is a
faulted off-set of the Valdecanas Vein.



Drilling results from the Juanicipio Vein,
located 1,000 metres south of Valdecanas, indicate a bonanza zone top-out about
100-150 metres deeper than Valdecanas and targets in 2010 are being proposed to
test for the bonanza zone at greater depth.  Drill results previously
disclosed may be found on SEDAR at www.sedar.com
and on SEC's EDGAR website at www.sec.gov
or detailed in press releases on the company website at www.magsilver.com.



5/19



---

MAG
SILVER CORP.

(An
exploration stage company)

Annual
Management Discussion & Analysis

For the year ended
December 31, 2009











For 2009, the Company's 44% contribution
toward joint venture expenditures amounted to $984,920.



Additional drilling was carried out on
other targets and two holes were in progress at the end of the year.  Both
holes are targeting structures where earlier drilling identified significant
geological or assay values indicative of favorable vein exploration
environments.



On December 4, 2009, the 2009 program
results were reviewed at a meeting of the technical committee of Minera
Juanicipio and a 2010 budget was presented including 21,400 metres of drilling
on the Juanicipio property.   This proposed drilling program resulted
in a 2010 exploration budget of US$4.0 million for Minera Juanicipio (MAG's
44% share is US$1.94 million).



The Company's 2010 Minera Juanicipio
budget of approximately US $2.6M represents MAG's pro rata 44% interest in the
joint venture.  At the board meeting in December of 2009 the board of
Minera Juanicipio approved an exploration budget of US $4.4M (100%) for 2010
including a carryover of an unspent US$400,000 from the 2009 budget for an
additional 2,000 metres of drilling. On March 16, 2010, the Minera Juanicipio
board approved an amendment to the 2010 exploration budget to include a further
of US$1.5 million (100%) engineering budget for a prefeasibility study. 
Commencement of the prefeasibility study is subject to completion of a resource
audit and update planned for June 2010 whereby at least 50% of the total
contained silver can be categorized as an indicated resource.  To the end
of 2009, almost 47% of the total contained resource ounces were classified as
indicated.  A 10 hole program utilizing 4 drills is presently underway and
is targeted for completion by June 2010.  MAG's 2010 budget for Minera
Juanicipio includes its 44% contribution for both the exploration budget and the
additional engineering budget.



Drilling in 2010 will be directed to the
Valdecanas Vein in order to convert a substantial portion of the inferred
resource to an indicated resource. Once this has been completed the project will
undertake a prefeasibility study. Work will also continue to explore along the
Juanicipio Vein for a potential bonanza zone. Exploration will also focus on new
areas in the search for other deeply buried veins on the Juanicipio property.



Although progress continues on the
Juanicipio property, the Company continues to advise Fresnillo that it supports
a rapid development program for the Valdecanas Vein in accordance with industry's
best practices in order to ensure the best financial results for the property.
 The technical committee and board of directors of Mineral Juanicipio,
comprised of representatives from both Fresnillo and the Company meet several
times a year to discuss the business of Minera Juanicipio and to review and
approve plans for the exploration and development of the Juanicipio property.



The Company has advanced Minera Juanicipio
a cumulative cash total of $9,382,075 for its 44% of acquisition and exploration
costs to December 31, 2009 (2008 - $8,471,205).  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
37,588 metres were drilled, in 72 holes, at Cinco de Mayo in 2009.  To
February 28, 2010 the Company has drilled approximately 100,400 metres on the
property, including 7,250 metres in 2010.



Early in 2009 as part of the Company's
defensive strategy, MAG accelerated the drill program at Cinco de Mayo having
recognized that the property was host to an extensive CRD system.  It was
also decided that the initial discovery, the Jose Manto, has a limited size
potential and this precluded further drilling. The 2009 program then shifted
focus to explore for the proximal center of the system in search of a major
skarn deposit of size and grade that would be a significant contributor of value
to the company.



6/19



---

MAG
SILVER CORP.

(An
exploration stage company)

Annual
Management Discussion & Analysis

For the year ended
December 31, 2009







Recent drilling has focused on locating
the central (proximal) intrusive source for the system, to which outer (distal)
styles of mineralization should be zonally related.  This drilling was
successful in the discovery in late 2009 of a high grade molybdenum/gold
mineralization at Pozo Seco, lying above a strong 2 by 3 kilometre positive
magnetic anomaly located about 4 kilometres southwest of the Jose Manto. At Pozo
Seco strong molybdenum mineralization hosted in silicified breccias sit
geologically above a large regional positive magnetic anomaly.  This
positionis comparable to what is seen
in the proximal parts of several major Mexican and U.S. CRD systems and is
consistent with what MAG's CRD exploration model predicts. Development of
increasingly distal mineralization styles in structural corridors leading
outwards from this centre is also consistent with the model.  Despite these
significant advances in the understanding of this system, this must still be
considered an early-stage project.



