---



Consolidated Financial Statements

December 31, 2006, 2005 and 2004









Notice to Readers

The consolidated financial statements of Augusta Resource
Corporation (the Company) for the twelve months ended December 31, 2006
(Financial Statements) have been prepared by management and have been audited
by the Companys auditor. The Financial Statements should be read in conjunction
with the Companys audited consolidated financial statements for the years ended
December 31, 2005 and December 31, 2004 which are available at the SEDAR website
at www.sedar.com.

|Augusta Resource
      Corporation | 1
|---------------------------------- | -

---

Directors Report to Our Shareholders

Augusta Resource Corporation was successful in reaching a
number of critical milestones in 2006 that have significantly advanced the
development of its 100% owned Rosemont copper/molybdenum/silver (Cu/Mo/Ag)
project in Arizona.

During the first quarter of 2006, the Company raised the
largest ever financing in its history to complete the acquisition of the
Rosemont property, paving the way to start work on advancing exploration,
development and permitting activities. In addition to meeting our financial
requirements for 2006, the $44,099,000 equity financing will continue to fund
these activities into the first half of 2007. Augusta also retired the remaining
$3,000,000 convertible debenture issued in June 2005 in the second quarter of
2006.

On June 14, 2006 the Company released the results of a
Preliminary Assessment and Economic Evaluation for the Rosemont Deposit (PA).
With low cost production and a manageable capital expenditure requirement, it is
our belief that these results, while still preliminary, suggest that the
Rosemont deposit may well be one of the best undeveloped open pit copper
projects in the United States.

Augusta also obtained a sustainable water supply source for
Rosemont when it signed two contracts with the Central Arizona Water
Conservation District (CAWCD) at the end of June. The CAWCD operates the
Central Arizona Project canal system (CAP). Later in the third quarter the
Company filed a Plan of Operations for the Rosemont project with the United
States (US) Forest Service, the first formal step in the permitting process.
The CAWCD contracts are significant to this activity because they address the
water supply question ahead of the Environmental Impact Statement (EIS) review
process, which removes a significant amount of uncertainty regarding project
impacts to the region. In addition to the CAWCD contract for a sustainable water
supply, Arizona state law allows for a mining company to drill wells as needed
to supply process water for mineral processing operations under a mineral
extraction permit from the Arizona Department of Water Resources.

In August, the Company commenced a feasibility study on
Rosemont. M3 Engineering and Technology Corporation of Tucson, Arizona was
awarded the contract for the feasibility study after a due bid and selection
process. To lead the project internally, the Company appointed Mr. Lance Newman
as Vice-President, Metallurgical Operations and Mr. Mark Stevens as Chief
Project Geologist. Both Mr. Newman and Mr. Stevens are seasoned members of the
team with proven track records in project development and operations.

Also in August, the Company graduated to the Toronto Stock
Exchange and on November 30 was listed on the American Stock and Options
Exchange, both under the symbol AZC. The move to these two major stock
exchanges is a further step in our strategic plan to maximize the value of the
Companys assets by expanding awareness within the global investment community.
In addition, the Companys common shares commenced trading on the Frankfurt
Stock Exchange under the symbol A5R in September. Newly appointed Manager,
Investor Relations and Corporate Communications, Mrs. Marlo Hamer-Jackson
followed up on these listings by coordinating a few targeted marketing tours for
President and CEO Gil Clausen. These events provided the opportunity to meet
with institutional investors and research analysts in Canada, the United States
and Europe. The Company is pleased to report that two financial firms,
Laurentian Bank Securities and BMO Capital Markets, initiated analyst research
coverage on Augusta in 2006.

Throughout the year, Augusta also continued exploration activities
  on its Mount Hamilton and Shell Deposit properties in Nevada. The Company commenced
  a pre-feasibility study at Mount Hamilton to evaluate development of the Centennial
  Deposit as well as a 3,000-meter phase I exploratory drilling program on the
  Shell molybdenum/tungsten deposit.

|Augusta Resource Corporation | 2
|---------------------------- | -

---

With the increase in Company activities in 2006, Augusta was
pleased to welcome Mr. Bruce Nicol as Senior Vice-President and Chief Financial
Officer, and Ms. Tracey Brix-Nielsen as Controller, to its management team in
September. Mr. Nicol was the former Acting Chief Financial Officer of Placer
Dome Inc, and is a Chartered Accountant with 15-years of professional experience
in the international mining industry. Ms. Brix-Nielsen brings to the Company
extensive knowledge and experience in the resource sector working with Placer
Dome Inc. and Teck Cominco Ltd.

Project UpdatesRosemont Property On March
31, 2006, Augusta completed the acquisition of a 100% ownership interest in the
Rosemont property. The property is located in Pima County, approximately 50
kilometers southeast of Tucson, Arizona, and is situated near a number of large
porphyry type producing copper mines operated by Phelps Dodge and Asarco.

The 2006 Rosemont Deposit Mineral Resource Statement*
(excluding satellite deposits) was announced in the first quarter of 2006,
reporting significant improvements when compared with the historic resource
reported by Anamax (Pincock, Allen and Holt  1977). The NI 43-101 compliant
resource estimate contains 6.4 billion lbs of copper ("Cu") equivalent
(442,000,000 tons at 0.73% Cu equivalent) in measured and indicated resources
and 1.9 billion lbs of Cu equivalent (145,000,000 tons at 0.67% Cu equivalent)
in inferred resources at a 0.2% copper cut-off.

Following up on the new resource estimate, the Company
commenced a 20,000-meter drill program during the latter part of the second
quarter with emphasis on moving inferred resources into the measured and
indicated category. The drill program and a concurrent program of re-logging and
re-assay of historic drill core will define potential oxide copper zones and
quantify a silver resource for the deposit, in addition to upgrading the sulfide
copper-molybdenum resource.

In early May, the Company announced positive results from
metallurgical test work that would impact production and process techniques at
Rosemont. The new findings had a major positive impact on flow sheet design and
the financial performance of the project. The Company published the PA in June
2006, which demonstrated that the Rosemont Cu/Mo/Ag deposit could be developed
as a low cost open pit mine with potentially robust project economics. With the
positive project economics noted in the PA and the continued buoyant market for
these strategic metals, management decided to move the Rosemont project to full
feasibility study and awarded the contract to M3 Engineering in early August.

The planned mine operations at Rosemont will incorporate
water-miser design principles and are expected to use less than 5,000 acre-feet
per year, approximately one third the water consumption of similar sized
operations in Arizona. The Company obtained a sustainable water supply source
for Rosemont when it signed two contracts with the CAWCD in June. The purchase
contract allows Augusta to become a water user in the CAWCD system, allowing the
Company to request up to 10,000 acre-feet of water per year for the five-year
term of the contract. The storage contract allows the Company to store the water
in the Pima Mine Storage and Retrieval Facility in Pima County, Arizona. The
pre-stored water will accumulate in a water-bank account to offset groundwater
removed from the aquifer once mine operations begin on the Rosemont
property.

* The mineral resource estimation work was performed by or under
  the direction of Mr. William L. Rose, P.E., Principal Mining Engineer of WLR
  Consulting, Inc. (WLRC) of Lakewood, Colorado. Mr. Rose is an independent Qualified
  Person under the standards set forth by Canadian National Instrument 43-101.
  Details of the Mineral Resource Estimate can be found in the technical report
  entitled Mineral Resource Estimate, Revised Technical Report for the Rosemont
  Deposit dated April 21, 2006 filed on SEDAR (www.sedar.com) and also available on the Companys
  website.

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

---

In late 2006, Augusta signed additional storage contracts with
the CAWCD allowing storage of CAP water at two additional storage and retrieval
facilities within the Santa Cruz basin. In accordance with the CAWCD purchase
contract, Augusta agreed to purchase an initial 10,000 acre-feet of water in
early 2007. At the same time the Company also agreed to purchase an available
surplus of 5,000 acre-feet of water. The total amount of 15,000 acre-feet will
be stored in the three specified storage facilities, and is enough to carry the
operation through its first three to four years of production.

The Company also filed Rosemonts initial Plan of Operations
with the US Forest Service in July. Stakeholder response to this document is
being used to modify the on-going feasibility study, and a final comprehensive
Plan of Operations will be filed when the feasibility study is complete. This
plan will be the basis for permitting after review under the National
Environmental Policy Act (NEPA), a process managed by the US Forest
Service.

