---



Consolidated Financial Statements

December 31, 2008, 2007 and 2006







|                            
|----------------------------
|Augusta Resource Corporation

---

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 Canadian
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, 2008. In making its
assessment, Management has used the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) framework in Internal ControlIntegrated
Framework to 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, 2008, as stated in their Auditors Report. Ernst & Young LLP
has provided such opinions.

|Raghunath Reddy       | Gil Clausen                      
|----------------------- | -----------------------------------
|                        |                                    
|Raghunath Reddy         | Gil Clausen                        
|Chief Financial Officer | President & Chief Executive Officer

---



Independent Auditors Report on Financial
Statements

To the Shareholders of Augusta Resource Corporation

We have audited the consolidated balance sheets of Augusta
Resource Corporation as at December 31, 2008 and 2007 and the consolidated
statements of shareholders equity, operations and deficit and cash flows for
the three years then ended. 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.

With respect to the consolidated financial statements for the
years ended December 31, 2008 and 2007, we conducted our audits in accordance
with Canadian generally accepted auditing standards and the standards of the
Public Company Accounting Oversight Board (United States). With respect to the
consolidated financial statements for the year ended December 31, 2006, we
conducted our audit in accordance with Canadian generally accepted auditing
standards. These standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, these consolidated financial statements present
fairly, in all material respects, the financial position of the Company as at
December 31, 2008 and 2007 and the results of its operations and its cash flows
in each of the three years ended December 31, 2008 in accordance with Canadian
generally accepted accounting principles.

We have also audited in accordance with standards of Public
Accounting Oversight Board (United States), the effectiveness of the Companys
internal control over financial reporting as of December 31, 2008, based on
criteria established in Internal Control-Integrated Frameworkissued by
the Committee of Sponsoring Organizations of the Treadway Commission and our
reported dated March 25, 2009 expressed an unqualified opinion
thereon.

|                |                      
|--------------- | ---------------------
|March 25, 2009  | Ernst & Young LLP    
|Vancouver, B.C. | Chartered Accountants

|                             |  
|---------------------------- | -
|Augusta Resource Corporation | 3

---



Independent Auditors' Report on Internal
Controls under Standards of thePublic Company
Accounting Oversight Board (United States)

TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF AUGUSTA
RESOURCE CORPORATION

We have audited the internal control over financial reporting
of Augusta Resource Corporation and subsidiaries (the Company) as of December
31, 2008, based on the 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 Report on Internal Control over
Financial Reporting. Our responsibility is to express an opinion on the
Companys internal control over financial reporting based on our audit.

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

A companys internal control over financial reporting is a
process designed 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, 2008,
  based on the COSO criteria.

|                             |  
|---------------------------- | -
|Augusta Resource Corporation | 4

---

We have also audited, in accordance with Canadian generally
accepted auditing standards and the standards of the Public Company Accounting
Oversight Board (United States), the consolidated financial statements as of and
for the year ended December 31, 2008 of the Company and our report dated March
25, 2009 expressed an unqualified opinion on those financial statements.



|                |                      
|--------------- | ---------------------
|March 25, 2009  | Ernst & Young LLP    
|Vancouver, B.C. | Chartered Accountants

|                             |  
|---------------------------- | -
|Augusta Resource Corporation | 5

---

AUGUSTA RESOURCE CORPORATIONCONSOLIDATED BALANCE SHEETSAs at December 31, 2008 and
2007

|                                                  | Notes    |  |   | 2008        |   |   | 2007        |  
|------------------------------------------------- | -------- |  | - | ----------- | - | - | ----------- | -
|ASSETS                                            |          |  |   |             |   |   |             |  
|                                                  |          |  |   |             |   |   |             |  
|CURRENT                                           |          |  |   |             |   |   |             |  
|Cash and cash equivalents                         |          |  | $ | 9,261,883   |   | $ | 25,586,997  |  
|Accounts receivable                               | (6),(13) |  |   | 1,795,529   |   |   | 530,066     |  
|Prepaid expenses                                  |          |  |   | 439,710     |   |   | 82,882      |  
|Assets of discontinued
      operations           | (4)      |  |   | -           |   |   | 6,884,516   |  
|                                                  |          |  |   | 11,497,122  |   |   | 33,084,461  |  
|                                                  |          |  |   |             |   |   |             |  
|CAPITAL ASSETS                                    | (5)      |  |   | 6,164,016   |   |   | 4,566,078   |  
|DEPOSITS ON LONG LEAD EQUIPMENT                   | (5)      |  |   | 18,714,619  |   |   | -           |  
|                                                  |          |  |   |             |   |   |             |  
|OTHER ASSETS                                      | (6)      |  |   | 3,495,589   |   |   | -           |  
|                                                  |          |  |   |             |   |   |             |  
|MINERAL PROPERTIES AND DEFERRED DEVELOPMENT COSTS | (7),(8)  |  |   |             |   |   |             |  
|Land and mineral properties                       |          |  |   | 31,181,829  |   |   | 28,798,566  |  
|Deferred development                              |          |  |   | 51,086,913  |   |   | 28,247,858  |  
|                                                  |          |  |   | 82,268,742  |   |   | 57,046,424  |  
|                                                  |          |  |   |             |   |   |             |  
|**TOTAL ASSETS**                                  |          |  | $ | 122,140,088 |   | $ | 94,696,963  |  
|                                                  |          |  |   |             |   |   |             |  
|LIABILITIES                                       |          |  |   |             |   |   |             |  
|                                                  |          |  |   |             |   |   |             |  
|CURRENT                                           |          |  |   |             |   |   |             |  
|Accounts payable and accrued liabilities          | (13)     |  | $ | 4,612,191   |   | $ | 1,981,702   |  
|Current portion of long-term debt                 | (8)      |  |   | 682,035     |   |   | 397,824     |  
|Liabilities of discontinued operations            | (4)      |  |   | -           |   |   | 1,801,788   |  
|                                                  |          |  |   | 5,294,226   |   |   | 4,181,314   |  
|                                                  |          |  |   |             |   |   |             |  
|LONG-TERM                                         |          |  |   |             |   |   |             |  
|Long term debt                                    | (8)      |  |   | 43,708,649  |   |   | 1,831,921   |  
|                                                  |          |  |   | 49,002,875  |   |   | 6,013,235   |  
|                                                  |          |  |   |             |   |   |             |  
|SHAREHOLDERS' EQUITY                              |          |  |   |             |   |   |             |  
|                                                  |          |  |   |             |   |   |             |  
|Share capital                                     | (10)     |  |   | 104,098,500 |   |   | 103,581,579 |  
|Contributed surplus                               | (10)     |  |   | 18,070,668  |   |   | 15,375,095  |  
|Deficit                                           |          |  |   | (49,031,955 | ) |   | (30,272,946 | )
|                                                  |          |  |   | 73,137,213  |   |   | 88,683,728  |  
|                                                  |          |  |   |             |   |   |             |  
|TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY        |          |  | $ | 122,140,088 |   | $ | 94,696,963  |  
|                                                  |          |  |   |             |   |   |             |  
|Commitments (Note 17)                             |          |  |   |             |   |   |             |  
|Subsequent Event (Note 19)                        |          |  |   |             |   |   |             |  

|On Behalf of the Board of Directors |  |                       
|----------------------------------- |  | ----------------------
|                                    |  |                       
|                                    |  |                       
|/S/ Richard W.
      Warke          |  | /S/
      Gil Clausen 
|Richard W. Warke  Director         |  | Gil Clausen - Director

See accompanying Notes to the Consolidated Financial Statements

|                             |  
|---------------------------- | -
|Augusta Resource Corporation | 6

---

AUGUSTA RESOURCE CORPORATIONCONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITYFor the Years Ended
December 31, 2008, 2007 and 2006

Common Shares
      
      
      
      
      
      
      
      
      TotalWithout Par Value
      
      
      Contributed
      
      
      
      
      
      Shareholders'Statements of Shareholders'
        Equity
      
      Shares
      
      
      Amount
      
      
      Surplus
      
      
      Deficit
      
      
      EquityBalance, December 31, 2005
      
      39,514,593
      
      
      18,437,248
      
      
      6,226,110
      
      
      (11,702,633
      )
      
      12,960,725Exercise of options
      
      195,667
      
      
      53,020
      
      
      (15,920
      )
      
      -
      
      
      37,100Exercise of warrants
      
      9,828,807
      
      
      4,430,223
      
      
      (842,464
      )
      
      -
      
      
      3,587,759Stock-based compensation expense
      
      -
      
      
      -
      
      
      1,679,534
      
      
      -
      
      
      1,679,534Share issue costs
      
      -
      
      
      -
      
      
      -
      
      
      (3,905,886
      )
      
      (3,905,886
      )Issued for special warrants
      
      23,210,000
      
      
      37,411,857
      
      
      -
      
      
      -
      
      
      37,411,857Fair value of warrants issued on private
        placements
      
      -
      
      
      -
      
      
      6,687,143
      
      
      -
      
      
      6,687,143Fair value of warrants issued on share issuance
      
      -
      
      
      -
      
      
      1,030,524
      
      
      -
      
      
      1,030,524Net loss and comprehensive loss
      
      -
      
      
      -
      
      
      -
      
      
      (6,659,591
      )
      
      (6,659,591
      )Balance, December 31, 2006
      
      72,749,067
      
      
      60,332,348
      
      
      14,764,927
      
      
      (22,268,110
      )
      
      52,829,165Issued shares for cash
      
      10,719,827
      
      
      37,519,394
      
      
      -
      
      
      -
      
      
      37,519,394Exercise of options
      
      74,167
      
      
      37,205
      
      
      (6,055
      )
      
      
      
      
      31,150Exercise of warrants
      
      5,045,000
      
      
      5,692,632
      
      
      (1,143,492
      )
      
      
      
      
      4,549,140Stock-based compensation expense
      
      -
      
      
      -
      
      
      1,759,715
      
      
      -
      
      
      1,759,715Share issue expense
      
      -
      
      
      -
      
      
      
      
      
      (25,000
      )
      
      (25,000
      )Net loss and comprehensive
        loss
      
      -
      
      
      -
      
      
      -
      
      
      (7,979,836
      )
      
      (7,979,836
      )Balance, December 31, 2007
      
      88,588,061
      
      
      103,581,579
      
      
      15,375,095
      
      
      (30,272,946
      )
      
      88,683,728Exercise of options
      
      146,200
      
      
      516,921
      
      
      (221,098
      )
      