The significance of this discovery, called
the Pozo Seco Molybdenum (Gold) Zone ("Pozo Seco"), is two-fold:



1) The high-grade molybdenum
(approximately three times the average grade of most molybdenum producers)
encountered over bulk mineable widths just below surface suggests the
possibility of a standalone molybdenum operation;



2) The presence of high-grade molybdenum
may indicate proximity to the intrusive centre of Cinco de Mayo's
silver-lead-zinc mineralization. A proximal molybdenum zone characterizes the
San Martin-Sabinas District in Zacatecas, the largest skarn-replacement deposit
known in Mexico.



The drilling to date has identified the
host environment as a near-surface, flat-lying and well-mineralized breccia.
Drilling in the later two months of 2009 was part of a 20 hole, 2,000 metre
program drilled on a 200 metre grid centered on discovery Hole CM09-130.



The discovery was augmented by workin the spring of 2009, whereby two large regional airborne surveys were
flown over the Cinco de Mayo Property by Geotech Ltd. of Aurora, Ontario,
Canada. Geotech surveyed the area with their VTEM/Aeromagnetic system then
re-surveyed roughly a quarter of the area to test their new ZTEM system. Results
from both surveys are encouraging and a number of drill targets have been
identified. The Pozo Seco zone was delineated as a high priority follow up
target by both survey methods.



Existing geophysical data is being
reprocessed in 3-D by Mira Geoscience Ltd, Montreal, Quebec, and incorporated
with recent geochemical surveys and the ongoing drilling results to establish
some early tonnage estimates and provide new drill targets. Also, using state of
the art satellite imagery, Photosat Ltd., Vancouver, B.C. has completed an
ambitious 200 by 200 kilometre regional 3-D elevation model, covering the entire
Cinco de Mayo property. Cinco de Mayo is large, complex and poorly exposed and
all these efforts are designed to locate the intrusive source of this strongly
mineralized system.



To the end of 2009, sixteen vertical and
two angle holes had been drilled into molybdenum-gold or gold mineralization,
starting at or near the surface, in a broad, gently east-dipping, breccia
developed along the strong northwest-trending Lucia Fault zone.  Currently,
effort is focused on drilling vertical offsets to Discovery Hole CM-130 on a 200
metre grid centered on a NW-SE trending axis through a series of strong,
multi-stage jasperoid breccia outcrops that show the same strong NW-SE fabric.



In addition to the moly/gold zone drilling
has identified a zone where gold values are the dominate mineralization. Hole
CM09-150 is the best of the new gold-dominant holes, returning 27.50 grams gold
in a 0.30 metre zone lying practically at surface and containing abundant
visible gold within an overall 4.41 metres (4.95 to 9.36 metre depth) grading
1.99 grams gold.  Hole 150 and adjoining holes 153 and 123 show only trace
molybdenum in contrast to neighboring holes on the northeast side of the major
northwest-trending Lucia Fault, which appears to be the limit of strong
molybdenum mineralization. Gold mineralization appears to have been fed into the
molybdenum zone along a perpendicular northeast-trending fault zone that
continues to the southwest to where a recent geochemical grid sampling has
revealed a 1 kilometre diameter area with highly anomalous gold, silver, copper,
zinc, lead, arsenic, antimony and mercury values directly overlying a high-point
on the magnetic anomaly that underlies the entire Pozo Seco area.





7/19



---

MAG
SILVER CORP.

(An
exploration stage company)

Annual
Management Discussion & Analysis

For the year ended
December 31, 2009







A systematic geochemical sampling program
started in late 2009 on several outcrop areas near the Pozo Seco moly-gold zone.
 Over 200 samples have been taken to date.  Most of the results come
from a 1 kilometre diameter alluvium-surrounded outcrop area lying about 1,250
metres southwest of Hole 150 along the projection of the gold trend.  This
area sits directly above a high on the strong positive magnetic anomaly that
underlies the entire Pozo Seco zone and is believed to reflect an underlying
intrusive body.  The area is laced with northwest-trending structures, many
of which are silicified and some of which contain 20-50 cm thick galena and
tennantite-bearing barite or silica veins.  The area shows consistently
high gold, silver, copper, zinc, lead, arsenic, antimony and mercury values and
drilling here will be undertaken immediately on rigs returning to the project.



The 2010 program will start very
aggressively with the service of 5 drills to outline and delineate the Pozo Seco
zone.  The zone remains open to the NW and airborne geophysical results and
surface work indicate a further 1.5 kilometres of strike length is highly
probable.  Drilling in late 2009 also identified a "gold dominant" zone
on the west side of the Lucia Fault that appears to be separate from Pozo Seco
molybdenum mineralization. Drill testing of this area and Pozo Seco South to
test an emerging multi-element anomaly is also a priority.  It is thought
that the Pozo Seco South may represent a halo to a much larger buried skarn as
predicted by MAG's geological model. A string of strong Geotech VTEM
conductors and a conductive zone traced by the ZTEM airborne surveys support
this concept.



