---



Consolidated Financial Statements

For the Years Ended December 31, 2009, 2008 and 2007

---

Management Report

Managements Responsibility for Consolidated Financial
Statements

The accompanying Consolidated Financial Statements of Augusta
Resource Corporation (the Company) are the responsibility of Management. The
Consolidated Financial Statements have been prepared by Management in United
States dollars in accordance with Canadian generally accepted accounting
principles and include certain estimates that reflect Managements best
judgments.

The Companys Board of Directors has approved the information
contained in the Consolidated Financial Statements. The Board of Directors
fulfills its responsibilities regarding the financial statements mainly through
its Audit Committee, which has a written mandate that complies with the current
requirements of Canadian securities legislation and the United States
Sarbanes-Oxley Act of 2002 and complies with the Audit Committee requirements of
the American Stock Exchange. The Audit Committee meets at least on a quarterly
basis.

Managements Assessment of Internal Control over Financial
Reporting

Management is also responsible for establishing and maintaining
adequate internal control over the Companys financial reporting. The internal
control system was designed to provide reasonable assurance to the Companys
Management regarding the preparation and presentation of the Consolidated
Financial Statements.

Internal control systems, no matter how well designed, have
inherent limitations. Therefore, even those systems determined to be effective
can provide only reasonable assurance with respect to financial statement
preparation and presentation. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.

Management has assessed the effectiveness of the Companys
internal control over financial reporting as at December 31, 2009. In making its
assessment, Management has used the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) framework in Internal ControlIntegrated
Frameworkto evaluate the effectiveness of the Companys internal control
over financial reporting. Based on our evaluation, Management has concluded that
the Companys internal control over financial reporting was effective as at that
date.

Ernst & Young LLP, a registered public accounting firm, was
appointed by a vote of shareholders at the Companys last annual meeting to
audit and provide independent opinions on both the Consolidated Financial
Statements and the Companys internal control over financial reporting as at
December 31, 2009, as stated in their Auditors Report. Ernst & Young LLP
has provided such opinions.

|Raghunath Reddy                               | Gil C. Clausen                   
|----------------------------------------------- | -----------------------------------
|                                                |                                    
|Raghunath Reddy                                 | Gil C. Clausen                     
|Senior Vice President & Chief Financial Officer | President & Chief Executive Officer

- 2 -

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Independent Auditors Report on Financial Statements

To the Shareholders of Augusta Resource Corporation

We have audited the consolidated balance sheets of Augusta
Resource Corporation (the Company) as at December 31, 2009 and 2008 and the
consolidated statements of shareholders equity, operations, comprehensive loss
and cash flows for each of the years in the three-year period ended 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 the audit to obtain reasonable assurance 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 the Company as at
December 31, 2009 and 2008 and the results of its operations and its cash flows
for each of the years in the three-year period ended December 31, 2009, in
conformity with Canadian generally accepted accounting principles.

We have also audited in accordance with standards of Public
Accounting Oversight Board (United States), the Companys internal control over
financial reporting as of December 31, 2009, based on criteria established in
Internal Control-Integrated Frameworkissued by the Committee of
Sponsoring Organizations of the Treadway Commission and our report dated March
25, 2010 expressed an unqualified opinion thereon.



|                  |                      
|----------------- | ---------------------
|March 25, 2010    | Ernst & Young LLP    
|Vancouver, Canada | Chartered Accountants

- 3 -

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Independent Auditors Report on Internal Controls under
Standards of the Public Company Accounting Oversight Board (United
States)

To the Shareholders of Augusta Resource Corporation

We have audited Augusta Resource Corporations (the Company)
internal control over financial reporting as at December 31, 2009, based on
criteria established in Internal ControlIntegrated Frameworkissued by
the Committee of Sponsoring Organizations of the Treadway Commission (the COSO
criteria). 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 Managements assessment of 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, 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 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 its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk
that 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 COSO criteria.

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 balance sheets as at December
31, 2009 and 2008 and the consolidated statements of shareholders equity,
operations, comprehensive loss and cash flows for each of the years in the
three-year period ended December 31, 2009 of the Company and our report dated
March 25, 2010 expressed an unqualified opinion on those financial statements.



|                  |                      
|----------------- | ---------------------
|March 25, 2010    | Ernst & Young LLP    
|Vancouver, Canada | Chartered Accountants

- 4 -

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|Augusta Resource Corporation    
|--------------------------------
|Consolidated Balance Sheets     
|As at December 31, 2009 and 2008
|(in U.S. dollars)               

|                                           |   | 2009        |   |   | 2008        |  
|------------------------------------------ | - | ----------- | - | - | ----------- | -
|ASSETS                                     |   |             |   |   |             |  
|Current                                    |   |             |   |   |             |  
|Cash and cash equivalents                  | $ | 6,247,217   |   | $ | 7,563,190   |  
|Accounts receivable - Note 6               |   | 268,476     |   |   | 1,163,339   |  
|Due from related parties - Note 11         |   | 252,444     |   |   | 302,877     |  
|Prepaids and deposits                      |   | 313,714     |   |   | 359,063     |  
|Total current assets                       |   | 7,081,851   |   |   | 9,388,469   |  
|Capital assets - Note 5                    |   | 7,739,911   |   |   | 5,033,493   |  
|Deposits on long-lead equipment - Note 5   |   | 35,490,072  |   |   | 15,282,230  |  
|Other assets - Note 6                      |   | 2,144,664   |   |   | 2,854,475   |  
|Mineral properties - Note 7                |   | 25,665,438  |   |   | 25,462,869  |  
|Deferred development costs - Note 7        |   | 64,516,724  |   |   | 41,717,224  |  
|Total assets                               | $ | 142,638,660 |   | $ | 99,738,760  |  
|                                           |   |             |   |   |             |  
|LIABILITIES                                |   |             |   |   |             |  
|Current                                    |   |             |   |   |             |  
|Accounts payable and accrued liabilities   | $ | 12,386,174  |   | $ | 3,774,450   |  
|Current portion of long-term debt - Note 8 |   | 42,177,512  |   |   | 556,945     |  
|Total current liabilities                  |   | 54,563,686  |   |   | 4,331,395   |  
|Long-term debt - Note 8                    |   | 3,590,439   |   |   | 35,692,184  |  
|Total liabilities                          |   | 58,154,125  |   |   | 40,023,579  |  
|                                           |   |             |   |   |             |  
|SHAREHOLDERS' EQUITY                       |   |             |   |   |             |  
|Share capital - Note 9                     |   | 123,386,017 |   |   | 92,614,531  |  
|Contributed surplus                        |   | 17,513,815  |   |   | 15,466,475  |  
|Accumulated other comprehensive income     |   | (5,534,505  | ) |   | (5,534,505  | )
|Deficit                                    |   | (50,880,792 | ) |   | (42,831,320 | )
|Total shareholders' equity                 |   | 84,484,535  |   |   | 59,715,181  |  
|                                           |   |             |   |   |             |  
|Total liabilities and shareholders' equity | $ | 142,638,660 |   | $ | 99,738,760  |  

Commitments - Note 14 Subsequent events - Note 18

On Behalf of the Board of Directors

|/S/ Richard W.
      Warke |  | /S/
      Gil C. Clausen
|-------------------------- |  | ------------------------
|Richard W. Warke, Director |  | Gil C. Clausen, Director

See accompanying notes to the consolidated financial
statements

- 5 -

---

|Augusta Resource Corporation                        
|----------------------------------------------------
|Consolidated Statements of Operations               
|For the years ended December 31, 2009, 2008 and 2007
|(in US dollars)                                     

|                                                                        |   | 2009       |   |   | 2008        |   |   | 2007       |  
|----------------------------------------------------------------------- | - | ---------- | - | - | ----------- | - | - | ---------- | -
|                                                                        |   |            |   |   |             |   |   |            |  
|                                                                        |   |            |   |   |             |   |   |            |  
|EXPENSES                                                                |   |            |   |   |             |   |   |            |  
|Salaries and benefits                                                   | $ | 1,913,506  |   | $ | 2,738,718   |   | $ | 1,804,875  |  
|Stock-based compensation                                                |   | 1,120,555  |   |   | 2,378,054   |   |   | 1,638,728  |  
|Exploration                                                             |   | -          |   |   | -           |   |   | 321,712    |  
|Legal, Accounting and Audit                                             |   | 822,650    |   |   | 3,397,442   |   |   | 939,579    |  
|Travel                                                                  |   | 148,907    |   |   | 447,766     |   |   | 292,366    |  
|Consulting and Advisory services                                        |   | 76,947     |   |   | 636,892     |   |   | 255,119    |  
|Filing and Regulatory fees                                              |   | 80,834     |   |   | 151,813     |   |   | 174,839    |  
|Recruiting fees and relocation costs                                    |   | 53,405     |   |   | 161,622     |   |   | 34,096     |  
|Office and Administration                                               |   | 250,933    |   |   | 309,069     |   |   | 133,175    |  
|Rent                                                                    |   | 161,194    |   |   | 150,018     |   |   | 48,907     |  
|Investor Relations                                                      |   | 157,171    |   |   | 152,483     |   |   | 259,956    |  
|Directors' fees                                                         |   | 109,296    |   |   | 134,823     |   |   | 59,184     |  
|Insurance                                                               |   | 170,133    |   |   | 159,175     |   |   | 100,944    |  
|Memberships and Conferences                                             |   | 25,191     |   |   | 34,009      |   |   | 7,602      |  
|Amortization                                                            |   | 154,854    |   |   | 87,894      |   |   | 33,311     |  
|Fiscal and Advisory services                                            |   | 12,968     |   |   | 12,169      |   |   | 14,764     |  
|Loss from operations                                                    |   | (5,258,544 | ) |   | (10,951,947 | ) |   | (6,119,157 | )
|Interest and other income, net                                          |   | 242,664    |   |   | 148,201     |   |   | 808,188    |  
|Other expenses                                                          |   | (502,244   | ) |   | (575,302    | ) |   | (267,380   | )
|Litigation settlement                                                   |   | -          |   |   | (2,626,004  | ) |   | -          |  
|Foreign exchange gains (losses)                                         |   | 596,880    |   |   | (2,985,504  | ) |   | (240,479   | )
|Interest and finance charges                                            |   | (98,312    | ) |   | (239,005    | ) |   | (169,742   | )
|Loss from continuing operations                                         |   | (5,019,556 | ) |   | (17,229,561 | ) |   | (5,988,570 | )
|Gain (loss) from discontinued operations - Note 4                       |   | (508,385   | ) |   | 543,177     |   |   | (1,664,213 | )
|Net loss for the
      year                                             | $ | (5,527,941 | ) | $ | (16,686,384 | ) | $ | (7,652,783 | )
|                                                                        |   |            |   |   |             |   |   |            |  
|Basic and diluted loss per share                                        |   |            |   |   |             |   |   |            |  
|Continuing operations                                                   | $ | (0.05      | ) | $ | (0.19       | ) | $ | (0.07      | )
|Discontinued
      operations                                           |   | (0.01      | ) |   | 0.01        |   |   | (0.02      | )
|Basic and diluted loss per share                                        | $ | (0.06      | ) | $ | (0.18       | ) | $ | (0.09      | )
|                                                                        |   |            |   |   |             |   |   |            |  
|Weighted average number of shares
      outstanding - basic and diluted |   | 96,409,230 |   |   | 88,643,084  |   |   | 81,795,564 |  

See accompanying notes to the consolidated financial
statements

- 6 -

---

|Augusta Resource Corporation                        
|----------------------------------------------------
|Consolidated Statements of Comprehensive Loss       
|For the years ended December 31, 2009, 2008 and 2007
|(in U.S. dollars)                                   

|                                                                              |   | 2009       |   |   | 2008        |   |   | 2007       |  
|----------------------------------------------------------------------------- | - | ---------- | - | - | ----------- | - | - | ---------- | -
|                                                                              |   |            |   |   |             |   |   |            |  
|Net loss for the year                                                         | $ | (5,527,941 | ) | $ | (16,686,384 | ) | $ | (7,652,783 | )
|Other
      comprehensive loss in the year Cumulative translation adjustments |   | -          |   |   | (16,430,577 | ) |   | 11,256,712 |  
|Comprehensive loss for the year                                               | $ | (5,527,941 | ) | $ | (33,116,961 | ) | $ | 3,603,929  |  