      
      
      
      295,823Stock-based compensation expense
      
      -
      
      
      -
      
      
      2,469,126
      
      
      -
      
      
      2,469,126Stock-based compensation capitalized
      
      -
      
      
      -
      
      
      447,545
      
      
      -
      
      
      447,545Net loss and comprehensive loss
      
      -
      
      
      -
      
      
      -
      
      
      (18,759,009
      )
      
      (18,759,009
      )Balance, December
        31, 2008
      
      88,734,261
      
      $
      104,098,500
      
      $
      18,070,668
      
      $
      (49,031,955
      )
      $
      73,137,213


See accompanying Notes to the Consolidated Financial Statements

|                             |  
|---------------------------- | -
|Augusta Resource Corporation | 7

---

AUGUSTA RESOURCE CORPORATIONCONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICITFor
the Years Ended December 31, 2008, 2007 and 2006

|                                                           |  | Notes   |  |   | 2008        |   |   | 2007        |   |   | 2006        |  
|---------------------------------------------------------- |  | ------- |  | - | ----------- | - | - | ----------- | - | - | ----------- | -
|                                                           |  |         |  |   |             |   |   |             |   |   |             |  
|EXPENSES                                                   |  |         |  |   |             |   |   |             |   |   |             |  
|Legal fees                                                 |  |         |  | $ | 3,583,169   |   | $ | 889,864     |   | $ | 112,413     |  
|Salaries and benefits                                      |  |         |  |   | 2,894,543   |   |   | 1,910,154   |   |   | 1,790,615   |  
|Stock based compensation                                   |  | (10[d]) |  |   | 2,469,126   |   |   | 1,759,715   |   |   | 1,679,534   |  
|Consulting and communication                               |  |         |  |   | 813,973     |   |   | 258,377     |   |   | 118,252     |  
|Other expenses (net)                                       |  |         |  |   | 527,702     |   |   | 239,085     |   |   | 215,268     |  
|Travel                                                     |  |         |  |   | 477,285     |   |   | 306,579     |   |   | 303,402     |  
|Office and sundry                                          |  |         |  |   | 315,470     |   |   | 133,979     |   |   | 28,184      |  
|Accounting and audit                                       |  |         |  |   | 254,560     |   |   | 83,335      |   |   | 159,352     |  
|Insurance                                                  |  |         |  |   | 170,330     |   |   | 117,662     |   |   | 80,254      |  
|Recruitment fees                                           |  |         |  |   | 169,222     |   |   | 33,477      |   |   | 37,275      |  
|Rent                                                       |  |         |  |   | 159,844     |   |   | 51,159      |   |   | 65,661      |  
|Investor relations                                         |  |         |  |   | 153,744     |   |   | 279,493     |   |   | 230,157     |  
|Filing and regulatory                                      |  |         |  |   | 153,142     |   |   | 191,279     |   |   | 234,730     |  
|Directors fees                                             |  |         |  |   | 139,729     |   |   | 61,519      |   |   | 22,807      |  
|Amortization                                               |  |         |  |   | 95,802      |   |   | 34,678      |   |   | 8,053       |  
|Fiscal and advisory services                               |  |         |  |   | 27,368      |   |   | 27,007      |   |   | 31,402      |  
|Exploration expense                                        |  |         |  |   | -           |   |   | 317,279     |   |   | -           |  
|Administration                                             |  | (13)    |  |   | -           |   |   | -           |   |   | 17,500      |  
|Write-off of mining assets                                 |  |         |  |   | -           |   |   | -           |   |   | 309,550     |  
|Loss from operations                                       |  |         |  |   | (12,405,009 | ) |   | (6,694,641  | ) |   | (5,444,409  | )
|                                                           |  |         |  |   |             |   |   |             |   |   |             |  
|Interest and other income
      (net)                      |  | (6)     |  |   | 4,045       |   |   | 793,464     |   |   | 631,509     |  
|Litigation settlement                                      |  |         |  |   | (3,183,960  | ) |   | -           |   |   | -           |  
|Foreign exchange (loss) gain                               |  | (19)    |  |   | (3,572,536  | ) |   | (231,176    | ) |   | 63,795      |  
|Interest and finance charges                               |  |         |  |   | (260,137    | ) |   | (176,822    | ) |   | (801,338    | )
|Debt issuance costs                                        |  | (9)     |  |   | -           |   |   | -           |   |   | (272,796    | )
|                                                           |  |         |  |   |             |   |   |             |   |   |             |  
|LOSS FROM CONTINUING OPERATIONS                            |  |         |  |   | (19,417,597 | ) |   | (6,309,175  | ) |   | (5,823,239  | )
|Gain (loss) from discontinued operations, net
      of tax |  | (4)     |  |   | 658,588     |   |   | (1,670,661  | ) |   | (836,352    | )
|                                                           |  |         |  |   |             |   |   |             |   |   |             |  
|NET LOSS AND COMPREHENSIVE LOSS FOR THE YEAR               |  |         |  |   | (18,759,009 | ) |   | (7,979,836  | ) |   | (6,659,591  | )
|Deficit, beginning of the year                             |  |         |  |   | (30,272,946 | ) |   | (22,268,110 | ) |   | (11,702,633 | )
|Share issue costs                                          |  |         |  |   | -           |   |   | (25,000     | ) |   | (3,905,886  | )
|                                                           |  |         |  |   |             |   |   |             |   |   |             |  
|DEFICIT, END OF YEAR                                       |  |         |  | $ | (49,031,955 | ) | $ | (30,272,946 | ) | $ | (22,268,110 | )
|                                                           |  |         |  |   |             |   |   |             |   |   |             |  
|BASIC & DILUTED LOSS PER SHARE                             |  |         |  |   |             |   |   |             |   |   |             |  
|Continuing operations                                      |  |         |  | $ | (0.22       | ) | $ | (0.08       | ) | $ | (0.10       | )
|Discontinued operations                                    |  |         |  | $ | 0.01        |   | $ | (0.02       | ) | $ | (0.01       | )
|Net loss                                                   |  |         |  | $ | (0.21       | ) | $ | (0.10       | ) | $ | (0.11       | )
|                                                           |  |         |  |   |             |   |   |             |   |   |             |  
|WEIGHTED AVERAGE NUMBER                                    |  |         |  |   |             |   |   |             |   |   |             |  
|OF SHARES OUTSTANDING                                      |  |         |  |   | 88,643,084  |   |   | 81,795,564  |   |   | 59,219,428  |  

See accompanying Notes to the Consolidated Financial Statements

|                             |  
|---------------------------- | -
|Augusta Resource Corporation | 8

---

AUGUSTA RESOURCE CORPORATIONCONSOLIDATED STATEMENTS OF CASH FLOWSFor the Years Ended
December 31, 2008, 2007 and 2006

|                                                                |  | Notes   |  |   | 2008        |   |   | 2007        |   |   | 2006        |  
|--------------------------------------------------------------- |  | ------- |  | - | ----------- | - | - | ----------- | - | - | ----------- | -
|                                                                |  |         |  |   |             |   |   |             |   |   |             |  
|CASH PROVIDED BY (USED IN) OPERATING
      ACTIVITIES           |  |         |  |   |             |   |   |             |   |   |             |  
|Loss from continuing operations                                 |  |         |  | $ | (19,417,597 | ) | $ | (6,309,175  | ) | $ | (5,823,239  | )
|Items not affecting cash:                                       |  |         |  |   |             |   |   |             |   |   |             |  
|Foreign exchange loss (gain)                                    |  |         |  |   | 4,827,244   |   |   | 249,331     |   |   | (18,462     | )
|ASARCO production accrual                                       |  | (19)    |  |   | 3,183,960   |   |   | -           |   |   | -           |  
|Stock based compensation                                        |  | (10[d]) |  |   | 2,469,126   |   |   | 1,759,715   |   |   | 1,679,534   |  
|Interest accretion and other                                    |  |         |  |   | (89,351)    |   |   | -           |   |   | 795,968     |  
|Amortization                                                    |  |         |  |   | 95,802      |   |   | 34,678      |   |   | 8,053       |  
|Debt issuance costs                                             |  | (8)     |  |   | -           |   |   | -           |   |   | 272,796     |  
|Write-off of mining assets                                      |  |         |  |   | -           |   |   | -           |   |   | 309,550     |  
|                                                                |  |         |  |   | (8,930,816  | ) |   | (4,265,451  | ) |   | (2,775,800  | )
|Net changes in non-cash working capital items:                  |  | (11)    |  |   | 899,180     |   |   | 539,746     |   |   | (327,243    | )
|Net cash flows used in operating
      activities               |  |         |  |   | (8,031,636  | ) |   | (3,725,705  | ) |   | (3,103,043  | )
|                                                                |  |         |  |   |             |   |   |             |   |   |             |  
|FINANCING                                                       |  |         |  |   |             |   |   |             |   |   |             |  
|Increase in loan facility, net of financing costs               |  | (8)     |  |   | 32,240,316  |   |   | -           |   |   | -           |  
|Issuance of common shares                                       |  | (10[c]) |  |   | -           |   |   | 37,550,544  |   |   | 3,624,859   |  
|Issuance of common shares - options exercised                   |  |         |  |   | 295,823     |   |   | -           |   |   | -           |  
|Issuance of common shares -
      warrants exercised            |  |         |  |   | -           |   |   | 4,549,140   |   |   | -           |  
|Issuance of special warrants                                    |  | (10[c]) |  |   | -           |   |   | -           |   |   | 44,099,000  |  
|Share issue costs                                               |  |         |  |   | -           |   |   | (25,000     | ) |   | (2,875,362  | )
|Repayment of convertible debt security                          |  |         |  |   | -           |   |   | -           |   |   | (3,000,000  | )
|Repayment of notes and
      advances                           |  |         |  |   | (556,931    | ) |   | -           |   |   | -           |  
|Net cash flows from financing activities                        |  |         |  |   | 31,979,208  |   |   | 42,074,684  |   |   | 41,848,497  |  
|                                                                |  |         |  |   |             |   |   |             |   |   |             |  
|INVESTING                                                       |  |         |  |   |             |   |   |             |   |   |             |  
|Proceeds from sale of
      discontinued operations             |  | (4)     |  |   | 1,603,875   |   |   | -           |   |   | -           |  
|Investment in mineral properties, net of
      related payables |  | (7)     |  |   | (2,386,169  | ) |   | (1,195,480  | ) |   | (16,683,262 | )
|Deferred development, net of
      related payables             |  | (7)     |  |   | (21,226,570 | ) |   | (13,026,037 | ) |   | (12,130,289 | )
|Investment in capital assets                                    |  | (5)     |  |   | (19,928,228 | ) |   | (4,433,399  | ) |   | (175,410    | )
|Net cash flows used in investing
      activities               |  |         |  |   | (41,937,092 | ) |   | (18,654,916 | ) |   | (28,988,961 | )
|                                                                |  |         |  |   |             |   |   |             |   |   |             |  
|Cash flows used in (provided by) discountinued operations       |  | (4)     |  |   | -           |   |   | (3,271,100  | ) |   | (2,361,793  | )
|Effect of exchange rate change on cash and                      |  |         |  |   |             |   |   |             |   |   |             |  
|cash equivalents in U.S.
      dollars                          |  |         |  |   | 1,664,406   |   |   | (486,946    | ) |   | 9,233       |  
|                                                                |  |         |  |   |             |   |   |             |   |   |             |  
|INCREASE (DECREASE) IN CASH AND CASH                            |  |         |  |   |             |   |   |             |   |   |             |  
|**EQUIVALENTS DURING THE YEAR**                                 |  |         |  |   | (16,325,114 | ) |   | 15,936,017  |   |   | 7,403,933   |  
|CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                    |  |         |  |   | 25,586,997  |   |   | 9,650,980   |   |   | 2,247,047   |  
|CASH AND CASH EQUIVALENTS, END OF YEAR                          |  |         |  | $ | 9,261,883   |   | $ | 25,586,997  |   | $ | 9,650,980   |  
|                                                                |  |         |  |   |             |   |   |             |   |   |             |  
|Interest Paid                                                   |  |         |  | $ | 181,278     |   | $ | 26,332      |   | $ | 135,000     |  
|Interest Received                                               |  |         |  | $ | 372,181     |   | $ | 453,353     |   | $ | 345,973     |  
|SUPPLEMENTAL INFORMATION (Note 12)                              |  |         |  |   |             |   |   |             |   |   |             |  