The Company spent $7,128,094 in
exploration costs at Cinco de Mayo in 2009 (2008: $7,997,357).  The Company
has spent historical totals of $17,901,130 in exploration costs $3,003,721 in
acquisition costs at Cinco de Mayo to December 31, 2009.  Exploration
programs at Cinco de Mayo by the Company for 2009 were budgeted for
approximately $4.0 million, however results warranted accelerated and expanded
programs. The Company's budgeted exploration programs at Cinco de Mayo for
2010 are approximately $4.7 million.



The Batopilas (Don Fippi) Property



The 100%-owned Batopilas project covers
4,800 hectares in the historic Batopilas Silver District in southwestern
Chihuahua.  Work in 2009 was limited to permitting and minimal
participation in state funded road construction.  It is anticipated that
this new road will provide improved access to the area in late 2010 and the
Company will await the road completion before commencing work.



The Company spent $157,117 in exploration
costs at Batopilas in 2009 (2008: $1,453,184) and has spent $4,954,714 in
exploration and $1,422,672 in acquisition costs to December 31, 2009.  The
Company's budgeted exploration program at Batopilas for 2010 is 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, lay northwest and southeast of the Juanicipio Joint
Venture along the "Fresnillo Silver Trend", a large regional structural zone
hosting the world class Guanajuato, Zacatecas and Fresnillo epithermal
silver-gold vein districts.



Lagartos SE



Although it has not had the same
significant assay and width results as Cinco de Mayo or Juanicipio, the results
to date indicate that the prolific Zacatecas silver district does extend to the
east.  MAG has discovered the eastern extension of the Veta Grande system
and at the Puerto Rico Vein we are clearly in a high grade silver dominant vein
set that requires further delineation.



Lagartos SE has seen exploration focused
on the eastern extension to the past producing Zacatecas silver district.
 Drilling in late 2009 appears to have discovered the continuation of the
prolific Veta Grande Vein, the second most important production vein in the
Zacatecas district.  The holes were targeted along the direct projection of
the vein, approximately 500 metres east of its last confirmed outcrop. 
This discovery shows that this important and historic vein is open along strike
from areas of past production including an additional 4 kilometres of possible
projection on MAG's wholly owned property.  In a second discovery in the
same vicinity, holes drilled in the Puerto Rico Vein, which runs parallel to the
Veta Grande Vein, have encountered high-grade silver mineralization (see MAG
press release dated January 19, 2010).  Accompanying low base metal values
indicate the vein was likely intersected at a high level. Future work will focus
on exploring these significant results.



8/19



---

MAG
SILVER CORP.

(An
exploration stage company)

Annual
Management Discussion & Analysis

For the year ended
December 31, 2009









The Veta Grande Vein was the second most
important vein in this billion-ounce silver producing district, with significant
ore-shoots distributed intermittently along the 12 kilometres of its trace
across the north-central part of the district.  The vein disappears under
alluvium at both ends. MAG sought its continuation at the northwest end at La
Luz before turning to the southeast extension (see MAG Press Release of June 5,
2009).  There are no outcrops in the Veta Grande SE target area, so
drilling was targeted on the south eastern projection of the principal Veta
Grande Vein and a coincident linear colour anomaly. Alluvium was found to be
less than 120 metre thick.



The result of drilling indicates that the
Veta Grande structure can be traced across the range-bounding fault with little
lateral displacement.  Vertical movement on the fault should have dropped
the eastern part down, so any bonanza zone is expected to found at a deeper
level than in the mined portion of the vein. Geophysical data are being examined
to determine if anomalies potentially reflecting mineralization occur along the
trace of this structure farther to the Southeast.



The Puerto Rico Vein runs parallel to, and
lies approximately 3 kilometres north of, the famous Veta Grande Vein.  The
Puerto Rico Vein has seen minor historic production and remains largely
unexplored.  Seven holes were drilled along approximately 1,000 metre of
strike length of the vein, intersection the structure between 150 and 350 metre
beneath the surface (see MAG press release dated January 19, 2010).



The presence of high silver and gold
grades with low base metals in three of the Puerto Rico vein intercepts
indicates they are very high within the zoning pattern expected for Zacatecas
District epithermal veins.  The contrasting silver versus base
metal-bearing intercepts in hole PR-03 indicates two separate mineralization
events, intersected at different levels within the epithermal zoning pattern.
 This composite vein signature is typical of many of the larger veins in
the Zacatecas District, including the Veta Grande and Mala Noche veins.



No work was conducted at Lagartos NW in
2009.  A gravity survey is planned for Lagartos NWin 2010to
explore for a buried silicified ridge that may sub crop in a shallower alluvial
environment.