See accompanying notes to consolidated financial
statements

- 7 -

---

|Augusta Resource Corporation                        
|----------------------------------------------------
|Consolidated Statements of Cash Flows               
|For the years ended December 31, 2009, 2008 and 2007
|(in US dollars)                                     

|                                                                       |   | 2009        |   |   | 2008        |   |   | 2007        |  
|---------------------------------------------------------------------- | - | ----------- | - | - | ----------- | - | - | ----------- | -
|Cash flows used in operating activities                                |   |             |   |   |             |   |   |             |  
|Loss from continuing operations                                        | $ | (5,019,556  | ) | $ | (17,229,561 | ) | $ | (5,988,570  | )
|Items not involving cash                                               |   |             |   |   |             |   |   |             |  
|Amortization                                                           |   | 154,854     |   |   | 87,894      |   |   | 33,311      |  
|Foreign exchange losses (gains)                                        |   | (621,956    | ) |   | 4,008,876   |   |   | 222,740     |  
|Stock-based compensation                                               |   | 1,120,555   |   |   | 2,378,054   |   |   | 1,638,728   |  
|Litigation settlement                                                  |   | -           |   |   | 2,626,004   |   |   | -           |  
|Amortization of deferred financing costs                               |   | 36,065      |   |   | 15,765      |   |   | -           |  
|Other                                                                  |   | 47,350      |   |   | (84,621     | ) |   | 1,622       |  
|                                                                       |   | (4,282,688  | ) |   | (8,197,589  | ) |   | (4,092,169  | )
|Changes in non-cash working capital items                              |   |             |   |   |             |   |   |             |  
|Accounts receivable                                                    |   | 149,710     |   |   | (98,483     | ) |   | (166,818    | )
|Prepaids and deposits                                                  |   | 146,121     |   |   | (310,335    | ) |   | 83,457      |  
|Accounts
      payable and accrued liabilities                         |   | (355,832    | ) |   | 1,133,218   |   |   | 614,442     |  
|Cash used in operating activities                                      |   | (4,342,689  | ) |   | (7,473,189  | ) |   | (3,561,088  | )
|                                                                       |   |             |   |   |             |   |   |             |  
|Financing activities                                                   |   |             |   |   |             |   |   |             |  
|Shares issued for cash                                                 |   | 30,806,064  |   |   | 283,962     |   |   | 38,339,427  |  
|Share issue costs                                                      |   | (2,190,327  | ) |   | -           |   |   | (22,766     | )
|Proceeds from loan facility                                            |   | 8,940,150   |   |   | 30,996,067  |   |   | -           |  
|Repayment of long-term note                                            |   | (556,945    | ) |   | (554,667    | ) |   | (172,750    | )
|Cash provided by
      (used in) financing activities                  |   | 36,998,942  |   |   | 30,725,362  |   |   | 38,143,911  |  
|                                                                       |   |             |   |   |             |   |   |             |  
|Investing activities                                                   |   |             |   |   |             |   |   |             |  
|Mineral property additions and
      expenditures                      |   | (86,358     | ) |   | (2,339,330  | ) |   | (1,023,232  | )
|Deposits on long-lead equipment                                        |   | (14,991,717 | ) |   | (17,854,903 | ) |   | -           |  
|Deferred development expenditures                                      |   | (17,673,855 | ) |   | (19,753,244 | ) |   | (12,068,723 | )
|Capital
      asset additions                                          |   | (2,852,353  | ) |   | (1,654,255  | ) |   | (4,353,920  | )
|Cash used in investing activites                                       |   | (35,604,283 | ) |   | (41,601,732 | ) |   | (17,445,875 | )
|                                                                       |   |             |   |   |             |   |   |             |  
|                                                                       |   |             |   |   |             |   |   |             |  
|Proceeds received from (provided to) discontinued
      operations     |   | 1,000,000   |   |   | 1,597,356   |   |   | (2,982,137  | )
|Effect of exchange rate changes on cash and
      cash equivalents     |   | 633,357     |   |   | (1,579,756  | ) |   | 3,458,368   |  
|Increase (decrease) in cash and cash equivalents during the
      year |   | (1,314,673  | ) |   | (18,331,959 | ) |   | 17,613,179  |  
|Cash and cash equivalents, Beginning of year                           |   | 7,563,190   |   |   | 25,895,149  |   |   | 8,281,970   |  
|Cash and cash
      equivalents, End of year                           | $ | 6,248,517   |   | $ | 7,563,190   |   | $ | 25,895,149  |  

Supplmental cash flow information on non-cash transactions -
Note 10

See accompanying notes to consolidated financial
statements

- 8 -

---

|Augusta Resource Corporation                   
|-----------------------------------------------
|Consolidated Statements of Shareholders' Equity
|December 31, 2009                              
|(in U.S. dollars except for shares)            

|                                                                        |  |                       |  |   |             |  |   |               |   |   | Accumulated |   |   |               |   |   |             |  
|----------------------------------------------------------------------- |  | --------------------- |  | - | ----------- |  | - | ------------- | - | - | ----------- | - | - | ------------- | - | - | ----------- | -
|                                                                        |  | Common Shares without |  |   |             |  |   | Other         |   |   |             |   |   | Total         |  
|                                                                        |  | Par Value             |  |   | Contributed |  |   | Comprehensive |   |   |             |   |   | Shareholders' |  
|                                                                        |  | Shares                |  |   | Amount      |  |   | Surplus       |   |   | Income      |   |   | Deficit       |   |   | Equity      |  
|                                                                        |  |                       |  |   |             |  |   |               |   |   |             |   |   |               |   |   |             |  
|Balance, December 31, 2006                                              |  | 72,749,067            |  | $ | 51,862,516  |  | $ | 12,302,097    |   | $ | (360,640    | ) | $ | (18,468,725   | ) | $ | 45,335,248  |  
|Issued shares for cash                                                  |  | 10,719,827            |  |   | 34,932,775  |  |   | -             |   |   | -           |   |   | -             |   |   | 34,932,775  |  
|Exercise of options                                                     |  | 74,167                |  |   | 34,640      |  |   | (5,637        | ) |   | -           |   |   | -             |   |   | 29,003      |  
|Exercise of warrants                                                    |  | 5,045,000             |  |   | 5,300,177   |  |   | (1,064,658    | ) |   | -           |   |   | -             |   |   | 4,235,519   |  
|Stock-based compensation expense                                        |  | -                     |  |   | -           |  |   | 1,638,728     |   |   | -           |   |   | -             |   |   | 1,638,728   |  
|Share issue costs                                                       |  | -                     |  |   | -           |  |   | -             |   |   | -           |   |   | (23,428       | ) |   | (23,428     | )
|Foreign currency translation                                            |  | -                     |  |   | -           |  |   | -             |   |   | 11,256,712  |   |   | -             |   |   | 11,256,712  |  
|Net loss for the
      year                                             |  | -                     |  |   | -           |  |   | -             |   |   | -           |   |   | (7,652,783    | ) |   | (7,652,783  | )
|Balance, December 31, 2007                                              |  | 88,588,061            |  |   | 92,130,108  |  |   | 12,870,530    |   |   | 10,896,072  |   |   | (26,144,936   | ) |   | 89,751,774  |  
|Exercise of stock options                                               |  | 146,200               |  |   | 484,423     |  |   | (199,663      | ) |   | -           |   |   | -             |   |   | 284,760     |  
|Stock-based compensation expense                                        |  | -                     |  |   | -           |  |   | 2,378,054     |   |   | -           |   |   | -             |   |   | 2,378,054   |  
|Stock-based compensation capitalized                                    |  | -                     |  |   | -           |  |   | 417,554       |   |   | -           |   |   | -             |   |   | 417,554     |  
|Cumulative translation adjustments                                      |  | -                     |  |   | -           |  |   | -             |   |   | (16,430,577 | ) |   | -             |   |   | (16,430,577 | )
|Net loss for the
      year                                             |  | -                     |  |   | -           |  |   | -             |   |   | -           |   |   | (16,686,384   | ) |   | (16,686,384 | )
|Balance, December 31, 2008                                              |  | 88,734,261            |  |   | 92,614,531  |  |   | 15,466,475    |   |   | (5,534,505  | ) |   | (42,831,320   | ) |   | 59,715,181  |  
|Shares and warrants issued pursuant to private
      placement          |  | 3,350,000             |  |   | 3,740,210   |  |   | 251,052       |   |   | -           |   |   | -             |   |   | 3,991,262   |  
|Shares and warrants issued pursuant to
      equity offering            |  | 14,237,000            |  |   | 26,218,197  |  |   | 237,845       |   |   | -           |   |   | -             |   |   | 26,456,042  |  
|Proceeds from exercise of stock compensation options
      and warrants |  | 280,555               |  |   | 711,252     |  |   | (123,944      | ) |   | -           |   |   | -             |   |   | 587,308     |  
|Proceeds from exercise of stock options                                 |  | 100,000               |  |   | 13,487      |  |   | (4,190        | ) |   | -           |   |   | -             |   |   | 9,297       |  
|Share issue costs for equity offering                                   |  | -                     |  |   | -           |  |   | -             |   |   | -           |   |   | (2,428,169    | ) |   | (2,428,169  | )
|Share issue costs for private placement                                 |  | 67,000                |  |   | 88,340      |  |   | 5,022         |   |   | -           |   |   | (93,362       | ) |   | -           |  
|Stock-based compensation expense                                        |  | -                     |  |   | -           |  |   | 1,120,555     |   |   | -           |   |   | -             |   |   | 1,120,555   |  
|Stock-based compensation capitalized                                    |  | -                     |  |   | -           |  |   | 561,000       |   |   | -           |   |   | -             |   |   | 561,000     |  
|Net loss for the
      year                                             |  | -                     |  |   | -           |  |   | -             |   |   | -           |   |   | (5,527,941    | ) |   | (5,527,941  | )
|Balance, December 31, 2009                                              |  | 106,768,816           |  | $ | 123,386,017 |  | $ | 17,513,815    |   | $ | (5,534,505  | ) | $ | (50,880,792   | ) | $ | 84,484,535  |  

See accompanying notes to consolidated financial
statements

- 9 -

---

|Augusta Resource Corporation                                  
|--------------------------------------------------------------
|Notes to Consolidated Financial Statements                    
|For the years ended December 31, 2009 and 2008                
|(All amounts are
      in U.S. dollars unless otherwise noted)

|1. | NATURE OF OPERATIONS AND GOING CONCERN                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   | Augusta Resource Corporation (Augusta or the Company)
      is a development stage enterprise engaged in the exploration and
      development of mineral properties in North America. The Companys most
      significant asset is the Rosemont copper project (Rosemont property)
      near Tucson, Arizona. The realization of the Companys investment in
      mineral properties is dependent upon various factors, including the
      ability to obtain the necessary financing to complete the development of
      the Rosemont property, future profitable operations, or, alternatively,
      upon disposal of the property at amounts sufficient to recover capitalized
      expenditures.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   | The Company incurred a loss of $5,527,941 for the year
      ended December 31, 2009 (2008 - $16,686,384; 2007 - $7,652,783) and has an
      accumulated deficit of $50,880,792 as at December 31, 2009. The losses
      have been funded primarily through the issuance of $30,806,064 in equity
      and draw down of $8,940,150 of a loan facility provided by Sumitomo
      Corporation of America (Sumitomo) (Note 9, Loan facility).The Company
      has no revenues from operations and does not expect to generate any
      revenues from operations until the Company completes its development and
      construction of the Rosemont project, which is expected be to in early
      2012. The Companys planned activities for 2010 anticipate significant
      Rosemont Project expenditures exceeding its current cash reserves. The
      Company will require additional capital to fund its business activities,
      including permitting and development expenditures, land purchases and
      deposits on long-lead time mining equipment. The funds required for the
      planned activities in 2010 are expected to be raised from additional debt
      and equity financings, off-take agreements and possibly through joint
      ventures, producing sharing arrangements or other means. Recent upheavals
      in financial markets worldwide could make it very difficult for the
      Company to raise funds. Such funding may not be available on commercially
      acceptable terms or at all. The Companys failure to meet its ongoing
      obligations on a timely basis or to raise the additional funds that it
      requires could result in the delay or indefinite postponement of further
      exploration and development of its property which may in turn, result in
      an impairment charge being required with respect to the Companys mineral
      properties, deposits on long-lead equipment and deferred development
      costs.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   | As the Company is listed on the NYSE Amex, a
      reconciliation from Canadian to United States (US) GAAP is required -
      Note 17.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

|2. | SUMMARY OF SIGNIFICANT ACCOUNTING
      POLICIES
|-- | ------------------------------------------------

|(a) | Basis of consolidation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    | These consolidated financial statements include the
      accounts of the Company and its subsidiaries. All inter- company
      transactions and balances have been eliminated.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    | Variable Interest Entities (VIEs), which include, but
      are not limited to, special purpose entities, trusts, partnerships, and
      other legal structures, as defined by the Accounting Standards Board in
      Accounting Guideline (AcG) 15, Consolidation of Variable Interest
      Entities (AcG 15), are entities in which equity investors do not have
      the characteristics of a controlling financial interest or there is not
      sufficient equity at risk for the entity to finance its activities without
      additional subordinated financial support. VIEs are subject to
      consolidation by the primary beneficiary who will absorb the majority of
      the entities expected losses and/or expected residual returns. The
      Company has not identified any VIEs at December 31, 2009.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    | Certain comparative figures have been reclassified to
      conform to the basis of presentation adopted in the current
  period.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