See accompanying Notes to the Consolidated Financial Statements

|                             |  
|---------------------------- | -
|Augusta Resource Corporation | 9

---

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSDECEMBER 31, 2008, 2007 AND 2006

|1. | NATURE OF BUSINESS AND GOING
  CONCERN                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   | Augusta Resource Corporation (the Company, Augusta)
      has interests in mining assets at the development stage. 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 is considered
      to be a development stage enterprise as it has yet to generate revenue
      from operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   | The Company incurred a loss of $18,759,009 for the year
      ended December 31, 2008 (2007 - $7,979,836; 2006 - $6,659,591) and has an
      accumulated deficit of $49,031,955 as at December 31, 2008. The losses
      have been funded primarily by the issuance of equity and through funding
      provided by Sumitomo Corporation of America (Sumitomo) (Note 8, Loan
      facility). The Company currently has cash reserves of $9.3 million as well
      as access to the remaining Sumitomo loan facility totaling US$9 million to
      fund ongoing operating activities as well as some of the planned capital
      expenditures until the Company can secure funding through joint venture
      arrangement, issuance of debt and/or shares for the Rosemont development.
      While the Company continues to seek alternative financing arrangements it
      is not possible to predict whether these efforts will be successful. The
      Company will monitor its cash flow progress and continue to operate in a
      prudent manner to preserve cash while securing financing.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   | These consolidated financial statements have been
      prepared in accordance with Canadian generally accepted accounting
      principles (GAAP) on a going concern basis which presumes that the
      Company will realize its assets and discharge its liabilities in the
      normal course of business for the foreseeable future. Management is of the
      opinion that additional financing is available to continue its planned
      activities in the normal course of business. Management has concluded,
      following the completion in January 2009 of the Updated Feasibility Study
      for the Rosemont property, which supplemented the August 2007 Feasibility
      Study, that the going concern basis is appropriate as, to date, the
      Company has been able to raise capital (both equity and debt) when
      required to advance the project.                                                                                                                                                                                                                        
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   | These consolidated financial statements do not reflect
      the adjustments to the carrying values of assets and liabilities and the
      reported expenses and balance sheet classifications that would be
      necessary were the going concern assumption to be inappropriate, and these
      adjustments could be material.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   | As the Company is listed on the NYSE Amex, a
      reconciliation from Canadian to United States (US) GAAP is required
      (Note 20).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|2. | SIGNIFICANT ACCOUNTING POLICIES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   | (a)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

|                             |   
|---------------------------- | --
|Augusta Resource Corporation | 10

---

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSDECEMBER 31, 2008, 2007 AND 2006

|2. | SIGNIFICANT ACCOUNTING POLICIES(continued)
|-- | ------------------------------------------
|   |                                           
|   | (b)                                       
|   |                                           
|   |                                           
|   |                                           
|   |                                           
|   |                                           
|   |                                           
|   |                                           
|   | (c)                                       
|   |                                           
|   |                                           
|   |                                           
|   | (d)                                       
|   |                                           
|   |                                           

Land
    N/AWater rights
    Unit-of-productionBuildings
    10 yearsComputer Software
    3 yearsComputer Hardware
    5 yearsFurniture & Equipment
    5 years


Water inventory will be amortized on a
unit-of-production basis over the estimated proven and probable ore reserves
commencing with 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 Augusta incurs debt directly related
to the purchase of plant and equipment, the interest and financing costs
associated with such debt are capitalized.

|                             |   
|---------------------------- | --
|Augusta Resource Corporation | 11

---

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSDECEMBER 31, 2008, 2007 AND 2006

|2. | SIGNIFICANT ACCOUNTING POLICIES(continued)
|-- | ------------------------------------------
|   |                                           
|   | (e)                                       
|   |                                           
|   |                                           
|   |                                           
|   |                                           
|   |                                           
|   |                                           
|   |                                           
|   | (f)                                       
|   |                                           
|   |                                           
|   |                                           
|   |                                           
|   |                                           
|   |                                           

|                             |   
|---------------------------- | --
|Augusta Resource Corporation | 12

---

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSDECEMBER 31, 2008, 2007 AND 2006

|2. | SIGNIFICANT ACCOUNTING POLICIES(continued)
|-- | ------------------------------------------
|   |                                           
|   | (g)                                       
|   |                                           
|   |                                           
|   |                                           
|   | (h)                                       
|   |                                           
|   |                                           
|   |                                           
|   | (i)                                       
|   |                                           
|   |                                           
|   |                                           
|   |                                           
|   |                                           
|   |                                           
|   |                                           
|   |                                           
|   |                                           
|   |                                           
|   |                                           
|   | (j)                                       
|   |                                           
|   |                                           

|                             |   
|---------------------------- | --
|Augusta Resource Corporation | 13

---

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSDECEMBER 31, 2008, 2007 AND 2006

| | (k) | 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.                                                                                                                                                                                                                                                      
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | (l) | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | (m) | 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.                                                                                                                                                                                                                                                                     
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | (n) | Comparative figures                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |     | Certain comparative figures have been reclassified to
      conform to the basis of presentation adopted in the current
  period.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | (o) | 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.
      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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

|                             |   
|---------------------------- | --
|Augusta Resource Corporation | 14

---

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSDECEMBER 31, 2008, 2007 AND 2006

|2. | SIGNIFICANT ACCOUNTING POLICIES
  (continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   | (p)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   | (q)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|3. | CHANGE IN ACCOUNTING POLICIES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   | The Company adopted the provisions of the Canadian
      Institute of Chartered Accountants (CICA) Handbook, Section 1400  Going
      Concern, Section 3031  Inventories, and Sections 3862 & 3863 
      Financial Instruments  Disclosure and Presentation on January 1, 2008.
      Other than additional footnote disclosures, going concern (Note 1) and
      financial instruments (Note 14) the adoption of these sections had no
      impact on the Companys financial statements. In addition to the above
      noted accounting policies, on January 1, 2008 the Company also adopted the
      CICA Handbook Section 1535  Capital Disclosures (Note
  13).

|                             |   
|---------------------------- | --
|Augusta Resource Corporation | 15

---

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSDECEMBER 31, 2008, 2007 AND 2006

|4. | DISCONTINUED OPERATIONS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   | On May 1, 2007, the Company entered into a Letter of
      Intent (LOI) with Ely Gold & Minerals Inc. (Ely) (formerly known
      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. As at
      December 31, 2007, included in current assets (net of the impairment
      recorded at year end), is $6,884,516 (2006 - $7,709,754) related to
      discontinued operations and included in current liabilities is $1,801,788
      (2006 - $4,227,465) related to discontinued operations. For the period
      ending December 31, 2007 the contribution from discontinued operations was
      a loss of $1,670,661 (2006 - $836,352). On February 29, 2008, with final
      regulatory approvals received, the transaction with Ely closed.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   | In accordance with the definitive agreement the
      consideration for the sale is US$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 $0.50 per share. The cash portion of the
      purchase price is payable in installments over five years, with
      US$1,625,000 ($1,603,875) paid on closing and an additional US$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.                                                                                                                                                                                                                                                                                                                                                     
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   | At December 31, 2007 the fair value of the compensation
      received was calculated to be approximately $5.1 million comprised of the
      cash payments, discounted at an annual interest rate of 15%, totaling $4.3
      million, plus the fair value of the warrants calculated to be $0.8
      million. The warrants value was determined using the Black-Scholes option
      pricing model using the following assumptions: expected life 1.5 years;
      annualized volatility 113%; a risk free rate of 3.2% and no
    dividends.                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   | The fair value of the compensation was less than the net
      book value of the assets being sold, at the 2007-year end. The Company
      recorded, an asset impairment charge of $1,200,000, net of
    taxes.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

2007
    
    
    2006Cash flow from discontinued
      operations:Operating activities
    $
    (740,190
    )
    $
    (367,653
    )Financing
      activities
    
    (1,601,851
    )
    
    (1,165,421
    )Investing activities
    
    (926,262
    )
    
    (827,957
    )Effect of
      exchange rate changes on cash
    
    (2,797
    )
    
    (762
    )$
    (3,271,100
    )
    $
    (2,361,793
    )


Based on the net book value of the
discontinued operations and the actual Canadian dollar proceeds, a gain on
disposal of $658,588 was recognized at December 31, 2008.

|                             |   
|---------------------------- | --
|Augusta Resource Corporation | 16