At Lagartos SE ground geological
and geophysical surveys are proposed to help in tracing the extensions of these
vein targets across MAG controlled property in preparation for follow up
drilling later in 2010.



The Company spent $3,372,345 in
exploration costs on the combined Lagartos land package in 2009 (2008:
$2,194,389) and has spent $9,907,735 in exploration costs and $86,490 in
acquisition costs to December 31, 2009.  The Company's budgeted
exploration programs for the Lagartos land package for 2010 are approximately
$1,500,000.



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.  A substantial database of past work on the property has been
accumulated since 2006 from airborne electromagnetic and magnetic surveys
however minimal work was done on the Guigui property during 2009.



The Company has spent $1,513,373 (2009:
50,444; 2008: 12,529) in exploration and $1,576,570 in acquisition costs on the
Guigui property to December 31, 2009.  The Company's budgeted exploration
program at Guigui for 2010 is approximately $35,000 which will be used primarily
to maintain the property.



Sierra de Ramirez Property



Sierra Ramirez is a large 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.   During the first half of 2009, results from
drilling 7,944 metres indicated that the Sierra Ramirez mantos were not fed
directly from depth, drilling was halted and exploration costs of $3,718,518
were subsequently written down.  All option agreements with this property
have been cancelled.



9/19



---

MAG
SILVER CORP.

(An
exploration stage company)

Annual
Management Discussion & Analysis

For the year ended
December 31, 2009











Other Properties



At December 31, 2009, the Company had capitalized
$1,419,761 in acquisition costs on other properties in Mexico.  The other
properties include the Zacatecas claims, the La Lorena claims, the Nuevo Mundo
claims, the Camino Duro claims, the Salemex claim options and the San Ramon
claim option.



In July, 2009 the Company optioned, from
Castle Resources, the San Ramon property adjoining Lagartos SE located in the
historic Mala Noche silver vein system. The option agreement calls for a cash
advance of US$75,000 (paid), a payment of US$ 750,000 on July 14, 2014, and work
commitments totaling US$3,250,000 over five years (approximately US$ 450,000
incurred to date) for MAG to acquire a 100% interest subject to a 1.5% Net
Smelter Royalty. The San Ramon property, combined with MAG's existing holdings
at Lagartos SE, gives MAG control of a significant portion of the eastern part
of the Mala Noche system.



MAG has drilled four holes in the San
Rafael claim group, optioned from Castle Resources in 2009, covering the north
western continuation of the Las Majadas-Pajarito Hill Vein zone within the
important Mala Noche Vein system.  Earlier drilling showed a progressive
northwest thickening of these veins and an increase in lead and zinc sulphide
content towards San Rafael. The results show the continuation of the grade trend
but thinning of the vein.  Further drilling in this area will target three
other veins with strong surface expressions



During the period ended December 31, 2009, the Company
completed approximately $2,053,992 in exploration costs including $478,852 on
the San Ramon claims, $1,014,751 in drilling and other exploration costs on the
Salemex claims, and $437,748 on the Nuevo Mundo claims. Another $122,641 in
exploration costs was spent on the remaining other properties.  Further
exploration work of approximately $430,000 is budgeted for these projects in
2010.



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 2010.
 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.  These programs were
undertaken as planned in 2009 and were substantially completed, with
approximately US $400,000 carried over and added into the planned 2010 budget.
 To December 31, 2009, the Company has advanced approximately US $8.1
million in total as its share of costs to Minera Juanicipio.  By March 5,
2010 the amount advanced had increased to US $8.55 million.



MAG has approved a total exploration and
administration budget of approximately $15 million for 2010.  Of this
amount $2.65 million (approx. US$2.6 million) is allotted for the Company's
44% share of Minera Juanicipio's US$4.4 million 2010 exploration budget plus
44% of a US$1.5 million engineering budget approved March 16, 2010.  From
MAG's remaining budget of $12.35 million the exploration component is
earmarked for nine 100% MAG-owned properties in Mexico.  Over 38% of the
remaining budget will be focused on exploration at Cinco de Mayo ($4.7million)
and 9% focused on Lagartos SE ($1.1 million).  Planned expenditures include
the diamond drilling of almost 27,000 metres of core on these two 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
aggressively on the "Pozo Seco" area at Cinco de Mayo where MAG is
outlining a new and potentially significant molybdenum / gold discovery.
 Drilling at Juanicipio by operator Fresnillo plc is expected to continue
at roughly the same level in 2010 as it did in 2009 at approximately 26,000
metres.  Presently, MAG has five drills operating at Cinco de Mayo while at
Juanicipio the joint venture has five drills testing the Valdecanas Vein, the
Juanicipio Vein and exploring for other veins.



10/19



---

MAG
SILVER CORP.

