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Magic swords are quite commonly encountered throughout Ultima VII. One can be found in the dungeon Shame at 5S 24W; another one lies in the armoury of Serpent's Hold at 157S 53E; a third was stolen by Pirates, who make their camp at 77N 196E.
According to Vetron's Guide to Weapons and Armour, the magic sword has an effectiveness rating of 7, and is listed as "very accurate."