---

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSDECEMBER 31, 2008, 2007 AND 2006

|5. | CAPITAL ASSETS AND DEPOSITS ON LONG LEAD
      EQUIPMENT
|-- | --------------------------------------------------------

| |                         |   | December
      31, 2008 |  |   | December
      31, 2007 | 
| | ----------------------- | - | ----------------------- |  | - | ----------------------- | 
| |                         |   |                         |  |   | Accumulated             | 
| |                         |   | Cost                    |  |   | Amortization            | 
| |                         |   |                         |  |   |                         | 
| | Land                    |   | 2,760,106               |  |   | -                       | 
| | Water rights (1)        |   | 2,713,526               |  |   | -                       | 
| | Furniture and equipment |   | 356,727                 |  |   | 53,801                  | 
| | Computer software       |   | 203,797                 |  |   | 45,123                  | 
| | Buildings               |   | 194,952                 |  |   | 23,506                  | 
| | Computer hardware       |   | 86,544                  |  |   | 29,206                  | 
| |                         | $ | 6,315,652               |  | $ | 151,636                 | 

|   | (1)Water rights payments relate primarily to
      the purchase of water from Central Arizona Project (CAP), water
      delivered from CAP is pumped into the local aquifer providing access to
      the resource at a later date. The Company has received tradable water
      storage certificates for this water inventory. The stored water will be
      used in the future for mining and plant operations at Rosemont.
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   | The Company has entered into various agreements to
      purchase long-lead equipment for mine development and metal production. As
      at December 31, 2008 $18.7 million, including $0.5 million of capitalized
      interest, has been placed on deposit (Note 17).                                                                                                                                                         
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                   
|6. | OTHER ASSETS                                                                                                                                                                                                                                                                                                                                                                                                                      

December 31,
    
    
    December 31,2008
    
    
    2007Long term receivable
    $
    4,694,370
    
    $
    -Warrants
    
    82,561
    
    
    -4,776,931
    
    
    -Less: current portion
    
    (1,281,342
    )
    
    -Total other assets
    $
    3,495,589
    
    $
    -


In consideration of the sale of the
Companys interest in the Mount Hamilton, Shell and Monte Cristo properties
(Note 4), the Company will receive US$5,000,000 payable in installments over
five years. At December 31, 2008 the fair value of the future compensation,
discounted at an annual interest rate of 15%, totaled $4,694,370. The first
payment of US$1,000,000 (with a net present value of $1,198,781), which was due
in February 28, 2009, has been paid. In addition to the cash purchase, the Company
received warrants exercisable to purchase up to 3,000,000 shares of Ely for
eighteen months after closing at a price of $0.50 per share. As at December 31,
2008 the fair value of the warrants is $82,561 and was determined using the
Black-Scholes option-pricing model using the following assumptions: expected
life 0.66 years; annualized volatility 207%, a risk free rate of 1.11% and no
dividends.

|                             |   
|---------------------------- | --
|Augusta Resource Corporation | 17

---

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSDECEMBER 31, 2008, 2007 AND 2006

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

| |                                                         |   | Mineral properties costs |  |   | Deferred development costs | 
| | ------------------------------------------------------- | - | ------------------------ |  | - | -------------------------- | 
| |                                                         |   | December 31              |  |   | December 31                | 
| | Mineral properties and deferred development             |   | 2008                     |  |   | 2007                       | 
| | Rosemont, Sanrita, Dawson and Wilmot properties         | $ | 31,181,829               |  | $ | 28,798,566                 | 
| |                                                         |   |                          |  |   |                            | 
| | Mineral properties costs:                               |   | 2008                     |  |   | 2007                       | 
| | Balance, beginning of period                            | $ | 28,798,566               |  | $ | 25,017,429                 | 
| | Acquisition costs (1)                                   |   | 2,383,263                |  |   | 3,781,137                  | 
| | Balance, December 31, 2008 and 2007                     |   | 31,181,829               |  |   | 28,798,566                 | 
| |                                                         |   |                          |  |   |                            | 
| | Deferred development costs:                             |   |                          |  |   |                            | 
| | Balance, beginning of period                            |   | 28,247,858               |  |   | 15,471,679                 | 
| | Work program expenditures (2)                           |   | 22,391,510               |  |   | 12,776,179                 | 
| | Stock based compensation                                |   | 447,545                  |  |   | -                          | 
| | Balance, December 31, 2008 and 2007                     |   | 51,086,913               |  |   | 28,247,858                 | 
| |                                                         |   |                          |  |   |                            | 
| | Total mineral properties and deferred development costs | $ | 82,268,742               |  | $ | 57,046,424                 | 

(1)Property acquisition
costs for the location of water well fields and pump stations: in January 2008
the Company purchased a 20-acre land parcel for US$1,204,835. In March 2008 the
Company entered into a contract for the purchase of an additional 20-acre land
parcel, which is conditional upon certain events. The contract required the
payment of a non-refundable deposit of US$100,000 and upon closing will require
the payment of an additional US$489,000. Closing will occur 25 days after both
title of the property being established to the Company's satisfaction and legal
physical access to the property, acceptable to the Company, has been granted. If
either of the above two conditions are not met the Company can elect not to
proceed with the purchase. In September 2008 the Company purchased an 80-acre
land parcel for US$950,000.

(2)Work program
expenditures: includes geological, engineering and environmental work programs
designed to advance the development of the mineral properties.

Rosemont Property, Arizona

On June 1, 2005, the Company announced
that it had entered into an option agreement to purchase 100% of the Rosemont
Ranch property in Pima County, Arizona. The 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% working interest in the property (which includes
patented and unpatented claims, fee land and surface grazing rights that in
aggregate total approximately 15,000 acres (6,070 hectares)), subject to a 3%
Net Smelter Royalty (NSR). The agreement required cash payments of US$20.8
million payable over a three-year period. After making the first payment of $8.3
million (US$6.7 million) in 2006, on March 31, 2007 the Company exercised its
option to purchase all of the Rosemont property with

|                             |   
|---------------------------- | --
|Augusta Resource Corporation | 18

---

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSDECEMBER 31, 2008, 2007 AND 2006

|7. | MINERAL PROPERTIES AND DEFERRED DEVELOPMENT(continued)                                                                                                                                                                                                                                                                                                       
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                              
|   | a payment of $16.1 million (US$13.7 million). Augusta now
      owns a 100% interest in the Rosemont property subject to the 3% NSR noted
      above. The purchase price of $24.4 million has been determined based on
      the fair value of the consideration provided and has been allocated to the
      Rosemont property and mineral rights acquired.
|   |                                                                                                                                                                                                                                                                                                                                                              
|   | In addition to the Rosemont purchase price of $24.4
      million, legal and other costs associated with the purchase totaled
      approximately $50,000. Also additional land was acquired during 2006 -
      $550,000, 2007 - $3,780,000 and 2008 - $2,380,000.                                                                                          
|   |                                                                                                                                                                                                                                                                                                                                                              
|   | During 2008, $22.4 million (2007 - $12.8 million) was
      incurred on engineering, geological and environmental programs designed to
      advance the development of the Rosemont property. To December 31, 2008,
      expenditures related to deferred development totaled $51.1 million (2007 
      $28.2 million).                                  
|   |                                                                                                                                                                                                                                                                                                                                                              
|8. | LONG TERM DEBT                                                                                                                                                                                                                                                                                                                                               

December 31
    
    
    December 312008
    
    
    2007Notes and advances
    $
    -
    
    $
    32,488Long term notes
    
    2,434,649
    
    
    2,197,257ASARCO production payment
    
    3,183,960
    
    
    -Loan facility
    
    38,772,075
    
    
    -44,390,684
    
    
    2,229,745Less: current portion
    
    (682,035
    )
    
    (397,824
    )Total long term debt
    $
    43,708,649
    
    $
    1,831,921


Long term notes

On February 20, 2007, the Company
entered into an agreement for the purchase of a 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 $1,149,969 (US$988,031) as well as the
assumption of a promissory note, bearing interest at 8%, for $2,601,308
(US$2,223,720). The promissory note, which is secured by a trust deed on the
property, requires 5 equal payments for principal and interest of US$556,945 on
the February 20 anniversary date. On February 20, 2008 the first payment of
$556,931 (US$556,945) was made. At December 31, 2008 the Canadian equivalent
obligation was $2,434,649 (US$1,988,117) of which $682,035 (US$556,945) is
current.

|                             |   
|---------------------------- | --
|Augusta Resource Corporation | 19

---

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSDECEMBER 31, 2008, 2007 AND 2006

|8. | LONG TERM DEBT(continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   | ASARCO production payment                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   | The Company reached an agreement on January 16, 2009 with
      ASARCO that fully and finally resolves the 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   | Once commercial mine operations commence at the Rosemont
      property, the Company will pay ASARCO certain specified annual production
      payments, without interest, over the course of eight years. These payments
      will come solely out of the net profits of mine operations and will not,
      in any year, exceed 25% of net profits. In the settlement, the Company has
      the right of a pre- production, pre-payment option for these annual
      payments at the net present value of the aggregate annual payments, using
      a 18% discount rate as mutually agreed with ASARCO.                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   | The ASARCO production payment arose from a contingency
      that existed at December 31, 2008 and can be reasonably measured. The
      Company has recorded this pre-production option whereby it will pay ASARCO
      $3,183,960 (US$2,600,000) (Note 19).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   | Loan facility                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   | On June 17, 2008 the Company announced that its wholly
      owned subsidiary, Rosemont Copper Company (Rosemont) had entered into a
      loan agreement with Sumitomo, a wholly owned subsidiary of Sumitomo
      Corporation. The material terms of the facility are that Sumitomo will
      provide US$40,000,000 to be drawn down by Rosemont over the twelve month
      period to June 30, 2009 to fund major equipment contracts (US$27 million)
      and general working capital (US$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 against
      Rosemonts assets, including the deposits on the long-lead time equipment
      being ordered, and will mature in June 2010. In exchange for the loan,
      Augusta granted Sumitomo certain rights to negotiate a minority ownership
      interest in the Rosemont project. Subsequently, Sumitomos rights expired
      unexercised.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   | As at December 31, 2008 the total amount owing is
      $38,772,075 (US$31,661,012) and comprise of $38,016,438 (US$31,043,964)
      drawn on the facility and accrued interest, net of financing costs, of
      $755,637 (US$617,048).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|9. | CONVERTIBLE DEBENTURE                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   | On June 1, 2005, in connection with the Rosemont
      acquisition, the Company issued a convertible debenture for $6,000,000.
      The debenture had a one-year term, with half due within six-months, and
      was convertible at the option of the borrower into 2,181,818 common shares
      of the Company at a price of $2.75 per share. The convertible debenture
      carried an interest rate of 9% annually and the Company had the option to
      repay the convertible debenture on the specified repayment dates in cash
      or stock. The convertible debenture was issued with 363,363 common shares
      of the Company to the lender at a fair market value at the date of the
      transaction of $2.805 per common share (after a discount of 15% to reflect
      a hold period expiring on October 2, 2005).                                                                                                                                                                                                                  

|                             |   
|---------------------------- | --
|Augusta Resource Corporation | 20

---

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSDECEMBER 31, 2008, 2007 AND 2006

|9. | CONVERTIBLE DEBENTURE(continued)                                                                                                                
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                 
|   | In accordance with CICA Handbook Section 3860, and
      following the fair value approach, the Company allocated the proceeds as
      follows:

Common shares
    $
    1,019,233Convertible debentureEquity component
    
    1,478,083Debt component
    
    3,502,684$
    6,000,000


The difference between the debt
allocation of $3,502,684 and the repayment amount of $6,000,000 is interest
expense, which is accrued over the term of the debenture. Through June 1, 2006,
all of the interest expense amounting to $2,497,316 had been accrued and paid.