(An
exploration stage company)

Annual
Management Discussion & Analysis

For the year ended
December 31, 2009











OUTSTANDING SHARE
DATA



The Company's
authorized capital consists of an unlimited number of common shares without par
value.  As at March 25, 2010, the following common shares and stock options
were outstanding:



|              |            |                |                 
|------------- | ---------- | -------------- | ----------------
|              | Number of  | Exercise       | Remaining       
|              | Shares     | Price ($)      | Life (mos/years)
|Capital Stock | 49,888,042 |                |                 
|Stock Options | 3,352,118  | $1.00 - $14.70 | 9 mos to 5 years
|Diluted       | 53,240,160 |                |                 



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 share
|December 31, 2009  | $42,227    | $(2,659,433) | $(0.05)                 
|September 30, 2009 | $66,189    | $(1,284,316) | $(0.03)                 
|June 30, 2009      | $51,365    | $(4,384,704) | $(0.09)                 
|March 31, 2009     | $138,725   | $(5,161,757) | $(0.10)                 
|December 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)                 



Notes:

(1)

The
Company's primary source of revenue during the quarters listed above was
interest earned on bank balances.  The amount of interest revenue earned
correlates directly to the amount of cash on hand during the period referenced
and prevailing interest rates.



(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 ended December
31, 2009, five drills were turning on the Juanicipio property. Two of these
drills targeted the Valdecanas Vein on a 100 by 100 metre grid in a program
designed to convert inferred resources to the indicated category as part of an
updated resource estimate scheduled for completion in early 2010. This program
will continue into 2010 until enough of the resource has been converted to
indicated to allow a prefeasibility study to proceed. At year end several more
high-grade intercepts were returned, further confirming the continuity
of the high-grade bonanza zone.  Hole PE2 in the east central portion
of the Valdecanas Vein returned 448 g/t silver (13.1 opt), 5.7 g/t gold, 1.68%
lead and 4.21% zinc over a true width of 8.0 metres.  Hole GF is the
deepest and most westerly of the holes drilled to date. This hole confirms the
wide nature of the Valdecanas vein on the west end and the vein reports two
intercepts of 13.0 metres of 95  g/t silver (2.8 opt),  2.40 g/t gold,
1.94% lead and 3.74% zinc and a slightly deeper 3.95 metres reporting 104 g/t
(3.0 opt), 2.88 g/t gold, 2.46% lead and 6.01% zinc.



11/19



---

MAG
SILVER CORP.

(An
exploration stage company)

Annual
Management Discussion & Analysis

For the year ended
December 31, 2009





One drill was testing the Juanicipio Vein
at year end where results in 2009 continue to produce encouraging results along
the now 1,200 metre long vein/structure.  This vein remains open to the
west.  It appears from the low base metal content, the presence of barite
and other geological features that the top of the bonanza zone may be 100 to 150
metres deeper than that of the Valdecanas Vein.  The Juanicipio Vein is
characterized by high grade gold and silver values as  seen in hole 22P,
the most westerly hole to date, which reported 0.30 metres of 6.68 grams per
tone (g/t) gold and 863 g/t silver (25.2 opt). Hole 20P reports 0.92 metres of
4.95 g/t gold and 111 g/t silver (3.2 opt).  The 2010 program
is expected to explore the strike and down dip portion of the vein in a
continued search for a typical Fresnillo style bonanza zone.



Two additional drills were operating on
other targets on the Juanicipio property at the end of the quarter.  Both
drills are targeting structures where earlier drilling identified significant
geological or assay values indicative of favorable vein exploration
environments.



On December 4, 2009, a meeting of the
Technical Committee of Minera Juanicipio (owned 44% MAG and 56% by Fresnillo)
was convened and a budget for 21,400 metres of drilling on the Juanicipio
property for 2010 was presented and the 2009 program results were
reviewed.   This proposed drilling program resulted in an exploration
budget of US$4.0 million in 2010 for Minera Juanicipio.



The Company's 2010 Minera Juanicipio
budget of approximately US $2.6M represents MAG's pro rata 44% interest in the
joint venture.  At the board meeting in December of 2009 the board of
Minera Juanicipio approved an exploration budget of US $4.4M (100%) for 2010
including a carryover of an unspent US$400,000 from the 2009 budget for an
additional 2,000 metres of drilling. On March 16, 2010, the Minera Juanicipio
board approved an amendment to the 2010 exploration budget to include a further
of US$1.5 million (100%) engineering budget for a prefeasibility study. 
Commencement of the prefeasibility study is subject to completion of a resource
audit and update planned for June 2010 whereby at least 50% of the total
contained silver can be categorized as an indicated resource.  To the end
of 2009, almost 47% of the total contained resource ounces were classified as
indicated.  A 10 hole program utilizing 4 drills is presently underway and
is targeted for completion by June 2010.  MAG's 2010 budget for Minera
Juanicipio includes its 44% contribution for both the exploration budget and the
additional engineering budget.