With five drill rigs on the property, the Company was pleased
to complete the 20,000-meter drill program in late September. Initial assay
results were announced in July, followed up by more results in September. After
the remaining assays had been processed in the first half of the fourth quarter,
the full set of drill results was published in early December. Highlights of
oxide results included 70 meters at 0.55% Cu from a 6 meter depth, 79 meters at
0.40% Cu from a 19 meter depth, and 78 meters at 0.50% Cu from surface. Notable
sulfide results included 89.9 meters at 1.0% Cu - 0.02% Mo - 6.4 g/t Ag; 105.2
meters at 0.99% Cu - 0.02% Mo - 7.2 g/t Ag; 260.6 meters at 0.81% Cu - 0.02% Mo
- 5.5 g/t Ag; and 172 meters at 0.91% Cu - 0.01% Mo - 5.4 g/t Ag. For a detailed
table of drill results, please refer to the news release dated December 1, 2006
at www.augustaresource.com.

Note on Pima County OppositionIn January 2007, the
Pima County Board of Supervisors passed a resolution opposing the development of
mineral resources at Rosemont. This was done prior to Augustas completion of
its final feasibility study and comprehensive Plan of Operations, which will be
filed in the second quarter of 2007. The County also requested that all public
land in the County be considered for withdrawal from mineral entry, and
questioned the validity of Augustas mining claims. In February 2007, the US
Forest Service responded to the Pima County Administrators request to challenge
the validity of Augustas mining claims for the Rosemont deposit. In the public
letter, Forest Supervisor Jeanine A. Derby states the following:

Your argument for claim validity challenge was based
primarily on the fact that the company intends to use many of the claims for
mill tailings and waste rock placement. I have received opinions on this topic
from our Office of General Counsel and also from our Regional Geologist in
Albuquerque. Both opinions state that it is not common practice, nor is it
Forest Service policy, to challenge mining claim validity, except when a)
proposed operations are within an area withdrawn from mineral entry, b) when a
patent application is filed, and c) when the agency deems that the proposed uses
are not incidental to prospecting, mining, or processing operations. This last
category includes such management concerns as illegal occupancy or use of mining
claims for non-mining or non-mineral processing purposes.

For operations proposed in accordance with our regulations,
and where the above situations do not exist, there is no basis for pursuing a
validity exam. The placement of waste rock and mill tailings on the Forest are
considered to be activities connected to the mining and mineral processing per
regulation 36CFR228 subpart A, and as such they are authorized activities
regardless of whether they are on or off mining claims.

I appreciate your interest in protecting the environment. I
have the same interest and will be giving particular attention to having an
effective design for mine reclamation when we address the mine operating plan.

The Company notes that the permits and permit review procedures
  to develop Rosemont are the responsibility of federal and state agencies. These
  procedures are well developed and allow for public and County input, however
  the County does not have jurisdiction over mining. The Company remains

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

---

committed to work with local groups and officials in order to
provide for the most effective design and mitigation of impacts. The Company is
advancing a very progressive plan that considers conservation/open land
protection, water protection, water miser design, advanced reclamation
technologies and minimal viewscape impairment.

White Pine County Properties  The Company announced the
acquisition of the Mount Hamilton property located in Nevada in December 2004,
and announced the option of the Shell Deposit property in January 2005. The
Shell Deposit property is situated in close proximity to the Mount Hamilton
property, approximately 35 miles west of Ely, Nevada.

The Mount Hamilton property contains a historical resource of
gold, molybdenum, tungsten and copper and the Shell Deposit property contains a
historical resource of molybdenum, gold and tungsten. Compilation of data from
prior programs has been completed and an updated geological model developed.

An independent Technical Report on Mount Hamilton was filed in
March 2005, which identified a National Instrument 43-101 compliant resource of
309,000 gold ounces in an indicated resource of 6.7 million tonnes of 1.31 g/t
gold, using a cut-off grade of 0.078 g/t gold. Mineralization appears to be open
in several directions, and potentially amenable to open pit mining. On May 11,
2006, the Company announced it had retained Pincock, Allen & Holt, to
conduct a pre-feasibility study at Mount Hamilton. The study is evaluating the
development of the Centennial Deposit as an open-pit heap leach gold mine. The
study is being expanded to assess run of mine heap leaching methods. Additional
metallurgical testing will be required to quantify grade/recovery
characteristics of run of mine leach versus crushed ore, therefore final study
results are not expected until the fourth quarter 2007.

Also in May, the Company announced a 3,000-meter phase I
exploratory drilling program at the Shell Deposit. The drilling program
commenced in August. The Shell Deposit property contains a historical resource
of molybdenum, gold and tungsten, including 469,157 tonnes of 7.4 g/t gold.
Compilation of data from prior programs has been completed and an updated
geological model developed. To date the Company has completed three drill holes,
and final assay results are pending.

Lone Mountain Property  On May 15, 2006 the Company
announced that after completing a detailed geological assessment, the Company
elected not to pursue its option to purchase the Lone Mountain project located
in Grant County, New Mexico.

2007 Growth ObjectivesUpdated Resource
Statement & Feasibility StudyAfter publishing the final drill
results from the 20,000-meter drill program in December, Augusta expects to
publish an updated resource statement in early March 2007. While the statement
was originally scheduled for completion before the end of the year, third party
assay processing delays have impacted the completion date.

The Company continues to work with consultants to advance the
  feasibility study, which is now expected for completion in the second quarter
  as a result of the delay in completing the updated resource statement. Metallurgical
  test work has largely been completed, and engineering is now 90% complete. The
  feasibility study will evaluate the project economics associated with processing
  sulfide ores as well as oxide copper processing.

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

---

PermittingConcurrent with completing the
feasibility study at Rosemont, the Company is preparing a detailed and
comprehensive Plan of Operations for submission to the US Forest Service in the
second quarter of 2007. Using this plan as a basis for permitting, Augusta will
then move through the National Environmental Policy Act permitting process,
whereby the US Forest Service initiates an Environmental Impact Statement and
public review process. The company continues to work with local interests to
address relevant factual concerns and issues as part of the NEPA process.

The US Forest Service is the official agency in charge of
leading the process of reviewing potential project impacts and identifying
relevant mitigation plans resulting from the Plan of Operations. As such, the US
Forest Service is responsible for issuing the final EIS and Record of Decision
after pubic review and comment. These documents and findings are then considered
by other federal and state agencies as they review the permits required to
initiate mineral development on the property.

It normally takes anywhere from 12 to 18 months to complete the
draft EIS and the initial public review process. Another three to six months are
typically required to respond to public comments and prepare the final EIS,
after which the US Forest Service will issue a Record of Decision either
approving the plan or providing recommendations for modifications to the plan.
Subsequent to the Record of Decision, the Company will file a final Plan of
Operations (incorporating any necessary modifications). It is then that permits
would be issued allowing the Company to commence construction. Upon completion
of this process, Augusta expects to receive approval to construct the mine in
2009 and to produce copper at Rosemont in 2010.

FinancingWith approximately C$10 million in
cash on hand as at December 31, 2006, the Company has commenced discussions with
various financial intermediaries in preparation for an expected release of a
positive feasibility study and the subsequent Board of Directors decision to
proceed with the development of Rosemont. The objective is to initially secure
sufficient funding to cover expenditures through to the expected completion of
the permitting process.

MarketingAugusta expects to participate in
several industry conferences throughout 2007. The management team also plans to
expand relationships with both new and existing institutional investors to
ensure our value is understood in the global financial community.

Corporate DevelopmentThe Augusta
management team is committed to advancing the Rosemont project as a cornerstone
asset for growth in becoming a mid-tier copper producer within the next five
years. The Company continues to look for opportunities to acquire exploration,
development and production stage projects, in an effort to position the Company
as a major copper producer in the long term.

For further details please refer to our Financial Statements
and Management Discussion and Analysis.

On behalf of the Board,

|/S/ Gil Clausen                     |              
|----------------------------------- | -------------
|                                    |              
|Gil Clausen                         |              
|President & Chief Executive Officer | March 1, 2007



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

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|                      | Ernst
      & Young LLP       | Phone:
      (604) 891-8200
|--------------------- | ----------------------------- | ---------------------------
|Chartered Accountants | Fax: (604) 643-5422          
|                      |                              
|Pacific Centre        |                              
|                      | 700 West Georgia
      Street |                            
|                      | P.O. Box 10101                |                            
|                      | Vancouver, BC V7Y 1C7         |                            

Auditors Report

To the Shareholders of Augusta Resource Corporation

We have audited the consolidated balance sheet of Augusta
Resource Corporation as at December 31, 2006 and 2005 and the consolidated
statements of shareholders equity, operations and deficit and cash flows for
the 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.

We conducted our audits in accordance with Canadian generally
accepted auditing standards. Those standards require that we plan and perform an
audit to obtain reasonable assurance whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation.