On November 17, 2005 the Company
renegotiated the terms of its convertible debenture to allow for repayment in
the form of cash and stock, as opposed to cash or stock. As consideration, the
Company agreed to issue 750,000 warrants with an exercise price of $1.44
expiring in one year, for which regulatory approval was received on March 15,
2006. The fair value of the warrants issued was $288,938, which was allocated to
debt ($203,193) and equity ($85,745).

On December 1, 2005, the Company
retired $3,000,000 of the convertible debenture plus interest of $270,000
through payment of $1,620,000 in cash and the issuance of 1,500,000 common
shares at a price of $1.10 per share. As the shares were issued at a discount of
15% to the market value in accordance with the terms of the convertible
debenture agreement, a loss on repayment of the convertible debenture of
$390,000 occurred which was recorded in the statement of operations.

In connection with the issuance of the
convertible debenture and common shares, the Company also paid a fee in the
amount of 6% cash and 218,181 warrants. The fair value of the warrants of
$247,769 was allocated to debt ($144,643) and equity ($103,126). Each warrant is
exercisable to acquire one common share at $2.75 per warrant for a period of one
year, which expired on June 14, 2006. The warrants had a hold period expiring on
October 15, 2005.

The remaining debenture was retired on
June 1, 2006 with the payment of $3 million cash.

|                             |   
|---------------------------- | --
|Augusta Resource Corporation | 21

---

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSDECEMBER 31, 2008, 2007 AND 2006

|10. | SHARE CAPITAL
|--- | -------------
|    |              
|    | (a)          
|    |              
|    | (b)          

| |                                             |  | Number
      of |  |   |             | 
| | ------------------------------------------- |  | --------------- |  | - | ----------- | 
| |                                             |  | Shares          |  |   | Amount      | 
| | Common shares, Balance at December 31, 2005 |  | 39,514,593      |  | $ | 18,437,248  | 
| | Issued for warrants exercised               |  | 9,828,807       |  |   | 4,430,223   | 
| | Issued for options exercised                |  | 195,667         |  |   | 53,020      | 
| | Issued for
      special warrants exercised |  | 23,210,000      |  |   | 37,411,857  | 
| | Common shares, Balance at December 31, 2006 |  | 72,749,067      |  | $ | 60,332,348  | 
| | Issued for cash                             |  | 10,719,827      |  |   | 37,519,394  | 
| | Issued for warrants exercised               |  | 5,045,000       |  |   | 5,692,632   | 
| | Issued for
      options exercised          |  | 74,167          |  |   | 37,205      | 
| | Common shares, Balance at December 31, 2007 |  | 88,588,061      |  | $ | 103,581,579 | 
| | Issued for
      options exercised          |  | 146,200         |  |   | 516,921     | 
| | Common shares, Balance at December 31, 2008 |  | 88,734,261      |  | $ | 104,098,500 | 

| | (c) | Private Placement                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |     | On June 19, 2007 the Company closed a non-brokered
      private placement of 10,719,827 common shares at $3.50 per share for total
      gross proceeds of $37,519,394. Sumitomo Corporation and Sumitomo
      Corporation of America subscribed for the placement of 7,600,000 common
      shares and two funds managed by US private investment firm Harbinger
      Capital Partners subscribed for 3,119,827 common shares.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |     | On March 17, 2006 the Company closed a brokered private
      placement of 23,210,000 Special Warrants with gross proceeds of
      $44,099,000. Each Special Warrant is convertible, without payment of
      additional consideration, into a unit consisting of one common share
      (23,210,000 shares) and one-half transferable common share purchase
      warrant (11,605,000 warrants). Each whole warrant entitles the holder to
      acquire, at any time within two years, one common share of the Company at
      a price of $4.10 expiring on March 17, 2008. Fair value of the Special
      Warrants is $6,687,143. The fair value of the warrants was calculated
      using the Black-Scholes option pricing model for warrant valuation,
      assuming an average volatility of 87% on the underlying shares, a risk
      free interest rate of 4.00%, a two year term to expiry and no annual
      dividends.
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |     | In consideration for their services, the agents received
      a cash commission equal to 6% of the gross proceeds, totaling $2,645,940
      from the offering and 1,392,600 agents warrants exercisable into common
      shares which is equal to 6% of the number of Special Warrants sold. Each
      agents warrant will entitle the holder to acquire one common share of the
      Company at a price of $4.10 expiring March 17, 2008. Fair value of the
      agents warrants is $1,030,524 and has been accounted for as a share issue
      cost. The fair value of the warrants was calculated using the
      Black-Scholes option pricing model for warrant valuation, assuming an
      average volatility of 87% on the underlying shares, a risk free interest
      rate of 4.00%, a two year term to expiry and no annual
  dividends.                                                                           

|                             |   
|---------------------------- | --
|Augusta Resource Corporation | 22

---

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSDECEMBER 31, 2008, 2007 AND 2006

|10. | SHARE CAPITAL(continued)
|--- | ------------------------
|    |                         
|    | (c)                     
|    |                         
|    |                         
|    |                         
|    | (d)                     
|    |                         
|    |                         
|    |                         
|    |                         

AverageNumber of Shares
    
    
    Exercise PriceOutstanding as at December
      31, 2006
    
    4,801,167
    
    $
    1.76Granted
    
    1,185,000
    
    $
    2.31Exercised
    
    (74,167
    )
    $
    0.42Forfeited
    
    (25,000
    )
    $
    1.78Outstanding as at December
      31, 2007
    
    5,887,000
    
    $
    1.89Granted
    
    2,170,000
    
    $
    4.00Exercised
    
    (146,200
    )
    $
    2.02Forfeited
    
    (619,584
    )
    $
    2.80Outstanding as at December
      31, 2008
    
    7,291,216
    
    $
    2.44Options exercisable at
      December 31, 2008
    
    4,206,206
    
    $
    1.97


The fair value of stock compensation
was determined using the Black-Scholes option- pricing model. Under this method
the expected term assumption takes into consideration assumed rates of employee
turnover as well as expectations of when options would be exercised and
represents the estimated average length of time stock options remain outstanding
before they are exercised or forfeited. The expected volatility assumptions have
been developed taking the historical Canadian dollar share price. The risk-free
rate is based on the Bank of Canada rate for zero interest bonds in effect at
the time of the grant that corresponds to the expected term of the option. The
fair value of stock based compensation expense for 2008 was $2,469,126 (2007 -
$1,759,715; 2006 - $1,679,534). Additionally, stock based compensation
capitalized in 2008 was $447,545 (2007  Nil; 2006  Nil).

|                             |   
|---------------------------- | --
|Augusta Resource Corporation | 23

---

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSDECEMBER 31, 2008, 2007 AND 2006

|10. | SHARE CAPITAL(continued)
|--- | ------------------------

| | (d) | Options (continued)
| | --- | -------------------

| |                                              |   | 2008         |  |   | 2007         |  |   | 2006         | 
| | -------------------------------------------- | - | ------------ |  | - | ------------ |  | - | ------------ | 
| | Valuation assumptions                        |   |              |  |   |              |  |   |              | 
| | Expected term (years)                        |   | 1 - 5        |  |   | 3            |  |   | 3            | 
| | Expected
      volatility                    |   | 65 -90%      |  |   | 67 - 69%     |  |   | 99 - 108%    | 
| | Weighted average volatility                  |   | 65%          |  |   | 69%          |  |   | 103%         | 
| | Expected
      dividend yield                |   | -            |  |   | -            |  |   | -            | 
| | Risk-free interest rate                      |   | 1.79 - 4.09% |  |   | 3.58 - 3.93% |  |   | 4.09 - 4.14% | 
| | Weighted average
      risk-free rate        |   | 3.09%        |  |   | 3.86%        |  |   | 4.12%        | 
| |                                              |   |              |  |   |              |  |   |              | 
| | Weighted average
      fair value per option | $ | 2.21         |  | $ | 1.11         |  | $ | 1.49         | 

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

Options
        Outstanding
      
      
      Options
        ExercisableWeighted
      
      
      
      
      
      
      
      
      WeightedWeighted
      
      
      Average
      
      
      Options
      
      
      Weighted
      
      
      AverageAverage
      
      
      Remaining
      
      
      Outstanding
      
      
      Average
      
      
      RemainingOptions
      
      
      Exercise
      
      
      Contractual
      
      
      and
      
      
      Exercise
      
      
      ContractualExercise Prices
      
      Outstanding
      
      
      Price
      
      
      Life
        (years)
      