- 10 -

---

|Augusta Resource Corporation                                  
|--------------------------------------------------------------
|Notes to Consolidated Financial Statements                    
|For the years ended December 31, 2009 and 2008                
|(All amounts are
      in U.S. dollars unless otherwise noted)

|(b) | Cash and cash equivalents                                                                                                                                                                                                               
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                         
|    | Cash consists of deposits in banks and guaranteed
      investment certificates (GICs) with an original maturity of three months
      or less.                                                                                       
|    |                                                                                                                                                                                                                                         
|(c) | Capital assets                                                                                                                                                                                                                          
|    |                                                                                                                                                                                                                                         
|    | Capital assets are carried at cost, less accumulated
      amortization. Amortization begins when the asset is substantially put into
      service and is primarily calculated on a straight line basis over the
      following terms:

| | Land                  | N/A               
| | --------------------- | ------------------
| | Water rights          | Unit-of-production
| | Buildings             | 10 years          
| | Computer Software     | 3 years           
| | Computer Hardware     | 5 years           
| | Furniture & Equipment | 5 years           

Water rights will be amortized on a
unit-of-production basis over the estimated proven and probable ore reserves
upon commencement of commercial production at Rosemont. Plant and equipment will
be amortized over their expected economic lives using either the
unit-of-production or the straight line basis, as appropriate. When debt is
incurred to finance the purchase of plant and equipment, the interest and
financing costs associated with such debt are capitalized. Upon commencement of
commercial production, the interest and financing costs are amortized over the
life of the mine.

|(d) | Mineral properties and deferred development
      costs                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    | Mineral properties are carried at cost less accumulated
      depletion and any accumulated impairment charges. Mineral property
      expenditures consists of payments to acquire property rights and leases,
      exploration and evaluation costs on a property once a determination has
      been made that a property has potentially recoverable resources and there
      is a reasonable expectation that costs can be recovered by future
      exploitation or sale of the property. Exploration expenditures made prior
      to this determination that a property has economically recoverable
      resources are expensed as incurred.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    | Development costs incurred on a mineral property are
      deferred once management has determined that, based on a feasibility
      study; a property is capable of economical commercial production as a
      result of having established proven and probable reserves.                                                                                                                                                                                                                                                                                                                                                                            
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    | Stripping costs represent the cost incurred to remove
      overburden and other waste materials to access ore. Stripping costs
      incurred prior to the commencement of commercial production are deferred
      and included as part of deferred development costs.                                                                                                                                                                                                                                                                                                                                                                                
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    | Pre-production expenditures, net of any sales proceeds,
      are capitalized as deferred development costs until such time production
      rates achieve sustained commercial production levels.                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    | Once a mine has achieved commercial production, mineral
      properties are depleted on a units-of-production basis.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    | The Company reviews the carrying values of mineral
      properties and deferred exploration and development expenditures regularly
      with a view to assessing whether there has been any impairment in value,
      or whenever events or changes in circumstances indicate that the carrying
      value may not be recoverable. In the event the estimated undiscounted cash
      flows expected from its use or eventual disposition
is                                                                                                                                                                                                        

- 11 -

---

|Augusta Resource Corporation                                  
|--------------------------------------------------------------
|Notes to Consolidated Financial Statements                    
|For the years ended December 31, 2009 and 2008                
|(All amounts are
      in U.S. dollars unless otherwise noted)

determined to be insufficient to
recover the carrying value of any property, the carrying value will be written
down to the estimated fair value.

|(e) | Reclamation and closure costs                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    | The Company recognizes liabilities for statutory,
      contractual or legal obligations associated with the retirement of
      property, plant and equipment, when those obligations result from the
      acquisition, construction, development or normal operations of the assets.
      Initially, a liability for an asset retirement obligation is recognized at
      its fair value in the period in which it is incurred. Upon initial
      recognition of the liability, the corresponding asset retirement cost is
      added to the carrying value of the asset and the cost is amortized as an
      expense over the economic life of the related asset. Following the initial
      recognition of the asset retirement obligation, the carrying amount of the
      liability is increased for the passage of time and adjusted for changes to
      the amount or timing of the underlying cash flows needed to settle the
      obligation.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    | The present value of the reclamation liabilities may be
      subject to change based on managements current estimates, changes in
      remediation technology or changes to the applicable laws and regulations
      by regulatory authorities, which affects the ultimate cost of remediation
      and reclamation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    | As at December 31, 2009 and 2008, the Company did not
      have any asset retirement obligations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|(f) | Share issue costs                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    | Share issue costs are recorded as an increase to the
      deficit in the year in which they are incurred.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|(g) | Loss per share                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    | Basic net loss per share is computed using the weighted
      average number of common share equivalents outstanding during the year.
      The Company uses the treasury stock method for the calculation of diluted
      loss per share.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|(h) | Foreign currencies                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    | Effective January 1, 2009, the Company changed its
      functional and reporting currency from Canadian dollars to the U.S.
      dollar. Transactions undertaken in foreign currencies are translated into
      U.S. dollars at exchange rates prevailing at the time the transaction
      occurred. Monetary assets and liabilities denominated in foreign
      currencies are translated into equivalent U.S. dollars at the exchange
      rates in effect at the balance sheet date with any resulting gain or loss
      being recognized in the consolidated statement of operations and deficit.
      The effect of fluctuations in exchange rates between the dates of
      transactions and the settlements is reflected in the statement of
      operations.                                                                                                                                                                                   
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    | The financial statements of Canadian dollar subsidiaries
      are translated into U.S. dollars using the temporal method for integrated
      operations, as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

- 12 -

---

|Augusta Resource Corporation                                  
|--------------------------------------------------------------
|Notes to Consolidated Financial Statements                    
|For the years ended December 31, 2009 and 2008                
|(All amounts are
      in U.S. dollars unless otherwise noted)

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | depreciation or amortization of assets translated at
      historical exchange rates are translated at the same exchange rates as the
      assets to which they relate; and                                                                                                                                                                                                   
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |                                                                                                                                                                                                                                                                                                                                                                                
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | translation gains and losses on monetary items or
      non-monetary items carried at market are included in the current years
      statement of operations.                                                                                                                                                                                                                 
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |                                                                                                                                                                                                                                                                                                                                                                                
|(i) | Stock-based compensation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |                                                                                                                                                                                                                                                                                                                                                                                
|    | The fair value method of accounting is used for
      stock-based awards. Under this method, stock options are recorded at their
      estimated fair value on the grant date and are charged either to earnings
      or capitalized to the mineral properties over the vesting period with a
      corresponding credit to contributed surplus. If the stock options are
      exercised, the proceeds are credited to share capital and the fair value
      of the options exercised is reclassified from contributed surplus to share
      capital. For options subject to graded vesting, the Company calculates the
      fair value of the award as if it was one single award with one expected
      life and amortizes the calculated expense for the entire award on a
      straight-line basis over the vesting period of the award.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |                                                                                                                                                                                                                                                                                                                                                                                
|(j) | Income taxes                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |                                                                                                                                                                                                                                                                                                                                                                                
|    | Income taxes are provided for in accordance with the
      liability method. Under the liability method of accounting for income
      taxes, future tax assets and liabilities are determined based on
      differences between the financial reporting and tax bases of assets and
      liabilities and are measured using the substantively enacted tax rates and
      laws that will be in effect when the differences are expected to
      reverse.                                                                                                                                                                                                                                                                                                                                                                                       
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |                                                                                                                                                                                                                                                                                                                                                                                
|(k) | Debt financing costs                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |                                                                                                                                                                                                                                                                                                                                                                                
|    | Costs incurred during the process of obtaining debt
      financing are deferred. These costs are amortized over the life of the
      related debt instrument.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |                                                                                                                                                                                                                                                                                                                                                                                
|(l) | Use of estimates                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |                                                                                                                                                                                                                                                                                                                                                                                
|    | These consolidated financial statements have been
      prepared in accordance with GAAP which require management to make
      estimates and assumptions that affect reported amounts of assets and
      liabilities and disclosure of contingent assets and liabilities at the
      date of the financial statements and the reported amounts expensed during
      the reporting year. Actual results may differ from those
  estimates.                                                                                                                                                                                                                                                                                                                                                                                                      
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |                                                                                                                                                                                                                                                                                                                                                                                
|(m) | Financial instruments  recognition and
      measurements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |                                                                                                                                                                                                                                                                                                                                                                                
|    | Financial assets and liabilities are recognized on the
      balance sheet when the Company becomes party to the contractual provisions
      of the instrument. Financial instruments are initially recognized and
      subsequently measured based on their classification as held-for-trading,
      available for sale financial assets, held-to- maturity, loans and
      receivables, or other financial liabilities as follows:                                                                                                                                                                                                                                                                                                                                                                                                           
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |                                                                                                                                                                                                                                                                                                                                                                                
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | Held-for-trading financial instruments are purchased and
      incurred with the intention of generating income in the near term. These
      instruments are measured at their fair value with change in fair value
      recognized in net income for the period.                                                                                                            
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |                                                                                                                                                                                                                                                                                                                                                                                
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | Available for sale financial assets are financial assets
      that are designated as available for sale and are not categorized into any
      other financial instrument category. These instruments are measured at
      their fair value and changes in fair value are included in other
      comprehensive income until the asset is removed from the balance
    sheet.

- 13 -

---

|Augusta Resource Corporation                                  
|--------------------------------------------------------------
|Notes to Consolidated Financial Statements                    
|For the years ended December 31, 2009 and 2008                
|(All amounts are
      in U.S. dollars unless otherwise noted)

- Held-to-maturity investments are financial assets
  with fixed or determinable payments that the Company has the intention and
  ability to hold-to-maturity. These are initially recognized at fair value and
  are measured at amortized cost using the effective interest rate method.
- Loans and receivables are initially recognized at
  fair value including direct and incremental transaction costs and are
  subsequently measured at amortized cost, using the effective interest method.
- Other financial liabilities are initially
  recognized at fair value and are measured at amortized cost using the
  effective interest rate method.

|3. | ADOPTION OF NEW ACCOUNTING STANDARDS
|-- | ------------------------------------

|a) | Goodwill and Intangible Assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   | In February 2008, the Canadian Institute of Chartered
      Accountants (CICA) issued Section 3064, Goodwill and Intangible
      Assets, which replaces Section 3062, Goodwill and Other Intangible
      Assets. This new standard provides guidance on the recognition,
      measurement, presentation and disclosures of goodwill and intangible
      assets. Concurrent with the adoption of this standard, CICA Emerging
      Issues Committee Abstract 27, Revenues and Expenditures in the
      Pre-operating Period was withdrawn.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   | The standard was effective for our fiscal year beginning
      on January 1, 2009. Adoption of this standard did not have any effect on
      the Companys financial statements.                                                                                                                                                                                                                                                                                                                                                                      
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|b) | Credit Risk and Fair Value of Financial Assets and
      Liabilities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   | In January 2009, the CICA issued EIC-173, Credit Risk
      and the Fair Value of Financial Assets and Financial Liabilities. EIC-173
      provides guidance on how to take into account credit risk of an entity and
      counterparty when determining fair value of financial assets and financial
      liabilities.                                                                                                                                                                                                                           
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   | The standard was effective for our fiscal year beginning
      on January 1, 2009 and adoption of EIC-173 did not have any effect on the
      Companys financial statements.                                                                                                                                                                                                                                                                                                                                                                         
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|c) | Mining Exploration Costs                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   | In March 2009, CICA issued EIC-174, Mining Exploration
      Costs. EIC-174 provides guidance on the accounting and impairment review
      of exploration costs. This standard was effective for our fiscal year
      beginning on January 1, 2009. The application of EIC-174 did not have any
      effect on the Companys financial statements.                                                                                                                                                                                                
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|d) | Financial Instruments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   | In June 2009, CICA amended Section 3862, Financial
      Instrument  Disclosures, to provide additional disclosure requirements
      about fair value measurements of financial instruments and to enhance
      liquidity risk disclosure requirements for publicly accountable
      enterprises. The additional disclosures were applicable to annual
      financial statements commencing with the Companys annual consolidated
      financial statements for its year ending December 31, 2009 (Note
    13).                                
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|e) | 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, with
      earlier                                                                                                                                                                                                                                                                                                                        

- 14 -

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|Augusta Resource Corporation                                  
|--------------------------------------------------------------
|Notes to Consolidated Financial Statements                    
|For the years ended December 31, 2009 and 2008                
|(All amounts are
      in U.S. dollars unless otherwise noted)

adoption permitted. Accordingly, the
conversion to IFRS will be applicable to the Corporations reporting no later
than in the first quarter of 2011 with restatement of comparable information
presented. The conversion to IFRS will impact the Companys accounting policies,
information technology and data systems, internal control over financial
reporting and disclosure controls and procedures. The transition may also impact
business activities, such as foreign currency and hedging activities, certain
contractual arrangements, debt covenants, capital requirements and compensation
arrangements. The Company is currently evaluating the future impact of IFRS on
its financial statements and will continue to invest in training and additional
resources to ensure a timely conversion. The Company has completed its IFRS
diagnostic plan and is currently preparing its IFRS conversion plan which will
outline the steps required to complete for the transition to IFRS.