In our opinion, these consolidated financial statements present
fairly, in all material respects, the financial position of the Company as at
December 31, 2006 and 2005 and the results of its operations and its cash flows
for the years then ended in accordance with Canadian generally accepted
accounting principles.

The consolidated financial statements for the year ended
December 31, 2004 were audited by other auditors, who expressed an opinion
without reservation in their report dated April 19, 2005.

As described in Notes 2 and 16(b), the consolidated financial
statements of the Company as at December 31, 2005 and for the year then ended
have been restated. We therefore withdraw our previous report dated March 27,
2006, except as to Note 2, which is as of June 26, 2006.

|                                                           | Ernst & Young LLP    
|---------------------------------------------------------- | ---------------------
|Vancouver, Canada                                          |                      
|February 14, 2007                                          | Chartered Accountants
|                                                           |                      
|(except as to Note 16(b) which is as of February 23, 2007) |                      



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

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|                            | Deloitte & Touche LLP
|--------------------------- | ---------------------
|2800 - 1055 Dunsmuir Street
|4 Bentall Centre           
|P.O. Box 49279             
|                            | Vancouver BC V7X 1P4 
|                            | Canada               
|                            |                      
|                            | Tel: (604) 669-4466  
|                            | Fax: (604) 685-0395  
|                            | www.deloitte.ca      

Report of Independent Registered Chartered
Accountants

To the Shareholders of Augusta Resource Corporation.

We have audited the consolidated statements of operations and
deficit and of cash flows of Augusta Resource Corporation (an exploration stage
company) for the year ended December 31, 2004. 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 audit.

We conducted our audit in accordance with Canadian generally
accepted auditing standards. Those standards require that we plan and perform an
audit to obtain reasonable assurance whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation.

In our opinion, these consolidated financial statements present
fairly, in all material respects, the results of the Companys operations and
its cash flows for the year ended December 31, 2004 in accordance with Canadian
generally accepted accounting principles.

The Company is not required to have, nor were we engaged to
perform, an audit of its internal control over financial reporting. Our audit
included consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Companys internal control over financial reporting. Accordingly, we express no
such opinion.



(Signed) Deloitte & Touche LLP

Independent Registered Chartered Accountants 
  Vancouver, Canada 
  April 19, 2005

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

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AUGUSTA RESOURCE CORPORATION CONSOLIDATED BALANCE SHEETSAs at December 31, 2006 and 2005

|(See Note 1 - Basis of presentation)           |  |       |   |   | December 31 |   |   | December 31                        |  
|---------------------------------------------- |  | ----- | - | - | ----------- | - | - | ---------------------------------- | -
|                                               |  | Notes |   |   | 2006        |   |   | 2005                               |  
|ASSETS                                         |  |       |   |   |             |   |   | (restated, note
      2 and 16(b)) |  
|                                               |  |       |   |   |             |   |   |                                    |  
|CURRENT                                        |  |       |   |   |             |   |   |                                    |  
|Cash and cash equivalents                      |  |       |   | $ | 9,686,886   |   | $ | 2,252,044                          |  
|Accounts
      receivable                      |  | (11   | ) |   | 370,270     |   |   | 28,470                             |  
|Prepaid expenses                               |  |       |   |   | 196,762     |   |   | 48,334                             |  
|Deferred debt
      issuance costs             |  | (7    | ) |   | -           |   |   | 272,796                            |  
|                                               |  |       |   |   | 10,253,918  |   |   | 2,601,644                          |  
|                                               |  |       |   |   |             |   |   |                                    |  
|CAPITAL ASSETS                                 |  | (4    | ) |   | 198,131     |   |   | 9,042                              |  
|                                               |  |       |   |   |             |   |   |                                    |  
|MINERAL PROPERTIES AND                         |  |       |   |   |             |   |   |                                    |  
|DEFERRED DEVELOPMENT                           |  | (5    | ) |   |             |   |   |                                    |  
|Land and mineral properties                    |  |       |   |   | 32,047,699  |   |   | 15,161,604                         |  
|Deferred
      development                     |  |       |   |   | 16,038,783  |   |   | 3,035,560                          |  
|                                               |  |       |   |   | 48,086,482  |   |   | 18,197,164                         |  
|                                               |  |       |   | $ | 58,538,531  |   | $ | 20,807,850                         |  
|                                               |  |       |   |   |             |   |   |                                    |  
|LIABILITIES                                    |  |       |   |   |             |   |   |                                    |  
|                                               |  |       |   |   |             |   |   |                                    |  
|CURRENT                                        |  |       |   |   |             |   |   |                                    |  
|Accounts payable and accrued
      liabilities |  | (11   | ) | $ | 1,792,788   |   | $ | 813,931                            |  
|Current portion
      of convertible debenture |  | (7    | ) |   | -           |   |   | 2,204,032                          |  
|Current portion of notes and
      advances    |  | (6    | ) |   | 1,700,209   |   |   | 1,136,895                          |  
|                                               |  |       |   |   | 3,492,997   |   |   | 4,154,858                          |  
|                                               |  |       |   |   |             |   |   |                                    |  
|LONG-TERM                                      |  |       |   |   |             |   |   |                                    |  
|Future income taxes                            |  | (13   | ) |   | 2,200,000   |   |   | 2,200,000                          |  
|Notes, advances
      and other                |  | (6    | ) |   | 16,369      |   |   | 1,492,267                          |  
|                                               |  |       |   |   | 5,709,366   |   |   | 7,847,125                          |  
|                                               |  |       |   |   |             |   |   |                                    |  
|Commitments                                    |  | (13   | ) |   |             |   |   |                                    |  
|                                               |  |       |   |   |             |   |   |                                    |  
|SHAREHOLDERS' EQUITY                           |  |       |   |   |             |   |   |                                    |  
|                                               |  |       |   |   |             |   |   |                                    |  
|Share capital                                  |  | (8[b] | ) |   | 60,332,348  |   |   | 18,437,248                         |  
|Contributed surplus                            |  | (8[f] | ) |   | 14,764,927  |   |   | 6,226,110                          |  
|Deficit                                        |  |       |   |   | (22,268,110 | ) |   | (11,702,633                        | )
|                                               |  |       |   |   | 52,829,165  |   |   | 12,960,725                         |  
|TOTAL LIABILITIES AND                          |  |       |   |   |             |   |   |                                    |  
|SHAREHOLDERS'
      EQUITY                     |  |       |   | $ | 58,538,531  |   | $ | 20,807,850                         |  

|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 | 9
|---------------------------- | -

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AUGUSTA RESOURCE CORPORATION STATEMENT OF SHAREHOLDERS
EQUITYAs at December 31, 2006 and 2005

DeficitCommon Shares
      
      
      
      
      
      
      
      
      Accumulated
      
      
      TotalWithout Par Value
      
      
      Subscriptions
      
      
      Contributed
      
      
      During
      
      
      Shareholders'Statements of Shareholders' Equity
      Shares
      
      
      Amount
      
      
      Received
      
      
      Surplus
      
      
      Exploration stage
      
      
      EquityBalance, December 31, 2004
      19,764,555
      
      
      4,611,331
      
      
      1,050,000
      
      
      104,500
      
      
      (4,991,105
      )
      
      774,726Issued for convertible debenture issuer bonus
      363,363
      
      
      1,019,233
      
      
      -
      
      
      -
      
      
      -
      
      
      1,019,233Issued for property acquisition
      4,100,000
      
      
      885,000
      
      
      -
      
      
      -
      
      
      -
      
      
      885,000Issued for cash
      8,998,500
      
      
      8,370,551
      
      
      (1,050,000
      )
      
      -
      
      
      -
      
      
      7,320,551Issued for fractional rounding
      9
      
      
      -
      
      
      -
      
      
      -
      
      
      -
      
      
      -Exercise of options
      445,833
      
      
      75,873
      
      
      -
      
      
      -
      
      
      -
      
      
      75,873Exercise of warrants
      4,342,333
      
      
      1,435,260
      
      
      -
      
      
      -
      
      
      -
      
      
      1,435,260Issued for convertible debenture repayment
      1,500,000
      
      
      2,040,000
      
      
      -
      
      
      -
      
      
      -
      
      
      2,040,000Stock-based compensation expense
      -
      
      
      -
      
      
      -
      
      
      1,039,794
      
      
      -
      
      
      1,039,794Share issue costs
      -
      
      
      -
      
      
      -
      
      
      -
      
      
      (1,373,691
      )
      
      (1,373,691
      )Fair value of warrants issued on private
        placements
      -
      
