PSLV

Business Context and Reporting Period

Sprott Physical Silver Trust is a closed-end mutual fund trust organized under the laws of Ontario, Canada, designed to provide investors with a secure, exchange-traded alternative to holding physical silver bullion. The Trust invests substantially all of its assets in unencumbered, fully allocated physical silver bullion stored at the Royal Canadian Mint. This Form 20-F covers the fiscal year ended December 31, 2010, which represents the Trust's initial period of operations following its Initial Public Offering (IPO) on October 28, 2010.

Key Financial Metrics

Note: The reporting period for operations was from October 28, 2010 (IPO date) to December 31, 2010.

Material Changes and Operational Highlights

• Initial Public Offering: The Trust completed its IPO on November 3, 2010, issuing 57,500,000 units at $10.00 per unit, raising gross proceeds of $575.0 million. Approximately $26.8 million was paid in underwriting commissions and offering expenses.
• Asset Acquisition: Net proceeds of approximately $541.7 million were invested in physical silver bullion at an average cost of $24.29 per troy ounce.
• Performance: Due to the appreciation in silver prices, the Trust recorded unrealized gains of $147.7 million during the short operating period, resulting in a NAV of $12.09 per unit by year-end.
• Trading Premium: During the period, units traded on the NYSE Arca at an average premium of approximately 8.64% to NAV.
• Redemptions: No unit redemptions occurred since the inception of the Trust.

Outlook, Risks, and Management Commentary

Management Commentary: The Trust does not actively trade silver to speculate on short-term price fluctuations. Its long-term performance is dependent on the price of silver increasing in an amount that exceeds the Trust's ongoing expenses. The Manager anticipates that silver prices will be influenced by global supply and demand, inflation expectations, and exchange rate volatility.

Key Risks:

• Price Volatility: The value of units is directly tied to the price of silver, which is subject to significant fluctuations based on economic, monetary, and political factors.
• Expense Drag: The Trust must sell silver bullion to pay ongoing expenses (management fees, storage, audit, etc.). This reduces the amount of silver represented by each unit over time, causing NAV to decline unless silver prices rise sufficiently to offset these costs.
• Redemption Discount: Cash redemptions are calculated at 95% of the lesser of the volume-weighted average trading price or NAV, potentially yielding less than selling units on the open market.
• Insurance and Custody: The Trust does not insure its assets. While the Royal Canadian Mint (a Crown corporation) bears the risk of loss, there is a risk that recovery may be limited or delayed if the Mint is deemed to have sovereign immunity.
• Taxation (PFIC): The Trust expects to be classified as a Passive Foreign Investment Company (PFIC) for U.S. federal income tax purposes, which may have adverse tax consequences for U.S. holders who do not make specific elections (QEF or mark-to-market).

Investor Verification Checklist

• Silver Holdings Verification: Confirm the physical count of 22,298,525 troy ounces held at the Royal Canadian Mint against the reported fair value.
• Expense Ratio Impact: Review the management fee (0.45% annually) and storage fees ($3.00 per bar per month) to understand the ongoing drag on NAV.
• Redemption Terms: Verify the specific calculation for cash redemptions (95% of NAV or VWAP) versus physical redemptions (100% of NAV less delivery costs).
• Tax Status: Confirm the Trust's PFIC status and the availability of the Qualified Electing Fund (QEF) election for U.S. investors to mitigate tax penalties.
• Custody Agreement: Review the Silver Storage Agreement with the Royal Canadian Mint regarding liability limits and insurance coverage.