|4. | DISCONTINUED OPERATIONS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   | On May 1, 2007, the Company entered into a Letter of
      Intent (LOI) with Ely Gold & Minerals Inc. (Ely) (formerly known
      as Ivana Ventures Inc.) for the sale of the Companys interest in the
      Mount Hamilton, Shell and Monte Cristo properties. Following the
      completion of a definitive sale agreement in November 2007, the Company
      reclassified the consolidated results of DHI Minerals to discontinued
      operations. On February 29, 2008, with final regulatory approvals
      received, the transaction with Ely closed.                                                          
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   | For the year ended December 31, 2009, the Company
      recorded a loss of $508,385 resulting from the write- off of the expired
      Ely warrants, interest accretion of the Ely receivable and the fair value
      reduction of the Ely receivable due to extending the Ely payment terms,
      which were reported as a gain (loss) from discontinued
  operations.                                                                                                                                                                                                                                                      
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   | In accordance with the definitive agreement the
      consideration for the sale is $6,625,000 in cash and warrants exercisable
      to purchase up to 3,000,000 shares of Ely for eighteen months after
      closing at the price of Cdn$0.50 per share. The cash portion of the
      purchase price is payable in instalments over five years, with $1,625,000
      paid on closing and $1,000,000 payable each 12 months thereafter. The
      shares of the subsidiaries and the properties directly are pledged to the
      Company as its sole recourse for non- payment of any portion of the
      purchase price.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   | Based on the net book value of the discontinued
      operations as at the February 29, 2008, the date of closing, and the
      actual Canadian dollar proceeds, a gain on sale of $543,177 was recognized
      for the year ended December 31, 2008.                                                                                                                                                                                                                                                                                                                                                                        

- 15 -

---

|Augusta Resource Corporation                                  
|--------------------------------------------------------------
|Notes to Consolidated Financial Statements                    
|For the years ended December 31, 2009 and 2008                
|(All amounts are
      in U.S. dollars unless otherwise noted)

|5. | CAPITAL ASSETS AND DEPOSITS ON LONG-LEAD
      EQUIPMENT
|-- | --------------------------------------------------------
|   |                                                         
|   | Capital assets consist of:                              

| |                         |   | December 31, 2009 |  |   | December 31, 2008 | 
| | ----------------------- | - | ----------------- |  | - | ----------------- | 
| |                         |   |                   |  |   | Accumulated       | 
| |                         |   | Cost              |  |   | Amortization      | 
| | Land                    | $ | 3,445,340         |  |   | -                 | 
| | Water rights            |   | 3,805,847         |  |   | -                 | 
| | Vehicles                |   | 244,341           |  |   | 71,939            | 
| | Buildings               |   | 161,046           |  |   | 30,379            | 
| | Furniture and equipment |   | 74,698            |  |   | 27,373            | 
| | Computer software       |   | 186,537           |  |   | 92,350            | 
| | Computer hardware       |   | 84,245            |  |   | 40,102            | 
| |                         | $ | 8,002,054         |  | $ | 262,143           | 

Water rights payments relate primarily
to the purchase of water from Central Arizona Project (CAP). The water
delivered from CAP is pumped into the local aquifer providing access to the
resource at a later date. The Company has also received tradable water storage
certificates for this water inventory.

Deposits on long-lead
equipment

| |                                                                  |   | 2009       |   |   | 2008       |  
| | ---------------------------------------------------------------- | - | ---------- | - | - | ---------- | -
| |                                                                  |   |            |   |   |            |  
| | Balance, December 31, 2008 and 2007                              | $ | 15,282,230 |   | $ | -          |  
| | Deposits made during the year                                    |   | 14,991,717 |   |   | 17,892,993 |  
| | Contractual obligations to be paid in the
      following period |   | 5,254,215  |   |   | -          |  
| | Effect from changes in foreign exchange rates                    |   | -          |   |   | (2,610,763 | )
| | Reclassifications                                                |   | (38,090    | ) |   | -          |  
| | Balance, December
      31, 2009 and 2008                        | $ | 35,490,072 |   | $ | 15,282,230 |  

During the year ended December 31,
2009, the Company made deposits totalling $14,991,717 (2008 -$17,892,993)
primarily on SAG mill and two ball mills, three mill drives and three electric
mining shovels.

- 16 -

---

|Augusta Resource Corporation                                  
|--------------------------------------------------------------
|Notes to Consolidated Financial Statements                    
|For the years ended December 31, 2009 and 2008                
|(All amounts are
      in U.S. dollars unless otherwise noted)

|6. | OTHER ASSETS
|-- | ------------

| |                                     |   | 2009       |   |   | 2008       |  
| | ----------------------------------- | - | ---------- | - | - | ---------- | -
| | Balance, December 31, 2008 and 2007 | $ | 3,900,810  |   | $ | -          |  
| | Sale of DHI Minerals Inc. to Ely    |   | -          |   |   | 3,528,926  |  
| | Interest accretion                  |   | 490,901    |   |   | 371,884    |  
| | Loan Impairment charge              |   | (929,628   | ) |   | -          |  
| | Payment received                    |   | (1,000,000 | ) |   | -          |  
| | Write-off of
      expired warrants |   | (67,419    | ) |   | -          |  
| |                                     |   | 2,394,664  |   |   | 3,900,810  |  
| | Less current
      portion          |   | (250,000   | ) |   | (1,046,335 | )
| | Long-term receivable                | $ | 2,144,664  |   | $ | 2,854,475  |  

On February 28, 2008, the Company
completed the sale of its interest in the Mount Hamilton, Shell and Monte Cristo
properties (Note 4) for cash consideration of $6.625 million of which $1.625
million was paid on closing and the remaining $5 million is payable in annual
instalments of $1 million (Annual Payment) over a five year period and share
purchase warrants (the Warrants) to purchase up to 3,000,000 shares of Ely for
eighteen months after closing at a price of Cdn$0.50 per share. The fair value
of the consideration was $3,596,345 comprising of $3,528,926 fair value of the
$5 million receivable (Ely Receivable) calculated using a 15% discount rate
and $67,419 fair value for the Warrants, which was calculated using the
Black-Scholes option-pricing model and based on the following assumptions:
expected life of 0.66 years; annualized volatility of 207%, a risk free rate of
1.11% and no dividends. The first Annual Payment of $1 million due on February
28, 2009 was received. On August 28, 2009, the warrants expired unexercised and
the carrying value was written off to loss from discontinued operations.

On November 16, 2009, the Company had
agreed to an extension of the time for Ely to pay the remaining $4 million under
the following terms:

Due Date
    
    Amount DueJune 1, 2010
    $
    250,000June 1, 2011
    
    500,000June 1, 2012
    
    750,000June 1, 2013
    
    750,000June 1, 2014
    
    750,000June 1, 2015
    
    1,000,000$
    4,000,000


In consideration for this extension,
Ely granted the Company share purchase warrants for the purchase of up to
2,000,000 Ely common shares at a price of Cdn$0.25 per common share and expires
on May 16, 2011. The share purchase warrants had a fair value of $8,714 based on
the following assumptions: expected life of 1.5 years, expected volatility of
40%, risk free interest rate of 1.34% and no dividends. On December 31, 2009,
Elys stock price closed at Cdn$0.13 on the TSX Venture Exchange.

- 17 -

---

|Augusta Resource Corporation                                  
|--------------------------------------------------------------
|Notes to Consolidated Financial Statements                    
|For the years ended December 31, 2009 and 2008                
|(All amounts are
      in U.S. dollars unless otherwise noted)

|7. | MINERAL PROPERTIES AND DEFERRED DEVELOPMENT
      COSTS
|-- | -------------------------------------------------------

| | Mineral properties consist of:                      |   |            |  |   |            |  
| | --------------------------------------------------- | - | ---------- |  | - | ---------- | -
| |                                                     |   | 2009       |  |   | 2008       |  
| |                                                     |   |            |  |   |            |  
| | Balance, December 31, 2008 and 2007                 | $ | 25,462,869 |  | $ | 29,145,396 |  
| | Acquisition costs                                   |   | 86,358     |  |   | 2,306,052  |  
| | Effect from changes in foreign exchange
      rates |   | -          |  |   | (5,986,624 | )
| | Capitalized
      interest                          |   | 116,211    |  |   | -          |  
| | Balance, December 31, 2009 and 2008                 | $ | 25,665,438 |  | $ | 25,462,869 |  

| | Development costs consist of:                 |   |            |  |   |             |  
| | --------------------------------------------- | - | ---------- |  | - | ----------- | -
| |                                               |   | 2009       |  |   | 2008        |  
| |                                               |   |            |  |   |             |  
| | Balance, December 31, 2008 and 2007           | $ | 41,717,224 |  | $ | 28,588,056  |  
| | Work program expenditures                     |   | 21,303,409 |  |   | 23,919,161  |  
| | Capitalized loan interest charges             |   | 935,990    |  |   | 619,986     |  
| | Effect from changes in foreign exchange rates |   | -          |  |   | (11,827,533 | )
| | Capitalized stock compensation expense        |   | 560,100    |  |   | 417,554     |  
| | Balance, December
      31, 2009 and 2008     | $ | 64,516,724 |  | $ | 41,717,224  |  

On June 1, 2005, the Company announced
that it had entered into an option agreement (the Agreement) to purchase 100%
of the Rosemont property in Pima County, Arizona. The Rosemont property is
approximately 50km southeast of Tucson, situated near a number of large porphyry
type producing copper mines operated by Freeport-McMoRan Copper & Gold Inc.
and ASARCO LLC (ASARCO).

The Agreement provided the Company with
the right to purchase a 100% interest in the Rosemont property for $20.4 million
and subject to a 3% net smelter royalty. The Rosemont property comprises of
15,000 acres (6,080 hectares) of patented and unpatented claims, fee land and
surface grazing rights. The $20.4 million purchase price was payable over a
three-year period. After the Company made its first payment of $6.7 million in
2005, on March 31, 2006 the Company exercised its option to purchase the
Rosemont property with a final payment of $13.7 million. The $20.4 million
purchase price was determined based on the fair value of the consideration
provided and has been allocated to mineral properties.

During the year ended December 31,
2009, the Company spent $21,303,409 (2008 - $23,919,161) on basic engineering
and design, project salaries and benefits, and permitting activities.

- 18 -

---

|Augusta Resource Corporation                                  
|--------------------------------------------------------------
|Notes to Consolidated Financial Statements                    
|For the years ended December 31, 2009 and 2008                
|(All amounts are
      in U.S. dollars unless otherwise noted)

|8. | LONG-TERM DEBT             
|-- | ---------------------------
|   |                            
|   | Long-term debt consists of:

| |                               |   | 2009        |   |   | 2008       |  
| | ----------------------------- | - | ----------- | - | - | ---------- | -
| |                               |   |             |   |   |            |  
| | Long-term note (a)            | $ | 1,547,384   |   | $ | 1,988,118  |  
| | ASARCO production payment (b) |   | 2,600,000   |   |   | 2,600,000  |  
| | Loan facility (c)             |   | 41,620,567  |   |   | 31,661,012 |  
| |                               |   | 45,767,951  |   |   | 36,249,130 |  
| | Current portion               |   | (42,177,512 | ) |   | (556,945   | )
| |                               | $ | 3,590,439   |   | $ | 35,692,184 |  

|a) | Long-term note                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   | On February 20, 2007, the Company entered into an
      agreement to purchase 53-acre parcel of land located 15 kilometers south
      of Tucson. The property will be used for a water-well field, pump station,
      and as a possible water recharge location. The purchase agreement required
      an immediate cash payment of $988,031 as well as the assumption of a
      promissory note, bearing interest at 8%, for $2,223,720. The promissory
      note, which is secured by a trust deed on the property, requires five
      equal payments for principal and interest of $556,945 on the February 20
      anniversary date. On February 20, 2009 the second payment of $556,945 was
      made. The outstanding balance as at December 31, 2009 was $1,547,384 of
      which $556,945 is current.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   | During the year ended December 31, 2009, the Company had
      capitalized $116,211 (2008 - $Nil) of interest to mineral
    properties.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|b) | ASARCO production payment                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   | The Company announced on January 16, 2009 that an
      agreement had been reached with ASARCO that fully and finally resolves a
      lawsuit ASARCO filed against the Company on August 8, 2007 in the ASARCO
      Chapter 11 bankruptcy proceeding in the Southern District of Texas, Corpus
      Christi Division. The proceeding sought the return of the Rosemont
      property, which the Company acquired in 2006 from a real-estate
      development company that had purchased the property from ASARCO in 2004.
      On March 26, 2009, the Company was granted an Order of Dismissal by the
      United States Bankruptcy Court with each party to bear its own fees, costs
      and expenses.                                                                                                    
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   | As part of the settlement, the Company made a $250,000
      cash payment to ASARCO, which was paid in the first quarter of 2009, and
      specified annual production payments (production payments) over an eight
      year period once Rosemont reaches commercial production. The Company also
      has the right of a pre- production, pre-payment option for the production
      payments at the net present value of the aggregate annual payments, using
      an 18% discount rate, as mutually agreed with ASARCO.                                                                                                                                                                                                                                                                                   
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   | The ASARCO production payments arose from a contingency
      that can be reasonably measured and existed at December 31, 2008. As a
      result, the Company recorded a $2,600,000 liability with respect to the
      pre- production payment option.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