      
      Exercisable
      
      
      Price
      
      
      Life
        (years)$0.10 - $1.96
      
      2,864,550
      
      $
      1.53
      
      
      3.8
      
      
      2,174,548
      
      $
      1.54
      
      
      1.8$2.05 - $2.30
      
      2,451,666
      
      
      2.11
      
      
      2.1
      
      
      1,621,658
      
      
      2.11
      
      
      2.1$3.50 - $3.61
      
      300,000
      
      
      3.56
      
      
      4.0
      
      
      50,000
      
      
      3.61
      
      
      3.9$4.10 - $4.97
      
      1,675,000
      
      
      4.26
      
      
      6.0
      
      
      360,000
      
      
      4.25
      
      
      9.77,291,216
      
      $
      2.44
      
      
      3.7
      
      
      4,206,206
      
      $
      1.97
      
      
      2.6


|11. | CHANGES IN NON-CASH WORKING CAPITAL
      ITEMS                                    
|--- | -----------------------------------------------------------------------------------
|    |                                                                                    
|    | The following table summarizes the changes in non-cash
      working capital items:

| |                                                      |   | December 31 |   |   | December 31 |   |   | December 31 |  
| | ---------------------------------------------------- | - | ----------- | - | - | ----------- | - | - | ----------- | -
| |                                                      |   | 2008        |   |   | 2007        |   |   | 2006        |  
| | Net changes in non-cash working capital
      items: |   |             |   |   |             |   |   |             |  
| | Accounts receivable                                  | $ | (122,185    | ) | $ | (158,762    | ) | $ | (341,800    | )
| | Prepaid items                                        |   | (356,828    | ) |   | 85,301      |   |   | (120,645    | )
| | Accounts payable & accrued liabilities               |   | 1,378,193   |   |   | 613,207     |   |   | 135,202     |  
| |                                                      | $ | 899,180     |   | $ | 539,746     |   | $ | (327,243    | )

|                             |   
|---------------------------- | --
|Augusta Resource Corporation | 24

---

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSDECEMBER 31, 2008, 2007 AND 2006

|12. | SUPPLEMENTAL CASH FLOW INFORMATION ON NON-CASH
      TRANSACTIONS
|--- | -----------------------------------------------------------------

| |                                               |   | December 31 |  |   | December 31 |  |   | December 31 | 
| | --------------------------------------------- | - | ----------- |  | - | ----------- |  | - | ----------- | 
| |                                               |   | 2008        |  |   | 2007        |  |   | 2006        | 
| |                                               |   |             |  |   |             |  |   |             | 
| | Purchase of property for promissory note      | $ | -           |  | $ | 2,601,308   |  | $ | -           | 
| | Special warrants converted into common shares | $ | -           |  | $ | -           |  | $ | 37,411,857  | 
| | Warrants issued as share issue expenses       | $ | -           |  | $ | -           |  | $ | 1,030,524   | 

|13. | RELATED PARTY TRANSACTIONS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    | During the year ending December 31, 2008, the Company
      incurred expenses of $Nil (2007 - $Nil; 2006 - $17,500) for administrative
      services provided by a company in which a director of the Company has a
      25% interest.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    | At December 31, 2008, $293,337 (2007 - $195,674) of
      accounts receivable was due from related companies, which share office
      space, administrative services and certain common directors with the
      Company. Also, included in accounts receivable at December 31, 2008 is an
      amount of $77,337 (2006 - $70,686) due from a company in which a director
      of the Company has a 25% interest. At December 31, 2008, included in
      accounts payable and accrued liabilities is an amount of $92,200 (2007 -
      $64,000) due to the Vice President Administration of the Company for
      accrued salaries.                                                                                                                                                                                                         
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    | On June 17, 2008, the Company entered into a
      US$40,000,000 loan agreement (Loan Facility) with Sumitomo, a
      significant shareholder of the Company. During the year ended December 31,
      2008 the Company had accrued $770,509 (US$661,540) of interest of which
      US$31,043,964 had been drawn on this Loan Facility as at December 31, 2008
      (Note 8).                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    | All related party transactions are recorded at the
      exchange value, which is fair market value.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|14. | CAPITAL MANAGEMENT                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    | 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 which will enable the Company to execute its business plan. With
      the completion of the Updated Feasibility Study and the current permitting
      process, we will require additional funds through completion of the Record
      of Decision (regarding the mine plan of operation/environmental impact
      statement) 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 US$897 million. Funding
      for the project could come from a number of sources and include project
      financing and from capital markets (including debt and equity).
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    | 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                                                                                                                                                                                                                                                                                                                                                                                                                            

|                             |   
|---------------------------- | --
|Augusta Resource Corporation | 25

---

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSDECEMBER 31, 2008, 2007 AND 2006

|    | 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
      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 with
      regard to the expected timing of expenditures from continuing operations.
      In order to maximize ongoing development efforts, the Company does not pay
      out dividends.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    | With existing cash reserves and the loan arrangement the
      Company entered into with Sumitomo in June 2008 (Note 8 - Loan facility),
      the Company expects its current capital resources will be sufficient to
      carry its exploration and development plans and operations through the
      first half of 2009. Augusta will require additional funding to maintain
      its ongoing development of Rosemont as well as for administrative
      purposes. Augusta is planning to meet its future expenditures and
      obligations by raising funds through additional capital by issuing shares,
      entering into a joint venture arrangement and or issuing debt. While the
      Company continues to seek alternative financing arrangements it is not
      possible to predict whether these efforts will be successful.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|15. | FINANCIAL INSTRUMENTS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    | Categories of financial assets and
    liabilities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    | 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:                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    | The carrying values of the Companys financial
      instruments are classified into the following
categories:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

December 31
    
    
    December 312008
    
    
    2007Held for trading
      (1)
    $
    9,261,883
    
    $
    25,586,997Loans and receivables (2)
    
    5,291,118
    
    
    530,066Other financial liabilities
      (3)
    
    (49,002,875
    )
    
    (4,211,447
    )


(1) Includes cash and cash equivalents.
(2) Includes the Ely receivable and warrants. (3) Includes accounts
payable, accrued liabilities and long-term debt.

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

|                             |   
|---------------------------- | --
|Augusta Resource Corporation | 26

---

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSDECEMBER 31, 2008, 2007 AND 2006

|15. | FINANCIAL INSTRUMENTS(continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    | 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.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    | 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                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    | The Company incurs expenditures in Canada and in the US.
      The functional and reporting currency of the parent company is Canadian
      dollars. Foreign exchange risk arises because the amount of the US dollar
      cash and cash equivalents, receivable or payable will vary in Canadian
      dollar terms due to changes in exchange rates.                                                                                                                                          
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    | As the majority of the Companys expenditures are in US
      dollars the Company has kept a significant portion of its cash and
      cash equivalents in US dollars. The Company has not hedged its
    exposure to currency fluctuations.                                                                                                                                                                                                                                                      
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    | At December 31, 2008, the Company is exposed to currency
      risk through the following assets and liabilities denominated in US
      dollars:                                                                                                                                                                                                                                                                                                                                                 

December 31
    
    
    December 312008
    
    
    2007Held for trading
      (1)
    $
    4,607,003
    
    $
    6,237,530Loans and receivables (2)
    
    3,956,664
    
    
    11,324Other financial liabilities
      (3)
    
    (36,249,129
    )
    
    (3,572,851
    )$
    (27,685,462
    )
    $
    2,676,003


(1) Includes cash and cash equivalents.
(2) Includes the Ely receivable. (3) Includes accounts payable, accrued
liabilities and long-term debt.

Based on the above net exposures, as at
December 31, 2008, a 10% change in the Canadian/US exchange rate will impact the
Companys earnings by approximately $3.4 million.

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.

|                             |   
|---------------------------- | --
|Augusta Resource Corporation | 27

---

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSDECEMBER 31, 2008, 2007 AND 2006

|15. | FINANCIAL INSTRUMENTS(continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    | The Companys cash and cash equivalents are held through
      large Canadian financial institutions, in short-term GIC and management
      believes the risk of loss is remote.                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    | The loans and receivables relate primarily to Ely and
      consist of a receivable (to be paid over 4 years) and warrants exercisable
      for the common shares of Ely through August 2009. In the event that Ely
      does not make the required payments (Note 8) Augusta can take back the
      common shares of DHI Minerals and DHI Minerals US or the properties in
      question. On February 25, 2009, Ely paid the Company the first annual
      payment of $1.3 million (US$1 million). Should Augusta reacquire the
      shares or properties noted above, an asset impairment assessment would be
      required.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    | 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 half of 2009 and is currently in
      discussions with a number of financial institutions and other
      intermediaries regarding financing alternatives necessary to advance the
      project through construction. While the Company continues to seek
      alternative financing arrangements it is not possible to predict whether
      these efforts will be successful.                                                                                                                                                      
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|16. | 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:                                                                                                                                                                                                                                                                                                                                                                                                    

| |                                                                      |   | 2008        |   |   | 2007       |   |   | 2006       |  
| | -------------------------------------------------------------------- | - | ----------- | - | - | ---------- | - | - | ---------- | -
| | Net loss from continuing operations                                  | $ | (18,759,009 | ) | $ | 6,309,175  |   | $ | 5,823,239  |  
| | Statutory tax rate                                                   |   | 31.00%      |   |   | 34.12%     |   |   | 34.12%     |  
| |                                                                      |   |             |   |   |            |   |   |            |  
| | Recovery of income taxes computed at Standard rates                  |   | (5,815,293  | ) |   | (2,152,691 | ) |   | (1,986,889 | )
| | Differences in foreign tax rates                                     |   | (1,457,627  | ) |   | (16,113    | ) |   | (50,494    | )
| | Tax losses not recognized in the period that the benefit
      arose |   | 4,600,945   |   |   | 1,391,201  |   |   | 1,228,016  |  
| | Foreign exchange gain (loss)                                         |   | 2,481,664   |   |   | (114,386   | ) |   | (38,707    | )
| | Stock based compensation                                             |   | 568,805     |   |   | 600,415    |   |   | 573,057    |  
| | Other permanent differences                                          |   | (378,494    | ) |   | 291,574    |   |   | 275,017    |  
| |                                                                      | $ | -           |   | $ | -          |   | $ | -          |  

As of December 31, 2008, the Company
has Canadian loss carry forwards of approximately $13,490,000 (2007 -
$8,958,000) and US loss carry forwards of approximately $30,077,000 (2007 -
$2,865,000) available to reduce future years income for tax purposes. The tax
loss carry forwards expire at various times between 2009 and 2028.

|                             |   
|---------------------------- | --
|Augusta Resource Corporation | 28