      
      -
      
      
      -
      
      
      2,722,199
      
      
      -
      
      
      2,722,199Fair value of warrants issued on debt negotiations
      -
      
      
      -
      
      
      -
      
      
      288,938
      
      
      -
      
      
      288,938Fair value of warrants issued on debt issuance
      -
      
      
      -
      
      
      -
      
      
      247,769
      
      
      -
      
      
      247,769Fair value of warrants issued on share issuance
      -
      
      
      -
      
      
      -
      
      
      213,631
      
      
      -
      
      
      213,631Fair value of warrants transferred on exercise
      -
      
      
      -
      
      
      -
      
      
      (309,344
      )
      
      -
      
      
      (309,344
      )Fair value of options transferred on exercise
      -
      
      
      -
      
      
      -
      
      
      (24,623
      )
      
      -
      
      
      (24,623
      )Fair value of equity component of convertible
        debenture
      -
      
      
      -
      
      
      -
      
      
      1,478,083
      
      
      -
      
      
      1,478,083Fair value of warrants issued on property acquisition
      -
      
      
      -
      
      
      -
      
      
      465,163
      
      
      -
      
      
      465,163Loss for the period
      -
      
      
      -
      
      
      -
      
      
      -
      
      
      (5,337,837
      )
      
      (5,337,837
      )Balance, December 31, 2005
      39,514,593
      
      
      18,437,248
      
      
      -
      
      
      6,226,110
      
      
      (11,702,633
      )
      
      12,960,725Exercise of options
      195,667
      
      
      53,020
      
      
      -
      
      
      -
      
      
      -
      
      
      53,020Exercise of warrants
      9,828,807
      
      
      4,430,223
      
      
      -
      
      
      -
      
      
      -
      
      
      4,430,223Stock-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
      
      
      -
      
      
      1,030,524Fair value of warrants transferred on exercise
      -
      
      
      -
      
      
      -
      
      
      (842,464
      )
      
      -
      
      
      (842,464
      )Fair value of options transferred on exercise
      -
      
      
      -
      
      
      -
      
      
      (15,920
      )
      
      -
      
      
      (15,920
      )Loss for the period
      -
      
      
      -
      
      
      -
      
      
      -
      
      
      (6,659,591
      )
      
      (6,659,591
      )Balance, December 31, 2006
      72,749,067
      
      $
      60,332,348
      
      $
      -
      
      $
      14,764,927
      
      $
      (22,268,110
      )
      $
      52,829,165


See accompanying Notes to the Consolidated Financial Statements

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

---

AUGUSTA RESOURCE CORPORATION CONSOLIDATED STATEMENTS OF
OPERATIONS AND DEFICITFor the Years Ended December 31, 2006, 2005
and 2004

|                                 |  |       |   |   | Year
      Ended December 31 |  
|-------------------------------- |  | ----- | - | - | ---------------------------- | -
|                                 |  | Notes |   |   | 2006                         |  
|                                 |  |       |   |   | (restated, note 2 and 16(b)) |  
|EXPENSES                         |  |       |   |   |                              |  
|Salaries,benefits and bonuses    |  |       |   | $ | 2,088,317                    |  
|Stock based compensation         |  | (8[d] | ) |   | 1,679,534                    |  
|Travel                           |  |       |   |   | 346,014                      |  
|Write-off of mining assets       |  | (5    | ) |   | 309,550                      |  
|Office and sundry                |  |       |   |   | 253,354                      |  
|Filing and regulatory            |  |       |   |   | 235,366                      |  
|Investor relations               |  |       |   |   | 215,253                      |  
|Accounting and audit             |  |       |   |   | 159,352                      |  
|Consulting and communication     |  |       |   |   | 118,252                      |  
|Legal fees                       |  |       |   |   | 112,633                      |  
|Insurance                        |  |       |   |   | 80,975                       |  
|Fiscal and advisory services     |  |       |   |   | 46,306                       |  
|Recruitment fees                 |  |       |   |   | 45,228                       |  
|Administration                   |  | (11   | ) |   | 17,500                       |  
|Amortization                     |  |       |   |   | 13,495                       |  
|Foreign exchange gain            |  |       |   |   | (83,078                      | )
|Other expenses (revenues)        |  |       |   |   | 194,901                      |  
|                                 |  |       |   |   |                              |  
|Loss from operations             |  |       |   |   | (5,832,952                   | )
|Interest and other income        |  |       |   |   | 631,509                      |  
|Debt issuance costs              |  | (7    | ) |   | (272,796                     | )
|Loss on repayment of debenture   |  |       |   |   | -                            |  
|Interest and finance charges     |  |       |   |   | (1,185,352                   | )
|                                 |  |       |   |   |                              |  
|NET LOSS                         |  |       |   |   | (6,659,591                   | )
|                                 |  |       |   |   |                              |  
|Deficit, beginning of the period |  |       |   |   | (11,702,633                  | )
|Change in accounting policy      |  |       |   |   | -                            |  
|Share issue costs                |  |       |   |   | (3,905,886                   | )
|                                 |  |       |   |   |                              |  
|DEFICIT, END OF PERIOD           |  |       |   | $ | (22,268,110                  | )
|                                 |  |       |   |   |                              |  
|BASIC & DILUTED LOSS PER SHARE   |  |       |   | $ | (0.11                        | )
|                                 |  |       |   |   |                              |  
|WEIGHTED AVERAGE NUMBER          |  |       |   |   |                              |  
|OF SHARES OUTSTANDING            |  |       |   |   | 59,219,428                   |  

See accompanying Notes to the Consolidated Financial Statements

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

---

AUGUSTA RESOURCE CORPORATION CONSOLIDATED STATEMENTS OF
CASH FLOWS For the Years Ended December 31, 2006, 2005 and 2004

|                                                                |  | Notes |   |   | 2006                         |   |   | 2005        |   |   | 2004      |  
|--------------------------------------------------------------- |  | ----- | - | - | ---------------------------- | - | - | ----------- | - | - | --------- | -
|                                                                |  |       |   |   | (restated, note 2 and 16(b)) |  
|NET INFLOW (OUTFLOW) OF CASH RELATED TO                         |  |       |   |   |                              |   |   |             |   |   |           |  
|THE FOLLOWING:                                                  |  |       |   |   |                              |   |   |             |   |   |           |  
|                                                                |  |       |   |   |                              |   |   |             |   |   |           |  
|OPERATING                                                       |  |       |   |   |                              |   |   |             |   |   |           |  
|Net loss for the period                                         |  |       |   | $ | (6,659,591                   | ) | $ | (5,337,837  | ) | $ | (866,057  | )
|Items not affecting cash:                                       |  |       |   |   |                              |   |   |             |   |   |           |  
|Stock based compensation                                        |  | (8[d] | ) |   | 1,679,534                    |   |   | 1,039,794   |   |   | 41,250    |  
|Accretion interest on debt                                      |  |       |   |   | 1,064,145                    |   |   | 1,972,663   |   |   | -         |  
|Debt issuance costs                                             |  | (7    | ) |   | 272,796                      |   |   | 325,628     |   |   | -         |  
|Amortization                                                    |  |       |   |   | 13,495                       |   |   | 1,594       |   |   | -         |  
|Unrealized foreign exchange gain                                |  |       |   |   | (10,307                      | ) |   | (165,960    | ) |   | -         |  
|Write-off of mining assets                                      |  | (5    | ) |   | 309,550                      |   |   | 251,501     |   |   | 509,154   |  
|Loss on repayment of debenture                                  |  |       |   |   | -                            |   |   | 390,000     |   |   | -         |  
|Other                                                           |  |       |   |   | (5,035                       | ) |   | (11,916     | ) |   | -         |  
|                                                                |  |       |   |   | (3,335,413                   | ) |   | (1,534,533  | ) |   | (315,653  | )
|                                                                |  |       |   |   |                              |   |   |             |   |   |           |  
|Net changes in non-cash working
      capital items:            |  | (9    | ) |   | (95,903                      | ) |   | (148,172    | ) |   | (102,479  | )
|Net cash flows used in operating activities                     |  |       |   |   | (3,431,316                   | ) |   | (1,682,705  | ) |   | (418,132  | )
|                                                                |  |       |   |   |                              |   |   |             |   |   |           |  
|FINANCING                                                       |  |       |   |   |                              |   |   |             |   |   |           |  
|Issuance of common shares                                       |  |       |   |   | 3,624,859                    |   |   | 11,219,916  |   |   | 530,000   |  
|Issuance of convertible debt security                           |  |       |   |   | -                            |   |   | 6,000,000   |   |   | -         |  
|Repayment of convertible debt
      security                    |  |       |   |   | (3,000,000                   | ) |   | (1,350,000  | ) |   | -         |  
|Advance (repayment) of notes and advances                       |  |       |   |   | (1,165,420                   | ) |   | (3,900      | ) |   | 644       |  
|Issuance of special warrants                                    |  | (8[c] | ) |   | 44,099,000                   |   |   | -           |   |   | -         |  
|Subscriptions for common shares                                 |  |       |   |   | -                            |   |   | -           |   |   | 1,050,000 |  
|Share issue costs                                               |  |       |   |   | (2,875,362                   | ) |   | (1,221,777  | ) |   | (80,500   | )
|Net cash flows from financing activities                        |  |       |   |   | 40,683,077                   |   |   | 14,644,239  |   |   | 1,500,144 |  
|                                                                |  |       |   |   |                              |   |   |             |   |   |           |  
|INVESTING                                                       |  |       |   |   |                              |   |   |             |   |   |           |  
|Investment in mineral properties,
      net of related payables |  | (5    | ) |   | (17,138,774                  | ) |   | (8,466,846  | ) |   | -         |  
|Deferred development , net of related payables                  |  | (5    | ) |   | (12,475,561                  | ) |   | (2,597,707  | ) |   | (57,591   | )
|Investment in fixed assets                                      |  |       |   |   | (202,584                     | ) |   | (10,636     | ) |   | (37,157   | )
|Acquisition of DHI Minerals Ltd.                                |  |       |   |   | -                            |   |   | (624,100    | ) |   | -         |  
|Net cash flows used in investing activities                     |  |       |   |   | (29,816,919                  | ) |   | (11,699,289 | ) |   | (94,748   | )
|                                                                |  |       |   |   |                              |   |   |             |   |   |           |  
|NET CASH INFLOW                                                 |  |       |   |   | 7,434,842                    |   |   | 1,262,245   |   |   | 987,264   |  
|CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                  |  |       |   |   | 2,252,044                    |   |   | 989,799     |   |   | 2,535     |  
|CASH AND CASH EQUIVALENTS, END OF PERIOD                        |  |       |   | $ | 9,686,886                    |   | $ | 2,252,044   |   | $ | 989,799   |  
|                                                                |  |       |   |   |                              |   |   |             |   |   |           |  
|SUPPLEMENTAL INFORMATION                                        |  | (10   | ) |   |                              |   |   |             |   |   |           |  
|Interest Paid                                                   |  |       |   | $ | 135,000                      |   | $ | 273,389     |   | $ | 10,909    |  
|Interest Received                                               |  |       |   | $ | 345,973                      |   | $ | 40,817      |   | $ | -         |  