- 19 -

---

|Augusta Resource Corporation                                  
|--------------------------------------------------------------
|Notes to Consolidated Financial Statements                    
|For the years ended December 31, 2009 and 2008                
|(All amounts are
      in U.S. dollars unless otherwise noted)

|c) | Loan facility                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   | On June 17, 2008 the Company announced that its wholly
      owned subsidiary, Rosemont Copper Company had entered into a loan
      agreement with Sumitomo Corporation of America (Sumitomo), a wholly
      owned subsidiary of Sumitomo Corporation. The material terms of the
      facility are that Sumitomo has provided a $40 million loan facility to be
      drawn down by Rosemont over the twelve month period to June 30, 2009 to
      fund major equipment purchase contracts ($27 million) and general working
      capital ($13 million). Repayment of the loan is for the principal amount
      plus interest at a rate of LIBOR + 1.50%. There were no other fees
      associated with the facility. The loan is guaranteed by the Company and is
      secured against Rosemonts assets, including the $35,490,072 of deposits
      on long-lead time equipment that are on order and will mature on June 17,
      2010. In exchange for the loan, Augusta granted Sumitomo certain rights to
      negotiate a minority ownership interest in the Rosemont project, which
      expired unexercised.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   | During the year ended December 31, 2009, the Company had
      accrued $983,340 (December 31, 2008  $661,540) of interest of which
      $935,990 (2008 - $619,986) was capitalized to the Rosemont
  project.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   | As at December 31, 2009, the $40 million loan facility
      has been fully drawn (December 31, 2008 - $31,043,962) and the Company has
      accrued interest, net of financing costs, of $1,620,567 (December 31, 2008
      - $617,050). Since the loan facility is due on June 17, 2010, the
      outstanding principle plus accrued interest has been classified as a
      current liability (Note 18 (a)).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

|9. | SHARE CAPITAL
|-- | -------------
|   |              
|a) | Authorized:  
|   |              
|b) | Issued:      

| |                                                                    |  | Number of   |  |   |             | 
| | ------------------------------------------------------------------ |  | ----------- |  | - | ----------- | 
| |                                                                    |  | shares      |  |   | Amount      | 
| | Balance at December 31, 2006                                       |  | 72,749,067  |  | $ | 51,862,516  | 
| | Issued pursuant to equity financing                                |  | 10,719,827  |  |   | 34,932,775  | 
| | Issued pursuant to exercise of
      warrants                      |  | 5,045,000   |  |   | 5,300,177   | 
| | Issued pursuant to exercise of stock options                       |  | 74,167      |  |   | 34,640      | 
| | Balance at December 31, 2007                                       |  | 88,588,061  |  |   | 92,130,108  | 
| | Issued pursuant to exercise of stock options                       |  | 146,200     |  |   | 484,423     | 
| | Balance at December 31, 2008                                       |  | 88,734,261  |  |   | 92,614,531  | 
| | Issued pursuant to private placement                               |  | 3,350,000   |  |   | 3,740,210   | 
| | Issued pursuant to Prospectus
      Offering                       |  | 14,237,000  |  |   | 26,218,197  | 
| | Issued pursuant to exercise of stock options                       |  | 100,000     |  |   | 9,297       | 
| | Issued pursuant to exercise of
      broker warrants and options   |  | 280,555     |  |   | 587,308     | 
| | Transfer fair value of exercised stock options                     |  | -           |  |   | 4,190       | 
| | Transfer fair value of
      exercised broker warrants and options |  | -           |  |   | 123,944     | 
| | Issued as compensation pursuant to private placement               |  | 67,000      |  |   | 88,340      | 
| | Balance at December 31, 2009                                       |  | 106,768,816 |  | $ | 123,386,017 | 

On August 19, 2009, the Company
completed a prospectus offering conducted by a syndicate of underwriters led by
Wellington West Capital Markets Inc. (the Underwriters) for the sale of
14,237,000

- 20 -

---

|Augusta Resource Corporation                                  
|--------------------------------------------------------------
|Notes to Consolidated Financial Statements                    
|For the years ended December 31, 2009 and 2008                
|(All amounts are
      in U.S. dollars unless otherwise noted)

common shares, including a 15%
over-allotment of 1,857,000 common shares, at a price of Cdn$2.02 for gross
proceeds of Cdn$28,758,740 ($26,218,196). In connection with the prospectus
offering, the Company incurred share issue costs totalling $2,175,067, which
included compensation options to the Underwriters to purchase 427,109 common
shares at a price of Cdn$2.19 per common share, exercisable in whole or in part
until August 6, 2010. These compensation options had a fair value of
$237,845.

On April 17, 2009, the Company
completed a private placement with the issuance of 3,350,000 units at a price of
Cdn$1.50 per unit for gross proceeds of Cdn$5,025,000 ($3,991,263). Each unit
consists of one common share and one non-transferable share purchase warrant
exercisable at Cdn$2.30 per warrant exercisable until April 17, 2010. The common
shares were subject to a four month hold period.

A finders fee consisting of cash of
$206,858 (Cdn$251,250) and 67,000 units having a fair value of $93,362 (common
shares - $88,340; share purchase warrants - $5,022) was paid to Peninsula
Merchant Syndications Corp. In total, the Company incurred $346,466 of costs
relating to this private placement and were charged to share issue costs.

The Company charges costs in connection
with equity financings to deficit in accordance with the Companys accounting
policy on share issue costs.

Stock options

The Company has a stock option plan
providing for the issuance of options that shall not at any time exceed 10% of
the total number of issued and outstanding common shares of the Company as at
the date of grant of the options. The Company may grant options to directors,
officers, employees, consultants and other personnel of the Company or any of
its subsidiaries. The exercise price of each option cannot be lower than the
market price of the shares being the closing price of the Companys common
shares on the Toronto Stock Exchange the day before the grant date. Options
generally vest ratably over periods of up to three/four years and may expire
within 5 years but no later than 10 years from the date of grant as determined
by the Board of Directors.

The following table summarizes the
Companys stock option plan as at December 31, 2009:

| |                                     |  |           |   |   | Average  | 
| | ----------------------------------- |  | --------- | - | - | -------- | 
| |                                     |  |           |   |   | exercise | 
| |                                     |  | Number of |   |   | price    | 
| |                                     |  | Shares    |   |   | (Cdn$)   | 
| | Outstanding as at December 31, 2006 |  | 4,801,167 |   | $ | 1.76     | 
| | Granted                             |  | 1,185,000 |   |   | 2.31     | 
| | Exercised                           |  | (74,167   | ) |   | 0.04     | 
| | Forfeited                           |  | (25,000   | ) |   | 1.78     | 
| | Outstanding as at December 31, 2007 |  | 5,887,000 |   | $ | 1.89     | 
| | Granted                             |  | 2,170,000 |   |   | 4.00     | 
| | Exercised                           |  | (146,200  | ) |   | 2.02     | 
| | Forfeited                           |  | (619,584  | ) |   | 2.80     | 
| | Outstanding as at December 31, 2008 |  | 7,291,216 |   |   | 2.44     | 
| | Granted                             |  | 1,790,000 |   |   | 0.71     | 
| | Exercised                           |  | (100,000  | ) |   | 0.10     | 
| | Forfeited                           |  | (505,416  | ) |   | 2.10     | 
| | Outstanding as at December 31, 2009 |  | 8,475,800 |   | $ | 2.14     | 

- 21 -

---

|Augusta Resource Corporation                                  
|--------------------------------------------------------------
|Notes to Consolidated Financial Statements                    
|For the years ended December 31, 2009 and 2008                
|(All amounts are
      in U.S. dollars unless otherwise noted)

The following table summarizes the
stock compensation expense and capitalized stock compensation expense for the
three years ended December 31, 2009, 2008 and 2007:

| |                                              |   | 2009      |  |   | 2008      |  |   | 2007      | 
| | -------------------------------------------- | - | --------- |  | - | --------- |  | - | --------- | 
| | Stock compensation expense                   | $ | 1,120,555 |  | $ | 2,378,054 |  | $ | 1,638,728 | 
| | Capitalized stock
      compensation expense |   | 561,000   |  |   | 417,554   |  |   | -         | 
| |                                              | $ | 1,681,555 |  | $ | 2,795,608 |  | $ | 1,638,728 | 

The following assumptions were used in
the Black Scholes option pricing model to fair value of the stock options
granted during the twelve months ended December 31, 2009, 2008 and 2007:

| |                                        |   | 2009          |  |   | 2008          |  |   | 2007          | 
| | -------------------------------------- | - | ------------- |  | - | ------------- |  | - | ------------- | 
| | Expected life                          |   | 3.5           |  |   | 3.0           |  |   | 3.0           | 
| | Expected volatility                    |   | 81% - 90%     |  |   | 65% -90%      |  |   | 67  69%      | 
| | Weighted average volatility            |   | 87%           |  |   | 65%           |  |   | 69%           | 
| | Expected dividend yield                |   | 0.0%          |  |   | 0.0%          |  |   | 0.0%          | 
| | Risk-free interest rate                |   | 1.81% - 2.34% |  |   | 1.79% - 4.09% |  |   | 3.58% - 3.93% | 
| | Weighted average risk free rate        |   | 2.05%         |  |   | 3.09%         |  |   | 3.86%         | 
| |                                        |   |               |  |   |               |  |   |               | 
| | Weighted average fair value per option | $ | 0.46          |  | $ | 2.21          |  | $ | 1.11          | 

The following table summarizes stock
options outstanding as at December 31, 2009:

Options Outstanding
    
    
    Options ExercisableWeighted
    
    
    
    
    
    
    
    
    WeightedWeighted
    
    
    Average
    
    
    
    
    
    Weighted
    
    
    AverageAverage
    
    
    Remaining
    
    
    
    
    
    Average
    
    
    RemainingNumber of
    
    
    Exercise
    
    
    Contractual
    
    
    Number of
    
    
    Exercise
    
    
    ContractualOptions
    
    
    Price
    
    
    Life
    
    
    Options
    
    
    Price
    
    
    LifeExercise Prices
      (Cdn$)
    
    Outstanding
    
    
    (Cdn$)
    
    
    (Years)
    
    
    Outstanding
    
    
    (Cdn$)
    
    
    (Years)$0.68 - $1.13
    
    1,800,000
    
    $
    0.73
    
    
    4.8
    
    
    368,332
    
    $
    0.73
    
    
    4.9$1.55 - $1.90
    
    2,310,800
    
    
    1.59
    
    
    1.0
    
    
    2,310,800
    
    $
    1.59
    
    
    1.0$2.05 - $2.94
    
    2,450,000
    
    
    2.14
    
    
    2.0
    
    
    2,076,656
    
    
    2.10
    
    
    1.7$3.50 - $3.61
    
    300,000
    
    
    3.56
    
    
    3.1
    
    
    150,000
    
    
    3.57
    
    
    3.1$4.10 - $4.97
    
    1,615,000
    
    
    4.26
    
    
    8.2
    
    
    778,327
    
    
    4.26
    
    
    8.28,475,800
    
    $
    2.14
    
    
    4.1
    
    
    5,684,115
    
    $
    2.14
    
    
    4.1


The following table summarizes the
outstanding share purchase warrants and compensation options as at December 31,
2009:

| |                         |   | Exercise Price |  |  |                |  |  | December 31, |  |  |           |  |  |           |   |  | December 31, | 
| | ----------------------- | - | -------------- |  |  | -------------- |  |  | ------------ |  |  | --------- |  |  | --------- | - |  | ------------ | 
| |                         |   | (Cdn$)         |  |  | Expiry Date    |  |  | 2008         |  |  | Issued    |  |  | Exercised |   |  | 2009         | 
| |                         |   |                |  |  |                |  |  |              |  |  |           |  |  |           |   |  |              | 
| | Share purchase warrants | $ | 2.30           |  |  | April 17, 2010 |  |  | -            |  |  | 3,417,000 |  |  | (67,000   | ) |  | 3,350,000    | 
| | Compensation options    | $ | 2.19           |  |  | August 6, 2010 |  |  | -            |  |  | 427,109   |  |  | (213,555  | ) |  | 213,554      | 
| |                         |   |                |  |  |                |  |  | -            |  |  | 3,844,109 |  |  | (280,555  | ) |  | 3,563,554    | 