During the fourth-quarter, drilling
activity on the 100% owned Cinco de Mayo property in northern Chihuahua State
discovered a new zone of high grade Molybdenum and gold at Pozo Seco (Spanish
for "Dry Well").Pozo Seco is
located 4.0 kilometres south west of the earlier Jose Manto discovery on the
Cinco de Mayo property.  At this time the zone has been traced for over
1,000 metres, is almost 300 metres wide (based on a broad 200 metre drill
spacing) and is averaging almost 50 metres in thickness.



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.  Drilling in the 4th quarter tested
several targets derived from the earlier work with favourable results.



Very little work was carried out on other projects in the
last quarter as work focused on the encouraging drill results emanating from
Cinco de Mayo and Lagartos SE



Fresnillo Arbitration



In November and December 2008 the Company
notified Fresnillo of various concerns arising under the Shareholders Agreement
dated October 10, 2005 which governs the Minera Juanicipio joint venture company
(the "Shareholders Agreement").  One such concern related to
Fresnillo's acquisition of shares in the Company and Fresnillo's December 1,
2008 announcement of its intention to launch a hostile bid for all of the
outstanding shares of the Company.  It has always been the Company's
position that an unsolicited hostile bid by Fresnillo is prohibited by the terms
of the Shareholders Agreement.  In response to Fresnillo's hostile action
and certain other alleged violations of the Shareholders Agreement, the Company
undertook certain defensive steps, including the activation of the dispute
resolution provisions of the Shareholders Agreement.  Following
unsuccessful attempts to resolve the disputes with Fresnillo through
negotiations or mediation, on May 8, 2009 the Company announced that it had
filed a formal request for arbitration with the International Court of
Arbitration of the International Chamber of Commerce ("ICC").  The
Company is seeking a ruling as to whether or not Fresnillo may acquire control
of the Company on a hostile basis in breach of the standstill provisions
contained in the Shareholders Agreement and is also seeking relief in relation
to other alleged violations by Fresnillo as operator under the Shareholders
Agreement.  On September 29, 2009, the ICC confirmed that an arbitral
tribunal consisting of three arbitrators was constituted to hear the
arbitration.  At this time the matter is proceeding in accordance with the
timelines established by the ICC.



12/19



---

MAG
SILVER CORP.

(An
exploration stage company)

Annual
Management Discussion & Analysis

For the year ended
December 31, 2009







LIQUIDITY AND CAPITAL
RESOURCES

At March 25, 2010 the Company had
49,888,042 issued and outstanding common shares.  At December 31, 2009 the
Company had 49,316,569 common shares issued and outstanding.  The Company
issued a total of 161,003 common shares during the year ended December 31, 2009
for cash proceeds of $381,027 (2008: 2,201,370 for cash proceeds of
$12,864,131). In the years ended December 31, 2009 and 2008 there were no shares
issued for mineral properties.  The Company's primary source of capital
has been from the issuance of equity.  At December 31, 2009 the Company had
cash and cash equivalents on hand of $26,803,652 (2008: $52,262,561). The
primary use of cash during the period was for mineral property acquisition and
exploration expenditures of $16,975,393 (2008: $15,263,132) and investment in
the Juanicipio project of $1,215,328 (2008: $2,522,844), management and
consulting fees of $1,984,515 (2008: $1,528,630) and other general and
administrative expenses of $6,281,219 (2008: $2,548,909) including legal
expenses in 2009 of $3,048,507 (2008: $884,000). The Company had approximately
$27.9 million in working capital as at December 31, 2009 compared to $53.3
million at December 31, 2008.



Current liabilities of the Company at
December 31, 2009 amounted to $1,076,606 (2008: $1,503,417), 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 of approximately two years.  In management's opinion, the Company
is able to meet its ongoing current obligations as they become due. 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.
Management refers the reader to the risk factors described in Notes 9 and 10 of
the annual financial statements for the year ended December 31, 2009.



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.  Due to
the devaluation in the Mexican peso during 2009, the Company also recorded a
loss on foreign exchange in the amount of $619,805 as opposed to a gain of
$96,596 in 2008.



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 years
|Salemex Property Option                            | 1,960,000 | 210,000                | 950,000         | 800,000         | Nil                    
|San Ramone Property Option (1)                     | 3,550,000 | 50,000                 | 1,500,000       | 2,000,000       | Nil                    
|Office Lease                                       | 784,132   | 150,602                | 312,418         | 321,112         | Nil                    

(1)
 The San Ramone Property option consists of $2,800,000 in exploration
commitments and $750,000 in a single property option payment in year 4.



13/19



---

MAG
SILVER CORP.

(An
exploration stage company)

Annual
Management Discussion & Analysis

For the year ended
December 31, 2009







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 the arbitration
referred to above under the heading "Fresnillo Arbitration".