---

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSDECEMBER 31, 2008, 2007 AND 2006

|16. | INCOME TAXES(continued)                                                                                                                                                                                                                                                                                                           
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                   
|    | 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, 2008, 2007
      and 2006 are as follows:

| | Future income tax assets:                                         |   | 2008       |   |   | 2007       |   |   | 2006       |  
| | ----------------------------------------------------------------- | - | ---------- | - | - | ---------- | - | - | ---------- | -
| | Non-capital losses and other
      future tax deductions          | $ | 16,925,000 |   | $ | 5,043,000  |   | $ | 4,577,000  |  
| | Mineral properties, deferred development and
      capital assets |   | 3,000      |   |   | 79,000     |   |   | -          |  
| | Other assets                                                      |   | 133,000    |   |   | -          |   |   | -          |  
| | Long-term debt                                                    |   | 1,380,000  |   |   | -          |   |   | -          |  
| |                                                                   |   | 18,441,000 |   |   | 5,122,000  |   |   | 4,577,000  |  
| | Valuation allowance for future income tax assets                  |   | (9,393,000 | ) |   | (5,122,000 | ) |   | (4,577,000 | )
| |                                                                   |   | 9,048,000  |   |   | -          |   |   | -          |  
| | Future income tax liabilities:                                    |   |            |   |   |            |   |   |            |  
| | Mineral properties, deferred
      development and capital assets |   | (9,048,000 | ) |   | -          |   |   | -          |  
| | Net future income tax assets (liabilities)                        |   | -          |   |   | -          |   |   | -          |  

|    | As the criteria for recognizing future income tax assets
      have not been met due to uncertainty of realization, a valuation allowance
      of 100% has been recorded for prior years.                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|17. | COMMITMENTS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    | On December 19, 2007 the Company announced that it had
      signed an agreement valued at approximately $33.3 million (US$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 total $10.3 million (US$10.1
      million), 2009 - $14.2 million (US$11.6 million) and 2010 - $8.8 million
      (US$7.2 million). To December 31, 2008 all of the 2008 required payments
      had been made.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    | On April 8, 2008 the Company announced the signing of a
      Letter Award with ABB Switzerland Ltd. for the supply of three gearless
      mill drives for $46.1 million (€27.3 million). Payments required in 2008
      total $4.1 million (€2.7 million), 2009 - $32.6 million (€19.1 million)
      and 2010 - $9.4 million (€5.5 million). To December 31, 2008 all of the
      2008 required payments had been made.                                                                                                                                                                                                                    
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    | On April 17, 2008 the Company announced the signing of an
      engineering, procurement and construction management contract with M3
      Engineering & Technology Corporation (M3). Total payments over the
      life of the contract are expected to total approximately $68.5 million
      (US$56 million) and will be incurred as services are rendered by M3. To
      December 31, 2008 payments of $1 million (US$0.9 million) have been
      made.                                                                                                                                                                               

|                             |   
|---------------------------- | --
|Augusta Resource Corporation | 29

---

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSDECEMBER 31, 2008, 2007 AND 2006

|17. | COMMITMENTS(continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    | 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 $10.4 million (US$8.6 million) with
      payments in 2008 totaling $0.7 million (US$0.6 million), 2009 - $0.7
      million (US$0.6 million), 2010 - $6.2 million (US$5.1 million) and 2011 
      $2.8 million (US$2.3 million). The 3 shovels are being purchased from
      Bucyrus International Inc. for total commitments of $77.5 million (US$63.8
      million) with payments in 2008 totaling $3.1 million (US$3 million), 2009
      - $14.3 million (US$11.7 million) and 2010 - $60.1 million (US$49.1
      million). To December 31, 2008 all of the 2008 required payments had been
      made. On December 18, 2008 a contract amendment for the three shovels was
      completed that delayed the 2009 payments until 2010.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    | Other Commitments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    | The Company leases building premises and office equipment
      recorded as operating leases. The terms of the leases extend through to
      September 30, 2011. The future minimum lease payments are as
    follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

Year2009
    $
    125,9902010
    
    117,0532011
    
    88,577Total
    $
    331,620


|18. | SEGMENTED INFORMATION                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    | The Company operates in one industry. As at December 31,
      2008, the Companys long-lived assets were in Canada, $3,511,911 (2007 -
      $19,000) and in the United States - $107,131,055 (2007 -
    $61,593,500).                                                                                                                                                                                                                                                                                        
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|19. | SUBSEQUENT EVENT                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    | ASARCO claim                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    | On January 16, 2009 the Company reached an agreement with
      ASARCO that fully and finally resolves the lawsuit ASARCO filed against
      the Company on August 8, 2007 in the ASARCO Chapter 11 bankruptcy
      proceeding pending 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.

|                             |   
|---------------------------- | --
|Augusta Resource Corporation | 30

---

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSDECEMBER 31, 2008, 2007 AND 2006

|19. | SUBSEQUENT EVENT(continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    | The resolution currently is reflected in a binding Terms
      of Settlement, and will be formalized in a comprehensive Settlement
      Agreement to be ordered by the Bankruptcy Court presiding over ASARCOs
      bankruptcy proceeding. In the settlement, ASARCO will receive from the
      Company the sum of US$250,000 cash during the first quarter of 2009. Once
      commercial mine operations commence at the Rosemont property, the Company
      will pay ASARCO certain specified annual production payments, without
      interest, over the course of eight years. These payments will come solely
      out of the net profits of mine operations and will not, in any year,
      exceed 25% of net profits. In the settlement agreement, the Company has
      the right to purchase the pre-production, pre-payment option (Option
      Payment) for $3,183,960 (US$2,600,000), if the option is exercised on or
      before December 31, 2009. If the option is exercised after December 31,
      2009, the Option Payment will be based on the net present value of
      aggregate annual payments, using an agreed 18% discount rate.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|20. | 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 in the tables below.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

| |                                   |   | December 31, 2008 |  
| | --------------------------------- | - | ----------------- | -
| |                                   |   |                   |  
| | Balance Sheets                    |   | Total Assets      |  
| | Reported under Canadian GAAP      | $ | 122,140,088       |  
| | Mineral property expenditures (a) |   | (24,970,097       | )
| | Capitalized interest (e)          |   | 270,077           |  
| | Reported under US
      GAAP      | $ | 97,440,068        |  

| |                                       |   | December 31, 2007 |  
| | ------------------------------------- | - | ----------------- | -
| |                                       |   |                   |  
| | Balance Sheets                        |   | Total Assets      |  
| | Reported under Canadian GAAP          | $ | 94,696,963        |  
| | Mineral property expenditures (a)     |   | (24,970,097       | )
| | Assets of discontinued operations (a) |   | (1,214,176        | )
| | Capitalized interest
      (e)        |   | 59,000            |  
| | Reported under US GAAP                | $ | 68,571,690        |  

|                             |   
|---------------------------- | --
|Augusta Resource Corporation | 31

---

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSDECEMBER 31, 2008, 2007 AND 2006

|20. | DIFFERENCES BETWEEN UNITED STATES AND CANADIAN
      GENERALLY ACCEPTED ACCOUNTING PRINCIPLES(continued)
|--- | --------------------------------------------------------------------------------------------------------

| |                                                                             |   | Cumulative from    |   |   |             |   |   |             |   |   |             |  
| | --------------------------------------------------------------------------- | - | ------------------ | - | - | ----------- | - | - | ----------- | - | - | ----------- | -
| |                                                                             |   | dormancy (1985) to |   |   |             |   |   |             |   |   |             |  
| | Statements of
      Operations                                              |   | December 31, 2008  |   |   | 2008        |   |   | 2007        |   |   | 2006        |  
| | Net loss reported under Canadian GAAP                                       | $ | (43,521,560        | ) | $ | (18,759,009 | ) | $ | (7,979,836  | ) | $ | (6,659,591  | )
| |                                                                             |   |                    |   |   |             |   |   |             |   |   |             |  
| | Operating loss from discontinued operations                                 |   | (1,442,792         | ) |   | -           |   |   | (470,661    | ) |   | (836,352    | )
| | Loss on
      disposition of discontinued operations, net of tax            |   | (541,412           | ) |   | 658,588     |   |   | (1,200,000  | ) |   | -           |  
| | Net Loss from discontinued operations under
      Canadian GAAP             |   | (1,984,204         | ) |   | 658,588     |   |   | (1,670,661  | ) |   | (836,352    | )
| | Net loss from continuting operations reported under
      Canadian GAAP     |   | (41,537,356        | ) |   | (19,417,597 | ) |   | (6,309,175  | ) |   | (5,823,239  | )
| | Mineral property expenditures (a)                                           |   | (24,970,097        | ) |   | -           |   |   | (9,498,418  | ) |   | (12,436,119 | )
| | Warrants (b)                                                                |   | (8,320,697         | ) |   | -           |   |   | (114,131    | ) |   | (4,096,284  | )
| | Capitalized interest (e)                                                    |   | 270,077            |   |   | 211,077     |   |   | 59,000      |   |   | -           |  
| | Accretion expense on debenture (c)                                          |   | 299,125            |   |   | -           |   |   | -           |   |   | -           |  
| | Debt issue costs (c)                                                        |   | (252,147           | ) |   | -           |   |   | -           |   |   | (134,835    | )
| | Interest and
      finance charges (c)                                      |   | 1,477,790          |   |   | -           |   |   | -           |   |   | 497,035     |  
| | Net loss from continuing operations
      reported under US GAAP            |   | (73,033,305        | ) |   | (19,206,520 | ) |   | (15,862,724 | ) |   | (21,993,442 | )
| |                                                                             |   |                    |   |   |             |   |   |             |   |   |             |  
| | Net income (loss) from discontinued
      operations under Canadian GAAP    |   | (1,984,204         | ) |   | 658,588     |   |   | (1,670,661  | ) |   | (836,352    | )
| | Assets
      discontinued operations (a)                                    |   | (1,214,176         | ) |   | -           |   |   | (647,072    | ) |   | (567,104    | )
| | Net income (loss) from discontinued operations reported
      under US GAAP |   | (3,198,380         | ) |   | 658,588     |   |   | (2,317,733  | ) |   | (1,403,456  | )
| | Net loss reported
      under US GAAP                                       | $ | (76,231,685        | ) | $ | (18,547,932 | ) | $ | (18,180,457 | ) | $ | (23,396,898 | )
| |                                                                             |   |                    |   |   |             |   |   |             |   |   |             |  
| | Basic and fully diluted loss from continuing operations                     |   |                    |   |   |             |   |   |             |   |   |             |  
| | per share under US GAAP                                                     |   |                    |   | $ | (0.22       | ) | $ | (0.19       | ) | $ | (0.37       | )
| | Basic and fully diluted earnings (loss) from discontinued
      operations  |   |                    |   |   |             |   |   |             |   |   |             |  
| | per share under US GAAP                                                     |   |                    |   | $ | 0.01        |   | $ | (0.03       | ) | $ | (0.02       | )
| | Basic and fully diluted loss per share under US GAAP                        |   |                    |   | $ | (0.21       | ) | $ | (0.22       | ) | $ | (0.40       | )
| | Weighted average number of common shares
      outstanding                  |   |                    |   |   |             |   |   |             |   |   |             |  
| | under both Canadian GAAP and US GAAP                                        |   |                    |   |   | 88,643,084  |   |   | 81,795,564  |   |   | 59,219,428  |  
| | Comprehensive loss                                                          |   |                    |   |   |             |   |   |             |   |   |             |  
| | Net loss under US GAAP                                                      |   | (76,231,685        | ) | $ | (18,547,932 | ) | $ | (18,180,457 | ) | $ | (23,396,898 | )
| | Other comprehensive income                                                  |   | -                  |   |   | -           |   |   | -           |   |   | -           |  
| | Comprehensive
      loss under US GAAP                                      | $ | (76,231,685        | ) | $ | (18,547,932 | ) | $ | (18,180,457 | ) | $ | (23,396,898 | )