- 22 -

---

|Augusta Resource Corporation                                  
|--------------------------------------------------------------
|Notes to Consolidated Financial Statements                    
|For the years ended December 31, 2009 and 2008                
|(All amounts are
      in U.S. dollars unless otherwise noted)

|10. | SUPPLEMENTAL CASH FLOW INFORMATION ON
      NON-CASH TRANSACTIONS
|--- | -----------------------------------------------------------------

| |                                                      |   | 2009    |  |   | 2008   |  |   | 2007      | 
| | ---------------------------------------------------- | - | ------- |  | - | ------ |  | - | --------- | 
| | Purchase of property for promissory note             | $ | -       |  | $ | -      |  | $ | 2,223,720 | 
| | Warrants issued on private placement (1)             |   | 93,361  |  |   | -      |  |   | -         | 
| | Compensation options issued as share issue
      (1) |   | 237,845 |  |   | -      |  |   | -         | 
| | Fair value of Ely share purchase warrants            | $ | 8,331   |  | $ | 67,420 |  | $ | -         | 

Note 1  Issued pursuant to equity
financings (Note 9 (b))

|11. | RELATED PARTY TRANSACTIONS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    | The Company shares rent, salaries and administrative
      services with two companies, related by common directors and officers.
      During the twelve months ended December 31, 2009, the Company charged
      $570,597 (2008 - $451,347) to these companies for their share of the rent,
      salaries and administrative expenses. As at December 31, 2009, $239,029
      (December 31, 2008 - $239,724) of accounts receivable was due from these
      two related companies.                                                                                                                                                                                                                                                                                                   
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    | As at December 31, 2009, accounts receivable included
      $13,416 (December 31, 2008 - $63,153) due from an Officer of the Company
      and companies related to the Officer.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    | Included in accounts payable and accrued liabilities at
      December 31, 2009 was $26,944 (December 31, 2008 - $75,290) due to an
      Officer of the Company for accrued salary.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    | All related party transactions are recorded at the
      exchange amount.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|12. | MANAGEMENT OF CAPITAL RISK                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    | The Companys objectives when managing capital are to
      safeguard the Companys ability to continue as a going concern in order to
      pursue the development of the Rosemont property and to maintain a flexible
      capital structure which optimizes the costs of capital at an acceptable
      risk level.                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    | Similar to other mining companies in the development
      stage, the Company is in discussions with certain parties to provide
      funding for the Company to execute its business plan. With the completion
      of an Updated Feasibility Study and continuation with the permitting
      process, the Company will require additional funding to complete the
      permitting process and through to mine and mill construction. The Updated
      Feasibility Study estimated the capital cost of the mill and mining
      equipment and all related construction costs at $897 million. Funding for
      the project could come from a number of sources, including project
      financing, off-take agreements, sale of future metal streams and from
      capital markets.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    | There are no externally imposed capital requirements. In
      the management of capital, the Company includes the components of
      shareholders equity, long term debt and current liabilities as well as
      the cash and cash equivalents. The Company manages the capital structure
      and makes adjustments to it in light of changes in economic and market
      conditions (including receptivity of the capital markets to new equity or
      debt issuances) and the risk characteristics of the underlying assets. To
      maintain or adjust the capital structure, the Company may issue new
      shares, issue new debt, acquire or dispose of assets and/or consider
      strategic alliances including joint venture partners.                                
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    | In order to facilitate the management of its capital
      requirements, the Company prepares annual expenditures budgets that are
      updated as necessary depending on various factors, including
    successful                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

- 23 -

---

|Augusta Resource Corporation                                  
|--------------------------------------------------------------
|Notes to Consolidated Financial Statements                    
|For the years ended December 31, 2009 and 2008                
|(All amounts are
      in U.S. dollars unless otherwise noted)

|    | capital deployment and general industry conditions. The
      annual budgets are approved by the Board of Directors.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    | The Companys investment policy is to invest its cash in
      highly liquid short-term interest-bearing investments, selected based on
      the expected timing of expenditures from continuing operations. In order
      to maximize ongoing development efforts, the Company does not pay out
      dividends.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    | Based on our 2010 capital requirements which will include
      the repayment of the $40 million Sumitomo debt due on June 17, 2010 and to
      maintain its ongoing development of Rosemont as well as for administrative
      purposes, the Company will require additional funding. On January 4, 2010,
      the Company signed a credit approved term sheet for a $40 million senior
      secured loan. Upon completion of the customary documentations, the loan
      proceeds will be used to repay the Sumitomo debt. Augusta is planning to
      meet its future expenditures and obligations by raising sufficient funds
      by issuing shares, entering into a joint venture arrangement and or
      issuing debt. The Company is currently in discussions with external
      parties regarding financing arrangements but it is not possible to predict
      whether these efforts will be successful.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|13. | FINANCIAL INSTRUMENTS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    | Under Canadian GAAP, financial instruments are classified
      into one of the following five categories: held- for-trading, held to
      maturity investments, loans and receivables, available-for-sale financial
      assets and other financial liabilities.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    | The carrying values of the Companys financial
      instruments are classified into the following
categories:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

Category
    
    
    Measurement
    
    
    2009
    
    
    2008Cash and cash equivalents
    
    Held for trading
    
    
    Fair Value - Level 1
    
    $
    6,247,217
    
    $
    7,563,190Accounts receivables
    
    Loans and receivable
    
    
    Amorized cost
    
    
    2,665,584
    
    
    4,320,691Accounts payable andaccrued liabilities
    
    Other financial liabilities
    
    
    Amorized cost
    
    
    (12,386,174
    )
    
    (3,774,450
    )Current and long-term debt
    
    Other financial liabilities
    
    
    Amorized cost
    
    $
    (45,767,951
    )
    $
    (36,249,130
    )


Financial instruments measured at
amortized cost are initially recognized at fair value and then subsequently at
amortized cost with gains and losses recognized in the statements of operations
in the period in which the gain or loss occurs.

The Company has estimated the fair
values of its financial instruments based on appropriate valuation
methodologies. These fair values are not materially different from their
carrying value.

Risks arising from financial
instruments and risk management

The Companys activities expose it to a
variety of financial risks; market risk (including foreign exchange), credit
risk and liquidity risk. Reflecting the current stage of development of the
Companys Rosemont project, the Companys overall risk management program
focuses on facilitating the Companys ability to continue as a going concern and
seeks to minimize potential adverse effects on the Companys ability to execute
its business plan.

- 24 -

---

|Augusta Resource Corporation                                  
|--------------------------------------------------------------
|Notes to Consolidated Financial Statements                    
|For the years ended December 31, 2009 and 2008                
|(All amounts are
      in U.S. dollars unless otherwise noted)

Risk management is the responsibility
of the corporate finance function. Material risks are identified and monitored
and are discussed by senior management and with the audit committee of the Board
of Directors.

Foreign exchange risk

On January 1, 2010, the Company changed
its functional and reporting currency from Canadian to U.S. dollar. As a result,
the Company is exposed to currency risks on its Canadian dollar denominated
working capital balances due to changes in exchange rates.

The Company issues equity in Canadian
dollars but a majority of its expenditures are in U.S. dollars. The Company
purchases U.S. dollars based on its near term forecast expenditures and
currently does not hedge its exposure to currency fluctuations.

As at December 31, 2009, the Company is
exposed to currency risk through the following assets and liabilities
denominated in Canadian dollars:

| | Cash and cash equivalents                      | $ | 4,942,433 |  
| | ---------------------------------------------- | - | --------- | -
| | Accounts receivable                            |   | 253,350   |  
| | Prepaid expenses                               |   | 9,966     |  
| | Accounts payable
      and accrued liabilities |   | (512,029  | )
| |                                                | $ | 4,693,720 |  

Based on the net Canadian dollar
denominated asset and liability exposures as at December 31, 2009, a 10% change
in the USD/CAD exchange rate will impact the Companys earnings by approximately
$408,000 (2008 - $250,000).

Credit risk

Credit risk arises from cash and cash
equivalents held with banks and financial institutions, as well as credit
exposure on outstanding accounts receivable. The maximum exposure to credit risk
is equal to the carrying value of the financial assets.

The Companys cash and cash equivalents
are held at a large Canadian chartered bank and invested in either short-term
GICs or high interest saving accounts. Management believes the risk of loss is
remote.

The other asset and significant portion
of the accounts receivable relates to an Ely receivable, which has a fair value
of $2,394,664, and payable over a five year period and warrants exercisable into
2,000,000 Ely common shares through to May 16, 2011. On November 16, 2009, the
Company had agreed to extend the terms for payment for an additional two years
to 2015. In the event that Ely does not make the required payments (Note 7)
Augusta can take back the common shares of DHI Minerals and DHI Minerals US or
the properties in question. Should Augusta reacquire the DHI shares or
properties, an asset impairment assessment may be required.

- 25 -

---

|Augusta Resource Corporation                                  
|--------------------------------------------------------------
|Notes to Consolidated Financial Statements                    
|For the years ended December 31, 2009 and 2008                
|(All amounts are
      in U.S. dollars unless otherwise noted)

Liquidity risk

Liquidity risk arises through excess of
financial obligations over available financial assets due at any point in time.
The Companys objective in managing liquidity risk is to maintain sufficient
readily available reserves in order to meet its liquidity requirements at any
point in time. The Company achieves this by maintaining sufficient cash and cash
equivalents.

Based on current obligations the
Company will require additional funding in the second quarter of 2010 and is
currently in discussions with a number of financial institutions and other
intermediaries regarding financing alternatives necessary to advance the project
through permitting to construction. While the Company continues to seek
alternative financing arrangements it is not possible to predict whether these
efforts will be successful.

|14. | COMMITMENTS                                                                               
|--- | ------------------------------------------------------------------------------------------
|    |                                                                                           
|    | The following table lists the known contractual
      obligations as at December 31, 2009:

| | in thousands of U.S. dollars             |   | < 1 year |  |   | 1 - 2 years |  |   | 2 - 3 years |  |   | > 3 years |  |   | Total   | 
| | ---------------------------------------- | - | -------- |  | - | ----------- |  | - | ----------- |  | - | --------- |  | - | ------- | 
| |                                          |   |          |  |   |             |  |   |             |  |   |           |  |   |         | 
| | Accounts payable and accrued liabilities | $ | 12,386   |  | $ | -           |  | $ | -           |  | $ | -         |  | $ | 12,386  | 
| | Current portion long-term debt           |   | 41,621   |  |   | -           |  |   | -           |  |   | -         |  |   | 41,621  | 
| | Note payable                             |   | 557      |  |   | 557         |  |   | 557         |  |   | -         |  |   | 1,671   | 
| | Long-lead equipment purchases            |   | 36,753   |  |   | 68,293      |  |   | -           |  |   | -         |  |   | 105,046 | 
| | Land purchases                           |   | 112      |  |   | 69          |  |   | 69          |  |   | 1,146     |  |   | 1,397   | 
| | Operating lease obligations              |   | 186      |  |   | 172         |  |   | 88          |  |   | 177       |  |   | 624     | 
| |                                          | $ | 91,615   |  | $ | 69,092      |  | $ | 715         |  | $ | 1,323     |  | $ | 162,744 | 

On December 19, 2007 the Company
announced that it had signed an agreement valued at approximately $29 million
with Polysius Corp. (Polysius) for the purchase and delivery of a SAG mill and
two ball mills needed for the construction of the Rosemont mine. The payments
are spread out over two and a half year period starting in January 2008.
Payments required in 2008 totalled $10.1 million, $11.0 million for 2009 and
$7.3 million for 2010. To December 31, 2009 all of the 2009 required payments
had been made.

On April 8, 2008 the Company announced
the signing of a Letter Award with a subsidiary of ABB Ltd. for the supply of
three gearless mill drives for $40.6 million (€28.3 million). Payments required
in 2008 totaled $3.3 million (€2.7 million), $12.8 million (€6.4 million) for
2009, $16.7 million (€11.8 million) for 2010 and $10.7 million (€7.4 million)
for 2011. To December 31, 2009, all of the 2009 payment requirements had been
made except for $5.3 million (€3.7 million) which was paid in January 2010.

On June 6 and June 26, 2008 the Company
signed Letters of Awards for the purchase of a gyratory crusher and for three
electric mining shovels. The gyratory crusher is being purchased from Sandvik
Mining for total commitments of $8.4 million with payments in 2008 totaling $0.6
million, $0.5 million for 2009, $2.5 million for 2010 and $4.8 million for 2011.
The 3 shovels are being purchased from Bucyrus International Inc. for total
commitments of $63.8 million with payments in 2008 totaling $3.0 million, $11.7
million for 2010 and $49.1 million for 2011. On December 18, 2008 a contract
amendment for the three shovels was completed that delayed the 2009 payments
until 2010.