See accompanying Notes to the Consolidated Financial Statements

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

---

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSDECEMBER 31, 2006, 2005 AND 2004

|1. | NATURE OF BUSINESS AND BASIS OF
      PRESENTATION                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   | Augusta Resource Corporation (the Company) was
      continued under the Canadian Business Corporations Act. The Company has
      interests in mining assets at the exploration stage, the economic
      viability of which has not been assessed. The realization of the companys
      investment in mineral properties is dependent upon various factors,
      including the existence of economically recoverable mineral reserves, the
      ability to obtain the necessary financing to complete the exploration and
      development of the properties, future profitable operations, or,
      alternatively, upon disposal of the investment at amounts sufficient to
      recover capitalized expenditures. The Company is considered to be a
      development stage enterprise as it has yet to generate significant revenue
      from operations.                                                                                                                                                                                                                                                     
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   | 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. The Company incurred
      a loss of $6,659,591 for the year ended at December 31, 2006 (2005 -
      $5,337,837; 2004 - $866,057) and has an accumulated deficit of $22,268,110
      as at December 31, 2006. The losses have been funded primarily by the
      issuance of equity. The Companys ability to continue as a going concern
      is uncertain and dependent on its ability to achieve profitable
      operations, on its ability to obtain additional capital and on the
      continued support of its shareholders and creditors. Management plans to
      raise additional capital to finance expected mine development however its
      ability to do so is uncertain and the timing of any additional financing
      cannot be predicted at this time.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   | These consolidated financial statements do not include
      any adjustment to the amounts and classifications of assets and
      liabilities, which might be necessary should the Company be unable to
      continue in business.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   | As the Company is listed on the American Stock Exchange
      (AMEX) a reconciliation from Canadian to United Stated (US ) GAAP is
      required (Note 16).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|2. | RESTATEMENT                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   | During the preparation of the Form 40-F filing document,
      a requirement of an AMEX listing the Company was pursuing, the Company
      discovered non-cash errors relating to its financial statements for the
      first quarter ended March 31, 2006 as well as for each quarter of 2005
      including the 2005 year end audited financial statements. In the
      previously released financial statements the Company had not properly
      accounted for the convertible debenture issued on June 1, 2005. Canadian
      GAAP requires that the proceeds received from the issuance of convertible
      debt be allocated between its equity and debt components. The Company had
      treated all the proceeds as debt. Further, upon review of the option
      pricing model (Black-Scholes) used for valuing stock options and warrants
      issued during 2005, the Company concluded that the time period used to
      calculate the volatility assumption required
adjustment.                                                                                                                    



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

---

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSDECEMBER 31, 2006, 2005 AND 2004

|2. | RESTATEMENT(continued)                                                      
|-- | ----------------------------------------------------------------------------
|   |                                                                             
|   | Through and as at December 31, 2005 the impact of the
      restatement was:

| |                                        |  | As previously |   |  | Adjustments |   |  | As restated |  
| | -------------------------------------- |  | ------------- | - |  | ----------- | - |  | ----------- | -
| |                                        |  | reported      |   |  |             |   |  |             |  
| |                                        |  |               |   |  |             |   |  |             |  
| |                                        |  |               |   |  |             |   |  |             |  
| | Balance Sheet                          |  |               |   |  |             |   |  |             |  
| | Deferred debt
      Issuance costs     |  | 1,132,792     |   |  | (859,996    | ) |  | 272,796     |  
| | Current portion of convertible debt    |  | 3,000,000     |   |  | (795,968    | ) |  | 2,204,032   |  
| | Share capital                          |  | 17,392,510    |   |  | 1,044,738   |   |  | 18,437,248  |  
| | Contributed surplus                    |  | 7,177,811     |   |  | (951,701    | ) |  | 6,226,110   |  
| | Deficit                                |  | (11,545,568   | ) |  | (157,065    | ) |  | (11,702,633 | )
| |                                        |  |               |   |  |             |   |  |             |  
| |                                        |  |               |   |  |             |   |  |             |  
| |                                        |  |               |   |  |             |   |  |             |  
| | Statement of operations                |  |               |   |  |             |   |  |             |  
| | Stock
      based compensation         |  | 1,550,871     |   |  | (511,077    | ) |  | 1,039,794   |  
| | Loss from
      operations             |  | (3,665,751    | ) |  | 1,254,661   |   |  | (2,411,090  | )
| | Debt
      issuance costs              |  | (1,069,212    | ) |  | 743,584     |   |  | (325,628    | )
| | Interest and
      finance charges     |  | (567,204      | ) |  | (1,701,348  | ) |  | (2,268,552  | )
| | Net
      loss for the period          |  | (4,891,150    | ) |  | (446,687    | ) |  | (5,337,837  | )
| | Share issue
      expenses             |  | (1,663,313    | ) |  | 289,622     |   |  | (1,373,691  | )
| | Deficit, end of period                 |  | (11,545,568   | ) |  | (157,065    | ) |  | (11,702,633 | )
| | Basic and diluted
      loss per share |  | (0.15         | ) |  | (0.02       | ) |  | (0.17       | )
| |                                        |  |               |   |  |             |   |  |             |  
| | Statement of cash flows                |  |               |   |  |             |   |  |             |  
| | Net
      loss for the period          |  | (4,891,150    | ) |  | (446,687    | ) |  | (5,337,837  | )
| | Discount interest
      on debt        |  | 271,315       |   |  | 1,701,348   |   |  | 1,972,663   |  
| | Debt
      issue costs                 |  | 1,069,212     |   |  | (743,584    | ) |  | 325,628     |  
| | Stock based
      compensation         |  | 1,550,871     |   |  | (511,077    | ) |  | 1,039,794   |  

|3. | SIGNIFICANT ACCOUNTING POLICIES
|-- | -------------------------------
|   |                                
|   | (a)                            
|   |                                
|   |                                



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

---

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSDECEMBER 31, 2006, 2005 AND 2004

|3. | SIGNIFICANT ACCOUNTING POLICIES(continued)
|-- | ------------------------------------------
|   |                                           
|   | (b)                                       
|   |                                           
|   |                                           
|   |                                           
|   |                                           
|   |                                           
|   |                                           
|   |                                           
|   | (c)                                       
|   |                                           
|   |                                           
|   |                                           
|   | (d)                                       
|   |                                           
|   |                                           

Buildings
    10 yearsComputer Software
    3 yearsComputer Hardware
    5 yearsFurniture & Equipment
    5 years


| | (e) | Mineral properties and deferred development
      costs                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |     | Mineral properties and deferred development are comprised
      of undivided interests in properties and option payments to acquire
      properties and deferred exploration and development expenses on properties
      in the exploration stage. They are recorded at acquisition cost or at a
      reduced carrying value amount if effected by a permanent impairment of
      value. Mining properties, related deferred exploration and development
      expenses and options to acquire undivided interests in mining properties
      are amortized only as these properties are put into production or written
      off if they are abandoned.                      
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |     | During the normal course of its business, the Company
      enters into agreements or option agreements to acquire undivided interests
      in mining properties, which are normally acquired in exchange for
      exploration and development expenses to be incurred according to different
      schedules, issuance of shares and payments subject to feasibility studies.
      In addition, royalties will be paid on commercial operations of certain
      mining properties. In the event the agreement to acquire property is an
      option agreement failure to make all payments in accordance with the
      agreement will result in forfeiture of the
property.