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



Subsequent to December 31, 2009, 571,473
common shares were issued pursuant to the exercises of 571,473 stock options at
prices between $1.06 and $6.32 per share for aggregate proceeds of $878,911. In
March 2010, there were 50,000 incentive stock options granted at a price of
$6.87 per share.



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
for at least the next two years.



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.



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 www.sec.gov.



From mid calendar 2008 until early 2009
there had 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.
 Those macro-economic events negatively affected the mining and minerals
sectors in general.  The Company's market capitalization was
significantly reduced during that period.  Although market conditions are
improving, the Company's liquidity and its long term ability to raise the
capital required to execute its business plans remain uncertain.  As a
result the Company will consider its plans and options carefully going forward
into 2010.  The Company intends to preserve its cash balances to the
greatest extent possible while still striving to execute its business plans.



At December 31, 2009, the Company had a
receivable of $1,493,337 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.



14/19



---

MAG
SILVER CORP.

(An
exploration stage company)

Annual
Management Discussion & Analysis

For the year ended
December 31, 2009









Related Party Transactions



The Company paid or accrued non-executive directors fees
of $258,750 (2008: 305,750) during the year ended December 31, 2009.



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, 2009 the Company accrued or
paid Cascabel and Imdex consulting, administration and travel fees totaling
$291,871 (2008: $194,590) and exploration costs totaling $2,982,276 (2008:
$2,504,237) 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, 2009, the Company accrued or paid Anthem $87,444 (2008: $83,556)
under the office lease agreement. In September of 2009, the Company provided
notice to Anthem Works Ltd. that this lease will not be continued or renewed and
in December 2009 the Company occupied offices at a new location leased from an
arm's length third party.



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, 2009, the Company accrued or paid
Platinum Group Metals Ltd. $135,751 (2008: $135,777) under the office services
agreement.  The office services agreement was terminated by the Company
effective December 31, 2009.



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
do 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.



15/19



---

MAG
SILVER CORP.

(An
exploration stage company)

Annual
Management Discussion & Analysis

For the year ended
December 31, 2009











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, 2009 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,
2009 of $1,804,464 (2008 - $2,539,011).



CHANGES IN
ACCOUNTING POLICIES

Adoption of
new accounting pronouncements



(i)

Credit Risk and the
Fair Value of Financial Assets and Financial Liabilities ("EIC-173")



In January 2009,
the CICA issued Emerging Issues Committee ("EIC") Abstract 173 - Credit Risk
and the Fair Value of Financial Assets and Financial Liabilities ("EIC-173").
EIC-173 provides guidance on how to take into account credit risk of an entity
and counterparty when determining the fair value of financial assets and
financial liabilities, including derivative instruments. EIC-173 is applicable
for the Company's interim and annual consolidated financial statements for its
fiscal year ending December 31, 2009, with retroactive application. The adoption
of EIC-173 did not result in a material impact on the Company's consolidated
financial statements.



(ii)

Mining Exploration
Costs ("EIC-174")



In March 2009, the
CICA issued EIC Abstract 174 - Mining Exploration Costs ("EIC-174") which
supersedes EIC Abstract 126 - Accounting by Mining Enterprises for Exploration
Costs ("EIC-126"), to provide additional guidance for mining exploration
enterprises on the accounting for capitalization of exploration costs and when
an impairment test of these costs is required. EIC 174 is applicable for the
Company's interim and annual consolidated financial statements for its fiscal
year ending December 31, 2009, with retroactive application. The adoption of EIC
- 174 did not result in a material impact on the Company's consolidated
financial statements.



(iii)

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 was effective in the first quarter of 2009,
and the Company has evaluated the requirements of this Section and concluded
that the impact is not material to the financial statements.





16/19



---

MAG
SILVER CORP.

(An
exploration stage company)

Annual
Management Discussion & Analysis

For the year ended
December 31, 2009









(iv)

Amendment to Financial Instruments - Disclosures ("Section 3862")





During 2009, CICA
Handbook Section 3862, Financial Instruments - Disclosures ("Section 3862"),
was amended to require disclosures about the inputs to fair value measurements,
including their classification within a hierarchy that prioritizes the inputs to
fair value measurement. The three levels of the fair value hierarchy are:



Level 1 - Valuation based on unadjusted quoted prices in active markets for identical
assets or liabilities;

Level 2 - Valuation techniques based on inputs other than quoted prices that are
observable for the asset or liability either directly or indirectly; and

Level 3 - Valuation techniques based on inputs that are not based on observable market
data.



Refer to notes 4
and 11 for the relevant disclosures.



Recent Accounting
Pronouncements



(i)

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.