- 26 -

---

|Augusta Resource Corporation                                  
|--------------------------------------------------------------
|Notes to Consolidated Financial Statements                    
|For the years ended December 31, 2009 and 2008                
|(All amounts are
      in U.S. dollars unless otherwise noted)

For purchase agreements related to long
lead time equipment the Company has included or intends to include in such
agreements provisions which will allow it under certain circumstances and
conditions to assign/transfer/or sell the contracts to third parties. In the
event that the Company does not make the necessary progress payments through to
completion of the contract, amounts paid to date are not refundable.

|15. | INCOME TAXES                                                                                                                                                                                                                     
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                  
|    | The provision for income taxes reported differs from the
      amount computed by applying the cumulative Canadian Federal and Provincial
      Income tax rates to the loss before the tax provision due to the
      following:

| |                                                                      |   | 2009       |   |   | 2008        |   |   | 2007       |  
| | -------------------------------------------------------------------- | - | ---------- | - | - | ----------- | - | - | ---------- | -
| | Net loss from continuing operations                                  | $ | (5,019,556 | ) | $ | (17,229,561 | ) | $ | (5,988,570 | )
| | Statutory tax rate                                                   |   | 30.00%     |   |   | 31.00%      |   |   | 34.12%     |  
| |                                                                      |   |            |   |   |             |   |   |            |  
| | Recovery of income taxes computed at standard rates                  |   | (1,505,867 | ) |   | (5,341,164  | ) |   | (2,002,913 | )
| | Differences in foreign tax rates                                     |   | (278,899   | ) |   | (1,296,578  | ) |   | (14,992    | )
| | Tax losses not recognized in the period that the benefit
      arose |   | 1,771,060  |   |   | 4,260,986   |   |   | 1,294,405  |  
| | Foreign exchange gains (losses)                                      |   | (375,330   | ) |   | 2,207,473   |   |   | (106,427   | )
| | Stock based compensation                                             |   | 166,238    |   |   | 505,960     |   |   | 558,640    |  
| | Other permanent differences                                          |   | 222,798    |   |   | (336,677    | ) |   | 271,287    |  
| |                                                                      | $ | -          |   | $ | -           |   | $ | -          |  

As of December 31, 2009, the Company
has Canadian loss carry forwards of approximately $15,085,000 (2008 -
$12,662,000) and US loss carry forwards of approximately $38,700,000 (2008 -
$25,084,000) available to reduce future years income for tax purposes. The tax
loss carry forwards expire at various times between 2010 and 2029. The
utilization of the U.S. loss carry-forwards may be subject to certain annual
limitations under the provisions of the Internal Revenue Code Section 382
relating to a 50% change in control over a three-year period. Additional change
in control could have occurred since December 31, 2009 as a result of the equity
offering announced on February 12, 2010 which may further limit the availability
of losses prior to the date of change in control.

- 27 -

---

|Augusta Resource Corporation                                  
|--------------------------------------------------------------
|Notes to Consolidated Financial Statements                    
|For the years ended December 31, 2009 and 2008                
|(All amounts are
      in U.S. dollars unless otherwise noted)

Future income taxes result primarily
from temporary differences in the recognition of certain revenue and expense
items from financial and income tax reporting purposes. Significant components
of the Companys future tax assets and liabilities as at December 31, 2009 and
2008 are as follows:

| |                                                                   |   | 2009        |   |   | 2008       |   |   | 2007       |  
| | ----------------------------------------------------------------- | - | ----------- | - | - | ---------- | - | - | ---------- | -
| | Future income tax assets                                          |   |             |   |   |            |   |   |            |  
| | Non-capital losses and other future tax deductions                | $ | 21,138,000  |   | $ | 13,821,000 |   | $ | 5,103,734  |  
| |                                                                   |   |             |   |   |            |   |   |            |  
| | Mineral properties, deferred development and capital
      assets |   | -           |   |   | 2,000      |   |   | 79,951     |  
| | Other assets                                                      |   | 202,000     |   |   | 109,000    |   |   | -          |  
| | Long-term
      debt                                              |   | 1,028,000   |   |   | 1,127,000  |   |   | -          |  
| |                                                                   |   | 22,368,000  |   |   | 15,059,000 |   |   | 5,183,685  |  
| | Valuation
      allowances for future income tax assets           |   | (11,385,000 | ) |   | (7,670,000 | ) |   | (5,183,685 | )
| |                                                                   |   | 10,983,000  |   |   | 7,389,000  |   |   | -          |  
| | Future income tax liabilities                                     |   |             |   |   |            |   |   |            |  
| | Mineral properties, deferred development and capital
      assets |   | (10,983,000 | ) |   | (7,389,000 | ) |   | -          |  
| | Net future tax
      assets (liabilities)                         | $ | -           |   | $ | -          |   | $ | -          |  

|    | As the criteria for recognizing future income tax assets
      have not been met due to uncertainty of realization, a valuation allowance
      has been recorded for each of the years.                                                                                                                                                 
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                          
|16. | SEGMENTED INFORMATION                                                                                                                                                                                                                                                                                                                    
|    |                                                                                                                                                                                                                                                                                                                                          
|    | The Company operates in one industry. As at December 31,
      2009, the Companys long-lived assets were in Canada, $2,154,276 (2008 -
      $2,867,811) and in the United States - $133,402,533 (2008 -
      $87,482,479).                                                                                                            
|    |                                                                                                                                                                                                                                                                                                                                          
|17. | DIFFERENCES BETWEEN UNITED STATES AND CANADIAN
      GENERALLY ACCEPTED ACCOUNTING PRINCIPLES                                                                                                                                                                                                                                            
|    |                                                                                                                                                                                                                                                                                                                                          
|    | These consolidated financial statements are prepared in
      accordance with Canadian GAAP, which differ in certain material respects
      from US GAAP. Material differences between Canadian GAAP and US GAAP and
      their effect on the Companys consolidated financial statements are
      summarized on the following tables.

| |                                                 |   | December 31, 2009 |  
| | ----------------------------------------------- | - | ----------------- | -
| |                                                 |   |                   |  
| | Balance Sheets                                  |   | Total Assets      |  
| | Reported under Canadian GAAP                    | $ | 142,638,660       |  
| | Mineral property expenditures (a)               |   | (22,755,313       | )
| | Deferred financing costs                        |   | 24,311            |  
| | Effect of changes in foreign exchange rates (a) |   | 2,177,633         |  
| | Capitalized interest (d)                        |   | 247,174           |  
| | Reported under
      USGAAP                     | $ | 122,332,465       |  

- 28 -

---

|Augusta Resource Corporation                                  
|--------------------------------------------------------------
|Notes to Consolidated Financial Statements                    
|For the years ended December 31, 2009 and 2008                
|(All amounts are
      in U.S. dollars unless otherwise noted)

| |                                                       |   | December 31, 2008 |  
| | ----------------------------------------------------- | - | ----------------- | -
| |                                                       |   |                   |  
| | Balance Sheets                                        |   | Total Assets      |  
| | Reported under Canadian GAAP                          | $ | 99,738,760        |  
| | Mineral property expenditures (a)                     |   | (22,594,673       | )
| | Effect of changes in foreign exchange rates
      (a) |   | 2,177,633         |  
| | Capitalized
      interest (d)                        |   | 247,174           |  
| | Reported under US GAAP                                | $ | 79,568,894        |  

| |                                                            |   | Cumulative from     |            |   |                         |            |   |             |            |   |             |  
| | ---------------------------------------------------------- | - | ------------------- | ---------- | - | ----------------------- | ---------- | - | ----------- | ---------- | - | ----------- | -
| |                                                            |   | Inception (1985) to |            |   | Year ended December 31, |           
| | Statements of
      Operations                             |   | December 31, 2009   |            |   | 2009                    |            |   | 2008        |            |   | 2007        |  
| | Net loss reported under Canadian GAAP                      | $ | (38,459,133         | )          | $ | (5,527,941              | )          | $ | (16,686,384 | )          | $ | (7,652,783  | )
| | Mineral property expenditures (a)                          |   | (22,755,313         | )          |   | (160,640                | )          |   | -           |            |   | (9,109,126  | )
| | Warrants (b)                                               |   | (7,109,697          | )          |   | (967,963                | )          |   | -           |            |   | (109,453    | )
| | Capitalized interest (d)                                   |   | 247,174             |            |   | -                       |            |   | 190,592     |            |   | 56,582      |  
| | Accretion expense on debenture                             |   | 246,924             |            |   | -                       |            |   | -           |            |   | -           |  
| | Debt issue costs                                           |   | (215,901            | )          |   | -                       |            |   | -           |            |   | -           |  
| | Assets of discontued operations (a)                        |   | -                   |            |   | -                       |            |   | 1,121,316   |            |   | (620,552    | )
| | Interest and
      finance charges                         |   | 1,248,492           |            |   | -                       |            |   | -           |            |   | -           |  
| | Net loss reported under US GAAP                            | $ | (66,797,454         | )          | $ | (6,656,544              | )          | $ | (15,374,476 | )          | $ | (17,435,332 | )
| | Basic and fully diluted loss per share under US GAAP       |   |                     |            | $ | (0.07                   | )          | $ | (0.17       | )          | $ | (0.21       | )
| | Weighted average number of common
      shares outstanding |   |                     | 96,409,230 |   |                         | 88,643,084 |   |             | 81,795,564 |  

| |                                                 |   | Cumulative from     |   |   |                         |   |   |             |   |   |             |  
| | ----------------------------------------------- | - | ------------------- | - | - | ----------------------- | - | - | ----------- | - | - | ----------- | -
| |                                                 |   | Inception (1985) to |   |   | Year ended December 31, |  
| | Comprehensive loss                              |   | December 31, 2009   |   |   | 2009                    |   |   | 2008        |   |   | 2007        |  
| | Net loss reported under US GAAP                 | $ | (66,797,454         | ) | $ | (6,656,544              | ) | $ | (15,374,476 | ) | $ | (17,435,332 | )
| | Other comprehensive income                      |   |                     |   |   |                         |   |   |             |   |   |             |  
| | Cumulative translation adjustment               |   | (3,500,992          | ) |   | -                       |   |   | (11,472,442 | ) |   | 8,332,090   |  
| | Comprehensive
      loss reported under US GAAP | $ | (70,298,446         | ) | $ | (6,656,544              | ) | $ | (26,846,918 | ) | $ | (9,103,242  | )

- 29 -

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|Augusta Resource Corporation                                  
|--------------------------------------------------------------
|Notes to Consolidated Financial Statements                    
|For the years ended December 31, 2009 and 2008                
|(All amounts are
      in U.S. dollars unless otherwise noted)

| |                                          |   | December 31, 2009 |  
| | ---------------------------------------- | - | ----------------- | -
| |                                          |   |                   |  
| |                                          |   |                   |  
| |                                          |   | Common            |  
| | Statements of
      Shareholders' Equity |   | Shares            |  
| | Reported under CanadianGAAP              | $ | 123,386,017       |  
| | Mineral property expenditures (a)        |   | -                 |  
| | Warrants (b)                             |   | 7,745,316         |  
| | Convertible debenture                    |   | -                 |  
| | Share issue costs (c)                    |   | (6,948,911        | )
| | Capitalized interest (d)                 |   | -                 |  
| | Accretion expense on debenture           |   | (250,337          | )
| | Reported under US
      GAAP             | $ | 123,932,085       |  

| |                                          |   | December 31, 2008 |  
| | ---------------------------------------- | - | ----------------- | -
| |                                          |   |                   |  
| |                                          |   |                   |  
| |                                          |   | Common            |  
| | Statements of
      Shareholders' Equity |   | Shares            |  
| | Reported under CanadianGAAP              | $ | 92,614,531        |  
| | Mineral property expenditures (a)        |   | -                 |  
| | Warrants (b)                             |   | 7,745,316         |  
| | Convertible debenture                    |   | -                 |  
| | Share issue costs ( c)                   |   | (4,427,380        | )
| | Capitalized interest (d)                 |   | -                 |  
| | Accretion expense on debenture (c)       |   | (250,337          | )
| | Reported under US
      GAAP             | $ | 95,682,130        |  

| |                                          |   | December 31, 2007 |  
| | ---------------------------------------- | - | ----------------- | -
| |                                          |   |                   |  
| |                                          |   |                   |  
| |                                          |   | Common            |  
| | Statements of
      Shareholders' Equity |   | Shares            |  
| | Reported under Canadian GAAP             | $ | 92,130,108        |  
| | Mineral property expenditures (a)        |   | -                 |  
| | Assets of discontinued operations        |   | -                 |  
| | Warrants (b)                             |   | 7,745,316         |  
| | Convertible debenture                    |   | -                 |  
| | Share issue costs ( c)                   |   | (4,427,380        | )
| | Capitalized interest (d)                 |   | -                 |  
| | Accretion expense
      on debenture (c) |   | (250,337          | )
| | Reported under US GAAP                   | $ | 95,197,707        |  