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

---

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

  DECEMBER 31, 2006,2005 AND 2004

|3. | SIGNIFICANT ACCOUNTING POLICIES(continued)
|-- | ------------------------------------------
|   |                                           
|   | (e)                                       
|   |                                           
|   |                                           
|   |                                           
|   | (f)                                       
|   |                                           
|   |                                           
|   |                                           
|   |                                           
|   |                                           
|   |                                           
|   |                                           
|   | (g)                                       
|   |                                           
|   |                                           
|   |                                           
|   | (h)                                       
|   |                                           
|   |                                           



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

---

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

  DECEMBER 31, 2006,2005 AND 2004

|3. | SIGNIFICANT ACCOUNTING POLICIES(continued)
|-- | ------------------------------------------
|   |                                           
|   | (i)                                       
|   |                                           
|   |                                           
|   |                                           
|   |                                           
|   |                                           
|   |                                           
|   |                                           
|   |                                           
|   |                                           
|   |                                           
|   |                                           
|   | (j)                                       
|   |                                           
|   |                                           
|   |                                           
|   | (k)                                       
|   |                                           
|   |                                           



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

---

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

  DECEMBER 31, 2006, 2005 AND 2004

|3. | SIGNIFICANT ACCOUNTING POLICIES(continued)
|-- | ------------------------------------------
|   |                                           
|   | (l)                                       
|   |                                           
|   |                                           
|   |                                           
|   | (m)                                       
|   |                                           
|   |                                           
|   |                                           
|   | (n)                                       
|   |                                           
|   |                                           
|   |                                           
|   |                                           
|   |                                           
|   |                                           



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

---

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

  DECEMBER 31, 2006, 2005 AND 2004

|4. | CAPITAL ASSETS
|-- | --------------

| |                         |   | December
      31, 2006 |  |   | December
      31, 2005 | 
| | ----------------------- | - | ----------------------- |  | - | ----------------------- | 
| |                         |   |                         |  |   | Accumulated             | 
| |                         |   | Cost                    |  |   | Amortization            | 
| |                         |   |                         |  |   |                         | 
| | Buildings               | $ | 108,463                 |  | $ | -                       | 
| | Computer Software       |   | 37,113                  |  |   | 5,426                   | 
| | Furniture and Equipment |   | 34,828                  |  |   | 3,307                   | 
| | Computer Hardware       |   | 32,982                  |  |   | 6,522                   | 
| |                         |   |                         |  |   |                         | 
| |                         | $ | 213,386                 |  | $ | 15,255                  | 

|5. | MINERAL PROPERTIES AND DEFERRED DEVELOPMENT
      COSTS
|-- | -------------------------------------------------------

| |                                                         |   | Mineral Properties Cost |   |   | Deferred Development Expenses |  
| | ------------------------------------------------------- | - | ----------------------- | - | - | ----------------------------- | -
| |                                                         |   | December 31             |   |   | December 31                   |  
| | Mineral Properties and
      Deferred Development       |   | 2006                    |   |   | 2005                          |  
| | Rosemont property                                       | $ | 25,017,429              |   | $ | 8,315,611                     |  
| | Mt. Hamilton property                                   |   | 6,801,978               |   |   | 6,574,757                     |  
| | Shell property                                          |   | 228,292                 |   |   | -                             |  
| | Lone Mountain property                                  |   | -                       |   |   | 271,236                       |  
| |                                                         | $ | 32,047,699              |   | $ | 15,161,604                    |  
| |                                                         |   |                         |   |   |                               |  
| |                                                         |   |                         |   |   |                               |  
| | Mineral properties:                                     |   | 2006                    |   |   | 2005                          |  
| | Balance, beginning of period                            | $ | 15,161,604              |   | $ | 285,064                       |  
| | Acquisition
      costs                                 |   | 17,157,330              |   |   | 15,124,447                    |  
| | Lone Mountain
      cost adjustment                     |   | (24,993                 | ) |   | -                             |  
| | Write-offs                                              |   | (246,242                | ) |   | (247,907                      | )
| | Balance, December 31, 2006
      and 2005               |   | 32,047,699              |   |   | 15,161,604                    |  
| |                                                         |   |                         |   |   |                               |  
| |                                                         |   |                         |   |   |                               |  
| | Deferred development:                                   |   |                         |   |   |                               |  
| | Balance, beginning of period                            |   | 3,035,560               |   |   | 19,785                        |  
| | Work program
      expenditures (1)                     |   | 13,066,531              |   |   | 3,019,369                     |  
| | Write-offs                                              |   | (63,308                 | ) |   | (3,594                        | )
| | Balance, December 31, 2006
      and 2005               |   | 16,038,783              |   |   | 3,035,560                     |  
| |                                                         |   |                         |   |   |                               |  
| | Total Mineral Properties and
      Deferred Development | $ | 48,086,482              |   | $ | 18,197,164                    |  

| | (1) | Includes geological, engineering and environmental work
      programs designed to advance the development of the mineral
    property.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------



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

---

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

  DECEMBER 31, 2006, 2005 AND 2004

|5. | MINERAL PROPERTIES AND DEFERRED DEVELOPMENT(continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | 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 Phelps Dodge and Asarco.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | Rosemont Property, Arizona (continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | 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 14,880 acres (6,026 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 2005, on March 31, 2006 the
      Company exercised its option to purchase all of the Rosemont property with
      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, in August 2006 additional land was acquired
      totaling approximately $550,000. To December 31, 2006 total expenditures
      capitalized to mineral properties were $25.0 million.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | During 2006, $12.6 million was incurred on engineering,
      geological and environmental programs designed to advance the development
      of the Rosemont property. To December 31, 2006, expenditures related to
      deferred development totaled $15.5 million.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | Properties in White Pine County, Nevada                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | Mount Hamilton                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | On December 2, 2004, the Company announced the signing of
      an agreement to acquire a 100% interest in the Mount Hamilton property,
      located in White Pine County, Nevada. The Company purchased the Mount
      Hamilton property by purchasing 100% of the shares of DHI Minerals Ltd.,
      which owns 100% of DHI Minerals (U.S.) Ltd., holder of the property. The
      terms of the acquisition include the payment of US $3,000,000 payable in
      cash over two years (Net present value of $3,103,438, based on an annual
      discount rate of 15%), 3,750,000 common shares at US $0.16 ($0.19) per
      share (with a fair market value at the date of the transaction of
      $720,000) and 3,750,000 warrants to purchase common shares with an
      exercise price of US $0.16 ($0.19) per share for a period of two years.
      The fair value of the warrants calculated using the Black-Scholes
      option-pricing model at the date of the transaction of was
  $465,163.



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

---

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

  DECEMBER 31, 2006, 2005 AND 2004

|5. | MINERAL PROPERTIES AND DEFERRED DEVELOPMENT(continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   | Properties in White Pine County, Nevada                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   | Mount Hamilton(continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   | Under the terms of the acquisition the Company assumed
      the underlying NSR and minimum advance royalty payments to Centennial
      Minerals Company, LLC, payable prior to commercial production of US
      $100,000 per annum commencing on November 19, 2005 and continuing until
      November 19, 2010 when the annual payment amount increases to US $300,000
      per annum. Upon commencement of commercial production, a base rate of 3%
      NSR is payable, subject to an increase whenever the price of gold is
      greater than US $400 per ounce. The NSR shall increase by one half of one
      percent for each US $50 increment to a maximum of 8% NSR. The Company has
      the option to purchase up to one and one half percentage points of the NSR
      for US $2,000,000.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   | Effective May 6, 2005, the Company acquired 100% (1)of the outstanding common shares of DHI Minerals Ltd. The entire
      purchase consideration was allocated to the mineral property acquired,
      including a deferred taxation provision of
$2,200,000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

Purchase price:$3,000,000 USD (cash)
    $
    3,103,4383,750,000 common shares at $0.16 USD ($0.19
      CDN)
    
    720,0003,750,000 warrants for common shares at $0.16 USD
    
    465,163300,000 common shares issued for a finder's
      fee
    
    49,000Future income tax liability
    
    2,200,000$
    6,537,601


The purchase price has been determined
based on the fair value of the consideration provided and allocated to the Mount
Hamilton property and mineral rights. Additional amounts capitalized in 2005 and
2006 include the advance royalty payments of approximately $113,600 (US
$100,000) per annum plus during 2005 an additional $37,156 of professional
fees.