| |                                          |   | Cumulative from    |   |   | December
      31 |  
| | ---------------------------------------- | - | ------------------ | - | - | ----------------- | -
| |                                          |   | dormancy (1985) to |   |   |                   |  
| | Statements of Cash
      Flows           |   | December 31, 2007  |   |   | 2008              |  
| | Operating activities                     |   |                    |   |   |                   |  
| | Operating activities under Canadian GAAP | $ | (17,610,494        | ) | $ | (8,031,636        | )
| | Mineral property expenditures (a)        |   | (26,316,597        | ) |   | -                 |  
| | Operating activities
      under US GAAP | $ | (43,927,091        | ) | $ | (8,031,636        | )
| |                                          |   |                    |   |   |                   |  
| | Investing activities                     |   |                    |   |   |                   |  
| | Investing activities under Canadian GAAP | $ | (104,307,138       | ) | $ | (41,937,092       | )
| | Mineral property expenditures
      (a)  |   | 26,316,597         |   |   | -                 |  
| | Investing activities under US GAAP       | $ | (77,990,541        | ) | $ | (41,937,092       | )

|                             |   
|---------------------------- | --
|Augusta Resource Corporation | 32

---

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSDECEMBER 31, 2008, 2007 AND 2006

|20. | DIFFERENCES BETWEEN UNITED STATES AND CANADIAN
      GENERALLY ACCEPTED ACCOUNTING PRINCIPLES(continued)
|--- | --------------------------------------------------------------------------------------------------------

| |                                    |   | December
      31, 2008 |  
| | ---------------------------------- | - | ----------------------- | -
| |                                    |   |                         |  
| |                                    |   |                         |  
| |                                    |   | Common                  |  
| | Statements of Shareholders' Equity |   | Shares                  |  
| | Reported under Canadian GAAP       | $ | 104,098,500             |  
| | Mineral property expenditures (a)  |   | -                       |  
| | Warrants (b)                       |   | 8,785,860               |  
| | Convertible debenture (c)          |   | -                       |  
| | Share issue costs (d)              |   | (5,130,207              | )
| | Capitalized interest (e)           |   | -                       |  
| | Accretion expense on debenture (c) |   | (299,125                | )
| | Reported under US GAAP             | $ | 107,455,028             |  

| |                                       |   | December
      31, 2007 |  
| | ------------------------------------- | - | ----------------------- | -
| |                                       |   |                         |  
| |                                       |   |                         |  
| |                                       |   | Common                  |  
| | Statements of Shareholders' Equity    |   | Shares                  |  
| | Reported under Canadian GAAP          | $ | 103,581,579             |  
| | Mineral property expenditures (a)     |   | -                       |  
| | Assets of discontinued operations (a) |   | -                       |  
| | Warrants (b)                          |   | 8,785,860               |  
| | Convertible debenture (c)             |   | -                       |  
| | Share issue costs (d)                 |   | (5,130,207              | )
| | Capitalized interest (e)              |   | -                       |  
| | Accretion expense on debenture (c)    |   | (299,125                | )
| | Reported under US GAAP                | $ | 106,938,107             |  

| |                                       |   | December
      31, 2006 |  
| | ------------------------------------- | - | ----------------------- | -
| |                                       |   |                         |  
| |                                       |   |                         |  
| |                                       |   | Common                  |  
| | Statements of Shareholders' Equity    |   | Shares                  |  
| | Reported under Canadian GAAP          | $ | 60,332,348              |  
| | Mineral property expenditures (a)     |   | -                       |  
| | Assets of discontinued operations (a) |   |                         |  
| | Warrants (b)                          |   | -                       |  
| | Convertible debenture (c)             |   | -                       |  
| | Share issue costs (d)                 |   | (5,105,207              | )
| | Accretion expense on debenture (c)    |   | (299,125                | )
| | Reported under US GAAP                | $ | 54,928,016              |  

|                             |   
|---------------------------- | --
|Augusta Resource Corporation | 33

---

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSDECEMBER 31, 2008, 2007 AND 2006

|20. | DIFFERENCES BETWEEN UNITED STATES AND CANADIAN
      GENERALLY ACCEPTED ACCOUNTING PRINCIPLES(continued)
|--- | --------------------------------------------------------------------------------------------------------
|    |                                                                                                         
|    | a)                                                                                                      
|    |                                                                                                         
|    |                                                                                                         
|    |                                                                                                         
|    |                                                                                                         
|    |                                                                                                         
|    | b)                                                                                                      
|    |                                                                                                         
|    |                                                                                                         
|    |                                                                                                         
|    |                                                                                                         

|                             |   
|---------------------------- | --
|Augusta Resource Corporation | 34

---

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSDECEMBER 31, 2008, 2007 AND 2006

|20. | DIFFERENCES BETWEEN UNITED STATES AND CANADIAN
      GENERALLY ACCEPTED ACCOUNTING PRINCIPLES(continued)
|--- | --------------------------------------------------------------------------------------------------------
|    |                                                                                                         
|    | b)                                                                                                      
|    |                                                                                                         
|    |                                                                                                         
|    |                                                                                                         
|    | c)                                                                                                      
|    |                                                                                                         
|    |                                                                                                         
|    |                                                                                                         
|    |                                                                                                         
|    |                                                                                                         
|    | d)                                                                                                      
|    |                                                                                                         
|    |                                                                                                         
|    |                                                                                                         
|    | e)                                                                                                      
|    |                                                                                                         
|    |                                                                                                         

|                             |   
|---------------------------- | --
|Augusta Resource Corporation | 35

---

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSDECEMBER 31, 2008, 2007 AND 2006

|20. | DIFFERENCES BETWEEN UNITED STATES AND CANADIAN
      GENERALLY ACCEPTED ACCOUNTING PRINCIPLES(continued)
|--- | --------------------------------------------------------------------------------------------------------
|    |                                                                                                         
|    | (f)                                                                                                     
|    |                                                                                                         
|    |                                                                                                         
|    |                                                                                                         
|    |                                                                                                         
|    |                                                                                                         
|    | (g)                                                                                                     
|    |                                                                                                         
|    |                                                                                                         
|    |                                                                                                         
|    | (h)                                                                                                     
|    |                                                                                                         
|    |                                                                                                         
|    |                                                                                                         
|    |                                                                                                         
|    |                                                                                                         
|    |                                                                                                         
|    |                                                                                                         
|    |                                                                                                         

|                             |   
|---------------------------- | --
|Augusta Resource Corporation | 36

---

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSDECEMBER 31, 2008, 2007 AND 2006

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.

FSP APB 14-1, 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.

EITF 07-5 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. 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.

|                             |   
|---------------------------- | --
|Augusta Resource Corporation | 37

---

| | HEAD OFFICE    | #400  837 West Hastings Street                               
| | -------------- | --------------------------------------------------------------
| |                | Vancouver, BC, Canada V6C 3N6                                 
| |                |                                                               
| |                | Telephone:          
      (604) 687-1717                     
| |                | Facsimile:             
      (604) 687-1715                  
| |                |                                                               
| |                | Website: www.augustaresource.com                              
| |                | E-mail: info@augustaresource.com                              
| |                |                                                               
| |                |                                                               
| | DIRECTORS      | Tim C. Baker                                                  
| |                | Donald B. Clark                                               
| |                | Gil Clausen                                                   
| |                | W. Durand Eppler (Lead Director)                              
| |                | Christopher M.H.
      Jennings                               
| |                | Michael Steeves                                               
| |                | Robert P. Wares                                               
| |                | Richard W. Warke (Executive
      Chairman)                   
| |                |                                                               
| |                |                                                               
| | OFFICERS       | Gil Clausen ~ President &
      Chief Executive Officer       
| |                | Raghunath Reddy ~ Chief Financial
      Officer & SVP, Finance
| |                | Donald B. Clark ~ VP,
      Administration                    
| |                | Mark Stevens ~ VP, Exploration                                
| |                | Lance Newman ~ VP, Project
      Development                  
| |                | Rod Pace ~ VP, Operations                                     
| |                | James Sturgess ~ VP, Sustainable
      Development            
| |                | Tracey Brix-Nielsen ~ Treasurer
      & Corporate Controller  
| |                | Purni Parikh ~ Corporate
      Secretary                      
| |                |                                                               
| |                |                                                               
| | REGISTRAR AND  | Computershare Investor Services
      Inc.                    
| | TRANSFER AGENT | #401 - 510 Burrard Street                                     
| |                | Vancouver, BC V6C 3B9                                         
| |                |                                                               
| |                |                                                               
| | AUDITORS       | Ernst & Young, LLP                                            
| |                | 700  West Georgia
      Street                               
| |                | Vancouver, BC V7Y 1C7                                         
| |                |                                                               
| |                |                                                               
| | SOLICITORS     | Fasken Martineau DuMoulin LLP                                 
| |                | Suite 2900                                                    
| |                | 550 Burrard Street                                            
| |                | Vancouver, BC V6C 0A3                                         
| |                |                                                               
| |                |                                                               
| | SHARES LISTED  | Toronto Stock Exchange                                        
| |                | NYSE Alternext US.
      (1)                                  
| |                | Trading Symbol ~ AZC                                          
| |                | Frankfurt Stock
      Exchange                                
| |                | Trading Symbol  A5R                                          

(1)On October 1, 2008, NYSE Euronext (NYX), the worlds
  leading and most diverse exchange group, completed the acquisition of the American
  Stock Exchange(R) (Amex(R)). The Company is now listed
  on NYSE Alternext US.

|                             | 
|---------------------------- | 
|Augusta Resource Corporation | 

---