(ii)

Convergence With
International Financial Reporting Standards ("IFRS")



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. Accordingly on January 1, 2011, the Company will adopt
IFRS as the basis for preparing its consolidated financial statements, and will
issue its financial results for the quarter ended March 31, 2011 prepared on an
IFRS basis with restatement of comparative information presented for the quarter
ended March 31, 2010. It is expected that the overall presentation of the
financial statements will change significantly, as the Company complies with
increased disclosure requirements under IFRS and differing presentations of the
balance sheet and statements of loss and cash flows.



The conversion to
IFRS is being led by the Company's Chief Financial Officer, who along with
other members of the finance group, including a newly hired consultant, will
execute the conversion project. Management has participated in ongoing training
sessions provided by external advisors, and is currently evaluating the impact
of IFRS on its financial statements and developing a transition plan.  Some
of the key activities planned for the first half of 2010 include the preparation
of IFRS opening balance sheet for January 1, 2010 and draft financial statements
prepared under IFRS.



Management expects
differences between Canadian GAAP and IFRS to impact the Company's accounting
activities at varying degrees, some of which are dependent on policy-choice
decisions available in the transition period. The Company's main objective in
the selection of IFRS policies and transition elections is to become IFRS
compliant while ensuring it provides meaningful and transparent information to
stakeholders.  The audit committee of the Company will be kept informed of
management's decisions on accounting policy choices under IFRS, project status
and significant IFRS developments.





Significant accounting impacts of
conversion to IFRS



The Company has not yet completed its
assessment of all accounting policy differences that may arise on conversion to
IFRS. The following is a summary of potential accounting policy differences that
have been identified to date. The Company has not yet quantified the impact of
these differences on its consolidated financial statements.



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MAG
SILVER CORP.

(An
exploration stage company)

Annual
Management Discussion & Analysis

For the year ended
December 31, 2009





Exploration for and
Evaluation of Mineral Resources



The Company is in the exploration stage
and under Canadian GAAP currently capitalizes all costs related to the
acquisition and exploration of its mining rights. Management regularly reviews
the carrying value of mineral rights and deferred exploration costs for evidence
of impairment, and when the carrying values are estimated to exceed their net
recoverable amounts, a provision is made for the decline in value.



Under IFRS, specifically IFRS 6 "exploration
for and evaluation of mineral resources," exploration and evaluation
assets shall continue to be measured at cost, but the Company will have to
determine an accounting policy specifying which expenditures are to be
recognised as exploration and evaluation assets, and then apply that policy
consistently.  This standard will not apply to expenditures incurred for
investigating properties before the Company has the legal right to explore the
property, nor to expenditures incurred in the development stage of a property
once technical and economic feasibility are demonstrable.



In addition, under IFRS 6 and under
International Accounting Standard (IAS) 36, "Impairment of Assets,"
the Company will be required to assess at the end of each reporting period
whether there is any indication that the asset may be impaired. IFRS also allows
the reversal of impairments if conditions that gave rise to those impairments no
longer exist. Canadian GAAP prohibits reversal of impairment losses. It is
expected therefore, that there will be increased volatility in impairment
recognition due to increase in frequency of assessment and possibility of
reversal of impairments.





Other policy
differences



A number of other differences between
Canadian GAAP and IFRS identified, but their applicability and potential impact
to the Company have not yet been assessed, including the accounting for income
taxes, foreign currency transactions, stock-based compensation, financial
instruments and disclosure requirements. These differences may have a material
impact on the Company's financial statements. A more detailed review of the
impact of IFRS on the Company's consolidated financial statements is in
progress and will be completed during 2010.



Other impacts of conversion to IFRS



In addition to the impact of IFRS on
accounting policies, management is also in the process of assessing the impact
of IFRS adoption on the Company's internal controls over financial reporting,
disclosure controls and procedures, information technology and data systems, and
financial reporting expertise.  As a preliminary assessment, the Company
does not expect that the conversion to IFRS will have a significant impact on
its accounting processes and internal controls (including information technology
systems). The Company will be updating its disclosure controls and procedures to
ensure they are appropriate for reporting under IFRS. In addition, the Company
does not expect the conversion to IFRS to have a significant impact on its risk
management or other business activities.



Currently, there are no matters that would
be influenced by GAAP measures, such as debt covenants, capital requirements and
compensation arrangements that would be impacted by the transition to IFRS.



Management will continue to monitor
current IFRS developments as multiple changes are expected to come into effect
as the Company transitions to IFRS. Where sufficient technical expertise does
not exist in-house, management will rely on external advisers to assist with the
transition.



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, 2009.



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, 2008 and December 31, 2009 and quarterly during 2009 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.



18/19



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MAG
SILVER CORP.

(An
exploration stage company)

Annual
Management Discussion & Analysis

For the year ended
December 31, 2009









The Company also maintains a system of
internal controls over financial reporting, as defined by Multilateral
Instrument 52-109 - Certification of 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 2007, 2008 and 2009 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, 2009 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.



19/19



























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