To December 31, 2006 deferred
development costs totaled $378,670 and include expenditures on geological and
engineering studies designed to advance the development of the property.

(1)Subject to an Escrow Agreement
  pursuant to which, 33% of the shares are held pending final payment of US $1,500,000
  due on April 20, 2007.

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

---

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

  DECEMBER 31, 2006, 2005 AND 2004

|5. | MINERAL PROPERTIES AND DEFERRED DEVELOPMENT(continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   | Properties in White Pine County, Nevada
      (continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   | Shell Deposit                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   | On January 26, 2005, the Company announced the signing of
      agreements to acquire the Shell Deposit in White Pine County, Nevada.
      Formal agreements were entered into effective March 20, 2006. The Shell
      Deposit, located nearby the Mount Hamilton property, was subject to past
      exploration programs, with results indicating that the property hosted
      molybdenum and gold mineralization. The Company is acquiring a 100%
      working interest, subject to an underlying NSR ranging from 0.5% - 4.5%,
      for a cash payment of US $120,000, and annual advance royalty payments
      commencing at US $80,000 on first anniversary increasing by US $20,000 per
      year until production commences. Through December 31, 2006 a total of
      $228,292 ($US 200,000) has been capitalized as mineral properties and
      $183,434 related to engineering and geological work programs has been
      capitalized as deferred development costs.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   | Lone Mountain property, New Mexico                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   | On March 1, 2005, the Company announced the signing of an
      agreement to acquire the Lone Mountain property in New Mexico. The
      agreement provided for the acquisition of a 100% working interest, subject
      to an underlying NSR ranging from 2.0% - 3.0%, minimum exploration
      commitments of US $4,850,000, US $500,000 to be completed in a reasonable
      time frame when the surface access is agreed, and payments of US
      $1,000,000 cash and 325,000 common shares over a 3 year period. The
      agreement took effect on May 11, 2005. The Company paid US $100,000 and
      issued 50,000 common shares (FMV - $120,000) to date. The shares were
      valued at $2.40 per share, which was the fair value at the time the
      agreement was entered into. The total amount capitalized to mining
      properties at December 31, 2005 was $271,236.                                                                                             
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   | On May 15, 2006 the Company announced that after
      completing a detailed geological assessment that it had elected not to
      pursue its option to purchase the Lone Mountain property. In the second
      quarter net capitalized amounts totaling $309,550 were written
  off.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   | Properties in the Coronation Diamond District,
      Nunavut, Canada                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   | In 2003, the Company entered into property option
      agreements to acquire working interests of 10% and 20% in 4 properties
      located in the Coronation Diamond District in Nunavut, Canada which
      required the Company to pay cash amounts totaling $231,573 and the
      issuance of 116,670 common shares. Subsequent to the initial transactions
      further amounts were paid to acquire additional working
  interests.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               



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

---

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

  DECEMBER 31, 2006, 2005 AND 2004

|**5.** | MINERAL PROPERTIES AND DEFERRED DEVELOPMENT(continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|------ | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|       | Properties in the Coronation Diamond District,
      Nunavut, Canada (continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|       | As at December 31, 2005, the Company had paid $469,705
      acquiring working interests in six properties, incurred $215,949 in
      relation to deferred exploration expenditures related to these properties,
      issued 33,334 shares at fair market value at the date of the transaction
      of $0.11 per share and 58,335 shares at $0.28 per share, and accrued an
      amount of $55,000 included in accounts payable, which was agreed to be
      settled by the issuance of shares of the Company subject to regulatory
      approval. An assessment of the carrying value in 2004 resulted in the
      write- down of $296,799 in mining properties and $212,355 in deferred
      development expenses. At December 31, 2005, as the Company is no longer
      actively developing these properties, it has written off the remaining
      costs, $247,907 in mineral properties and $3,594 in deferred development
      expenses.
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|6.     | LONG TERM NOTES AND
  ADVANCES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

December 31
      
      
      December 312006
      
      
      2005Notes and advances
    $
      39,657
    
    $
      44,692Long term notes
    
      1,676,921
    
    
      2,584,4701,716,578
    
    
      2,629,162Less: Current portion
    
      (1,700,209
    )
    
      (1,136,895
    )Total long term notes and
      advances
    $
      16,369
    
    $
      1,492,267


The purchase of the Mount Hamilton
property included cash consideration of US $3,000,000 (net present value of
$3,103,438 discounted using an interest rate 15%). An initial installment
payment of US $500,000 ($620,100) was paid in the second quarter of 2005 and the
remaining consideration comprised two non-interest bearing US dollar notes
totaling US $2,500,000 which were discounted using an interest rate of 15%. On
June 30, 2006 the US $1,000,000 ($1,165,400) note was repaid. The remaining note
of US $1,500,000 (with a net present value of $1,676,921 and Canadian equivalent
of $1,747,950 at December 31, 2006) is due on April 20, 2007.

Other notes and advances do not provide
  for specific terms of repayment and are unsecured.

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

---

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSDECEMBER 31, 2006, 2005 AND 2004

|7. | 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 lender 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.).
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   | 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 | 24
|---------------------------- | --

---

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSDECEMBER 31, 2006, 2005 AND 2004

|7. | CONVERTIBLE DEBENTURE(continued)
|-- | --------------------------------

| |                                                         |   | December 31 |   |   | December 31 |  
| | ------------------------------------------------------- | - | ----------- | - | - | ----------- | -
| |                                                         |   | 2006        |   |   | 2005        |  
| |                                                         |   |             |   |   |             |  
| | Convertible debenture, beginning of period              | $ | 2,204,032   |   | $ | -           |  
| | Convertible debenture issued                            |   | -           |   |   | 3,502,684   |  
| | Accretion of discount interest                          |   | 795,968     |   |   | 1,701,348   |  
| | Repayment of debenture                                  |   | (3,000,000  | ) |   | (3,000,000  | )
| |                                                         |   |             |   |   |             |  
| | Convertible debenture, end of period                    | $ | -           |   | $ | 2,204,032   |  
| |                                                         |   |             |   |   |             |  
| |                                                         |   |             |   |   |             |  
| | Deferred debt issuance costs, beginning of
      period | $ | 272,796     |   | $ | -           |  
| | Debt issuance costs - incurred                          |   | -           |   |   | 598,424     |  
| | Debt issuance costs - amortized                         |   | (272,796    | ) |   | (325,628    | )
| |                                                         |   |             |   |   |             |  
| | Deferred debt issuance costs, end of period             | $ | -           |   | $ | 272,796     |  

|8. | SHARE CAPITAL
|-- | -------------

| | (a) | Authorized:                                        
      Unlimited number of common shares without par value.
| | --- | --------------------------------------------------------------------------------------------------------------
| |     |                                                                                                               
| | (b) | Issued:                                                                                                       

Changes in the Companys share capital
were as follows:

| |                                                                 |  | Number
      of |  |   |            | 
| | --------------------------------------------------------------- |  | --------------- |  | - | ---------- | 
| |                                                                 |  | Shares          |  |   | Amount     | 
| | Common shares, Balance at December 31, 2003                     |  | 9,164,555       |  | $ | 4,081,331  | 
| | Issued for finder's fees                                        |  | 140,000         |  |   | 7,000      | 
| | Issued for cash                                                 |  | 10,460,000      |  |   | 523,000    | 
| | Common shares,
      Balance at December 31, 2004               |  | 19,764,555      |  | $ | 4,611,331  | 
| | Issued to convertible debenture
      holder                    |  | 363,363         |  |   | 1,019,233  | 
| | Issued for convertible debenture repayment                      |  | 1,500,000       |  |   | 2,040,000  | 
| | Issued for property acquisitions                                |  | 4,100,000       |  |   | 885,000    | 
| | Issued for cash                                                 |  | 8,998,500       |  |   | 8,370,551  | 
| | Issued for fractional rounding due to
      share consolidation |  | 9               |  |   | -          | 
| | Issued for options exercised                                    |  | 445,833         |  |   | 75,873     | 
| | Issued for warrants exercised                                   |  | 4,342,333       |  |   | 1,435,260  | 
| | 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 | 