- 30 -

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|Augusta Resource Corporation                                  
|--------------------------------------------------------------
|Notes to Consolidated Financial Statements                    
|For the years ended December 31, 2009 and 2008                
|(All amounts are
      in U.S. dollars unless otherwise noted)

| |                                          |   |                         |   |   | Years ended December 31, |  
| | ---------------------------------------- | - | ----------------------- | - | - | ------------------------ | -
| |                                          |   |                         |   |   |                          |  
| |                                          |   |                         |   |   |                          |  
| |                                          |   | Cumulative
    from     |   |   |                          |  
| |                                          |   | inception (1985)
    to |   |   |                          |  
| | Statements of Cash
      Flows           |   | December 31, 2009       |   |   | 2009                     |  
| | Operating activities                     |   |                         |   |   |                          |  
| | Operating activities under Canadian GAAP | $ | (21,132,897             | ) | $ | (5,149,045               | )
| | Mineral property expenditures (a)        |   | (23,862,538             | ) |   | (160,640                 | )
| | Operating
      activities under US GAAP | $ | (44,995,435             | ) | $ | (5,309,685               | )
| |                                          |   |                         |   |   |                          |  
| | Investing activities                     |   |                         |   |   |                          |  
| | Investing activities under Canadian GAAP | $ | (131,754,309            | ) | $ | (36,998,942              | )
| | Mineral property
      expenditures (a)  |   | 23,862,538              |   |   | 160,640                  |  
| | Operating activities under US GAAP       | $ | (107,891,771            | ) | $ | (36,838,302              | )

| | a) | Mineral Property Expenditures                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    | Canadian GAAP allows exploration and development costs to
      be capitalized during the search for a commercially mineable body of ore.
      The Company has incurred exploration and development expenses that were
      added to the carrying value of mineral properties as it is anticipated
      that there is a continuing benefit of such expenditures. Under ASC Topic
      835, exploration expenditures can only be deferred subsequent to the
      establishment of proven and probable reserves. On August 28, 2007 the
      Company announced the results of the Feasibility Study for the Rosemont
      project and the approval by the Board of Directors to begin mine
      development. In the final four months of 2007 the Company had capitalized
      $3,252,194 of deferred development expenditures.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    | Investment in mining exploration expenditures, net of
      related payables, and certain expenditures incurred in 2009 that were
      deferred under Canadian GAAP amounting to $160,640 (2008 - $Nil; 2007 
      $9,959,176) would have been expensed under US GAAP and classified as
      operating activities on the consolidated statements of cash
  flows.                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | b) | Share Purchase Warrants                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    | Under Canadian GAAP share purchase warrants are accounted
      for as equity. Under US GAAP, as required by the Financial Accounting
      Standards Board (FASB) issued ASC Topic 815 (formerly, SFAS 133
      Accounting for Derivative Instruments and Hedging Activities), as
      amended, and EITF 07-5 Determining Whether an Instrument (or Embedded
      Feature) is Indexed to an Entitys Own Stock, share purchase warrants
      denominated in a currency that is not the functional currency of the
      Company are accounted for as a liability, with the change in fair value
      recorded in the statement of operations.                                                                                                                                                                              
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    | The Company had 3,563,554 warrants outstanding as at
      December 31, 2009. Under Canadian GAAP, The warrants have a fair value
      $369,974 whereas under US GAAP the warrants have a fair value $1,337,937,
      resulting in a charge of $967,963 to the statement of operations and the
      reclassification of the fair value to current liability. In May 2007,
      3,750,000 warrants were exercised for proceeds of $600,000. As the fair
      value of the warrants on the date of exercise was $7,745,316 an additional
      provision of $109,453 was required for 2007 as a charge to earnings. Upon
      exercise of the warrants the additional amount accrued was reclassified to
      share capital.                                                                                                     

- 31 -

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|Augusta Resource Corporation                                  
|--------------------------------------------------------------
|Notes to Consolidated Financial Statements                    
|For the years ended December 31, 2009 and 2008                
|(All amounts are
      in U.S. dollars unless otherwise noted)

| | c) | Share Issue Costs                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |    | Under Canadian GAAP, share issue costs related to
      issuance of common shares can be either netted against share capital or
      charged to deficit whereas under US GAAP share issue costs are netted
      against share capital. For the year ended December 31, 2009, share issue
      costs of $2,521,531 (2008 - $Nil) were charged to the deficit.                                                                                                                        
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | d) | Capitalized Interest                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |    | ASC Topic 835 provides for interest costs to be
      capitalized for qualifying assets under development. Under Canadian GAAP,
      interest is capitalized only on project specific debt. Following the
      August 2007 approval by the Board of Directors to develop the Rosemont
      project, interest amounting to $190,592 in 2008 and $56,582 for 2007 would
      have been capitalized under US GAAP. For 2009, there was no difference
      under Canadian and US GAAP.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | e) | Uncertain Tax Positions                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |    | The Company adopted the U.S. GAAP standards regarding
      uncertain tax positions. The adoption did not result in any adjustment to
      the opening deficit or any further increase in the liability for
      unrecognized tax benefits as of January 1, 2007. A reconciliation of the
      beginning and ending amount of unrecognized tax benefits is as
    follows:                                                                                                          

| | Total unrecognized tax benefits at January
      1, 2009            | $ | 369,000   |  
| | ------------------------------------------------------------------- | - | --------- | -
| | Additions based on tax prositions related to the current
      year |   | 644,000   |  
| | Additions for tax positions of prior years                          |   | 248,000   |  
| | Reductions for tax
      positions of prior years                   |   | (59,000   | )
| | Total unrecognized tax benefits at December 31, 2009                | $ | 1,202,000 |  

| |    | Due to the existence of tax assets subject to valuation
      allowance, no amount of the unrealized tax benefit would affect the annual
      effective tax rate. Additionally, due to the significant balance of loss
      carry-forwards of the Company in relation to the above uncertain tax
      positions, it has been determined that no interest and or penalties would
      apply. The Company or one of its subsidiaries files income tax returns in
      Canada and the U.S. federal jurisdictions and in various states. With few
      exceptions, the Company is no longer subject to examinations by U.S. or
      Canadian tax authorities for years prior to 2005.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | f) | Deferred Financing Costs                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    | Under Canadian GAAP, deferred financing costs are netted
      against the loan whereas under US GAAP, deferring financing costs are
      reported in non-current assets as deferred charges. Under US GAAP, the
      Company reclassified $24,311 of deferred financing costs from current
      liabilities to non-current assets.                                                                                                                                                                                                                                                                                                                                                  
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | g) | Recent Accounting Pronouncements in the United
      States                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    | SFAS 161 (ASC Topic 815), Disclosure about Derivative
      Instruments and Hedging Activities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    | In 2008, FASB issued SFAS 161  Disclosures about
      Derivative Instruments and Hedging Activities  an amendment to FASB
      Statement No 133 (SFAS 161). SFAS 161 is intended to improve
      financial                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

- 32 -

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|Augusta Resource Corporation                                  
|--------------------------------------------------------------
|Notes to Consolidated Financial Statements                    
|For the years ended December 31, 2009 and 2008                
|(All amounts are
      in U.S. dollars unless otherwise noted)

instruments standards for derivative
instruments and hedging activities by requiring enhanced disclosures to enable
investors to better understand their effects on an entitys financial position,
financial performance, and cash flows. Entities are required to provide enhanced
disclosures about: (a) how and why an entity uses derivative instruments; (b)
how derivative instruments and related hedged items are accounted for under
Statement 133 and its related interpretations; and (c) how derivative
instruments and related hedge items affect an entitys financial position,
financial performance and cash flows. It is effective for financial statements
issued for the years beginning after November 15, 2008, with early adoption
encouraged. Since the Company does not apply hedge accounting, the adoption of
this standard has no impact to the Companys consolidated financial
statements.

SFAS 141R (ASC Topic 805),
Business Combinations

In December 2007, FASB issued a
revised standard on accounting for business combinations (SFAS-141R). The
statement is effective for periods beginning on or after December 15, 2008.
SFAS-141R requires fair value measurement for all business acquisitions
including pre-acquisition contingencies. The standard also expands the existing
definition of a business and removes certain acquisition related costs from the
purchase price consideration. Since the Company has not been involved in any
business combinations, the adoption of this standard has no impact to the
Companys consolidated financial statements.

SFAS 165 (ASC Topic 855-10),
Subsequent Events

In May 2009, the FASB issued Statement
of Financial Accounting Standards No. 165, Subsequent Events, (SFAS 165). The
statement is effective for financial statements ending after June 15, 2009 and
establishes general standards of accounting for and disclosure of subsequent
events that occur after the balance sheet date. Entities are also required to
disclose the date through which subsequent events have been evaluated and the
basis for that date.

SFAS 168 (ASU 2009-1), FASB
Accounting Standards Codification

In July 2009, U.S. GAAP switched to a
completely new codification scheme aimed to simply U.S. GAAP accounting
research. The old system was a compilation of several unrelated labelling
systems and sub systems (FASB system, SEC system, etc.) that were poorly
cross-referenced and as a result was difficult when researching a particular
subject to know if all applicable GAAP had been found. The statement is
effective for financial statements issued for interim and annual periods after
September 19, 2009 and is adopted by the Company in the 2009 annual consolidated
financial statements.

FSP APB 14-1 (ASC Subtopic 470-20),
Accounting for Convertible Debt Instruments That May Be Settled In Cash Upon
Conversion

In May 2008, FASB issued FASB Staff
Position Accounting Principles Board 14-1 (APB 14-1), which revises the
accounting treatment for convertible debt instruments that may be settled in
cash upon conversion, including partial cash settlement. APB 14-1 requires the
issuer to separately account for the liability and equity components of
convertible debt instruments. The value assigned to the liability component
would be at estimated fair value, as at the date of issuance, of similar debt
without the conversion option, but including any other embedded features. The
difference between the proceeds of the debt and the value allocated to the
liability component would be recorded in equity. The standard is effective for
periods beginning on or after December 15, 2008, and is to be applied
retrospectively. Since the Company does not have any convertible debt
instruments, the adoption of this standard has no impact to the Companys
consolidated financial statements.

- 33 -

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|Augusta Resource Corporation                                  
|--------------------------------------------------------------
|Notes to Consolidated Financial Statements                    
|For the years ended December 31, 2009 and 2008                
|(All amounts are
      in U.S. dollars unless otherwise noted)

EITF 07-5 (ASC Topic 815),
Determining Whether an Instrument (or Embedded Feature) is Indexed to an
Equitys Own Stock

In June 2008, FASB Task Force reached
a consensus on EITF Issue No. 07-05, Determining Whether an Instrument (or
Embedded Feature) is Indexed to an Equitys Own Stock (EITF 07-5). The
standard provides that an equity linked financial instrument (or embedded
derivative) would not be considered indexed to the entitys own stock if the
strike price is denominated in a currency other than the issuers functional
currency. EITF 07-5 is effective for periods beginning on or after December 15,
2008. The Company share purchase warrants and compensation options
outstanding and the adoption of this standard increased the Companys net loss
from operations by $967,963 (2008  Nil).

|18. | SUBSEQUENT EVENTS                            
|--- | ---------------------------------------------
|    |                                              
|    | Subsequent to December 31, 2009, the Company:
|    |                                              
|    | (a)                                          
|    |                                              
|    |                                              
|    |                                              
|    |                                              
|    |                                              
|    |                                              
|    |                                              
|    | (b)                                          
|    |                                              
|    |                                              

- 34 -

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|Augusta Resource Corporation                                  
|--------------------------------------------------------------
|Notes to Consolidated Financial Statements                    
|For the years ended December 31, 2009 and 2008                
|(All amounts are
      in U.S. dollars unless otherwise noted)

| |     | The investment by Silver Wheaton is subject to receipt of
      all necessary permits to construct and operate Rosemont and Augusta having
      entered into committed arrangements for sufficient additional financings
      to construct and operate the mine.                                                                                                                                                                                                                                                                                 
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | (c) | On February 23, 2010 entered into an agreement with a
      syndicate of underwriters for the issuance of 11,820,000 common shares of
      the Company, on a bought deal basis, at a price of Cdn$2.75 per share for
      gross proceeds of Cdn$32,505,000 ($31,908,315).                                                                                                                                                                                                                                                                        
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |     | The common shares will be offered by way of a short form
      prospectus to be filed in certain of the provinces of Canada, other than
      Quebec, pursuant to National Instrument 44-101 Short Form Prospectus
      Distribution and in the United States on a private placement basis
      pursuant to exemptions from the registration requirements of the United
      States Securities Act of 1933, as amended. On March 12, 2010, the Company
      closed the equity financing for net proceeds of Cdn$30,829,750
      ($30,312,899).
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |     | The Company plans to use the net proceeds from this
      financing to advance the development of the Rosemont Copper property and
      for general working capital purposes.                                                                                                                                                                                                                                                                                                                                                                     

- 35 -

---