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

---

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSDECEMBER 31, 2006, 2005 AND 2004

|8. | SHARE CAPITAL(continued)
|-- | ------------------------
|   |                         
|   | (c)                     
|   |                         
|   |                         
|   |                         
|   |                         
|   |                         
|   |                         
|   |                         
|   | (d)                     
|   |                         
|   |                         

2006Average ExerciseNumber
        of Shares
    
    
      PriceOutstanding at beginning of
      year
    
      3,226,834
    
    $
      1.51Granted
    
      1,885,000
    
    $
      2.05Exercised
    
      (195,667
    )
    $
      0.19Cancelled
    
      (115,000
    )
    $
      2.20Outstanding at end of period
    
      4,801,167
    
    $
      1.76Options exercisable at December 31, 2006
    
      1,573,667
    
    $
      1.63  Augusta Resource Corporation
      26


---

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSDECEMBER 31, 2006, 2005 AND 2004

|8. | SHARE CAPITAL(continued)
|-- | ------------------------
|   |                         
|   | (d)                     
|   |                         
|   |                         

| |                                   |  | 2006         |  |  | 2005         |  |  | 2004         | 
| | --------------------------------- |  | ------------ |  |  | ------------ |  |  | ------------ | 
| | Valuation assumptions             |  |              |  |  |              |  |  |              | 
| | Expected term
      (years)       |  | 3            |  |  | 3 - 4        |  |  | 5            | 
| | Expected volatility               |  | 99 - 108%    |  |  | 49 - 82%     |  |  | 117 - 125%   | 
| | Weighted average
      volatility |  | 103%         |  |  | 72%          |  |  | 118%         | 
| | Expected dividend yield           |  | -            |  |  | -            |  |  | -            | 
| | Risk-free interest
      rate     |  | 4.09 - 4.14% |  |  | 3.17 - 4.21% |  |  | 3.82 - 3.83% | 
| | Weighted average risk-free rate   |  | 4.12%        |  |  | 4.07%        |  |  | 3.83%        | 

The following table summarizes stock
options outstanding at December 31, 2006:

Options
        Outstanding and ExercisableWeightedNumber
      Average
      Weighted
      Number
      WeightedOutstanding at
      Remaining
      Average
      Exercisable at
      AverageExercise
      December 31,
      Contractual
      Exercise
      December 31,
      ExercisePrices
      2006
      Life
      Prices
      2006
      Prices$      0.33
      66,667
      0.4 Years
      $ 0.33
      66,667
      $      0.33$      0.10
      104,500
      2.9 Years
      $ 0.10
      104,500
      $      0.10$      2.05
      450,000
      3.3 Years
      $ 2.05
      337,500
      $      2.05$      1.96
      125,000
      3.3 Years
      $ 1.96
      93,750
      $      1.96$      2.30
      100,000
      3.6 Years
      $ 2.30
      100,000
      $      2.30$      1.56
      2,035,000
      3.7 Years
      $ 1.56
      696,250
      $      1.56$      1.55
      150,000
      3.8 Years
      $ 1.55
      75,000
      $      1.55$      2.07
      816,000
      4.3 Years
      $ 2.07
      -
      $      2.07$      2.20
      539,000
      4.3 Years
      $ 2.20
      100,000
      $      2.20$      1.78
      365,000
      4.6 Years
      $ 1.78
      -
      $      1.78$      1.90
      50,000
      4.6 Years
      $ 1.90
      -
      $      1.904,801,167
      3.5
        Years
      $
        1.76
      1,573,667
      $      1.63  Augusta Resource Corporation
      27


---

|8. | SHARE CAPITAL(continued)
|-- | ------------------------
|   |                         
|   | (e)                     
|   |                         
|   |                         

Outstanding at
    
    
    
      Outstanding atDecember 31,
    
    
    
    December 31,Currency
    Exercise Price
      Expiry Dates
    2005
    Issued
    Exercised
    Expired
    2006CDN
    $      0.45
      March 3, 2006
    685,000
    -
    685,000
    -
    -CDN
    $      1.25
      April 15, 2006
    729,807
    -
    704,807
    25,000
    -CDN
    $      2.50
      April 15, 2006
    832,155
    -
    229,000
    603,155
    -CDN
    $      2.75
      June 14, 2006
    218,181
    -
    -
    218,181
    -CDN
    $      0.10
      September 7, 2006
    7,460,000
    -
    7,460,000
    -
    -CDN
    $      1.44
      April 28, 2007
    -
    750,000
    750,000
    -
    -USD
    $      0.16
      May 6, 2007
    3,750,000
    -
    -
    -
    3,750,000CDN
    $      3.00
      June 29, 2007
    2,200,000
    -
    -
    -
    2,200,000CDN
    $      3.10
      March 17, 2007 (1)
    -
    12,997,600
    -
    -
    12,997,60015,875,143
    13,747,600
    9,828,807
    846,336
    18,947,600


| | (1) | Each warrant entitles the holder to acquire one common
      share of the Company at a price of $3.10 until March 17, 2007 and
      thereafter at a price of $4.10 until March 17,
2008.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (f) | Contributed Surplus                                                         
| | --- | ----------------------------------------------------------------------------
| |     |                                                                             
| |     | On December 31, 2006 and 2005, the contributed surplus
      was as follows:

| |                                                               |   | 2006       |   |   | 2005      |  
| | ------------------------------------------------------------- | - | ---------- | - | - | --------- | -
| | Balance - Beginning of period                                 | $ | 6,226,110  |   | $ | 104,500   |  
| | Fair value of warrants issued on private placement            |   | 6,687,143  |   |   | 2,722,199 |  
| | Stock based compensation expense for the
      year           |   | 1,679,534  |   |   | 1,039,794 |  
| | Fair value of warrants issued on share issuance               |   | 1,030,524  |   |   | 213,631   |  
| | Fair value of equity component of
      convertible debenture |   | -          |   |   | 1,478,083 |  
| | Fair value of warrants issued on acquisition                  |   | -          |   |   | 465,163   |  
| | Fair value of warrants issued on debt
      renegotiations    |   | -          |   |   | 288,938   |  
| | Fair value of warrants issued on debt issuance                |   | -          |   |   | 247,769   |  
| | Transfer to share capital upon exercise of
      options      |   | (15,920    | ) |   | (24,623   | )
| | Transfer to share capital upon exercise of warrants           |   | (842,464   | ) |   | (309,344  | )
| | Balance - End of period                                       | $ | 14,764,927 |   | $ | 6,226,110 |  



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

---

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSDECEMBER 31, 2006, 2005 AND 2004

|9. | CHANGES IN NON-CASH WORKING CAPITAL
      ITEMS                                    
|-- | -----------------------------------------------------------------------------------
|   |                                                                                    
|   | The following table summarizes the changes in non-cash
      working capital items:

| |                                                      |   | 2006     |   |   | 2005     |   |   | 2004     |  
| | ---------------------------------------------------- | - | -------- | - | - | -------- | - | - | -------- | -
| |                                                      |   |          |   |   |          |   |   |          |  
| | Net changes in non-cash
      working capital items: |   |          |   |   |          |   |   |          |  
| | Accounts receivable                                  | $ | (341,800 | ) | $ | 4,509    |   | $ | (32,594  | )
| | Prepaid items                                        |   | (148,428 | ) |   | (10,767  | ) |   | (37,567  | )
| | Accounts payable & accrued
      liabilities         |   | 394,325  |   |   | (141,914 | ) |   | (32,318  | )
| |                                                      | $ | (95,903  | ) | $ | (148,172 | ) | $ | (102,479 | )

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

| |                                                          |   | 2006       |  |   | 2005      |  |   | 2004 | 
| | -------------------------------------------------------- | - | ---------- |  | - | --------- |  | - | ---- | 
| |                                                          |   |            |  |   |           |  |   |      | 
| | Special warrants converted
      into common shares      | $ | 37,411,857 |  | $ | -         |  | $ | -    | 
| | Warrants issued as share issue expenses                  | $ | 1,030,524  |  | $ | 213,631   |  | $ | -    | 
| | Acquisition of DHI Minerals
      Ltd.                   | $ | -          |  | $ | 4,337,601 |  | $ | -    | 
| | Repayment of convertible debt security with
      shares | $ | -          |  | $ | 1,650,000 |  | $ | -    | 
| | Investment in mining
      properties                    | $ | -          |  | $ | 120,000   |  | $ | -    | 

|11. | RELATED PARTY TRANSACTIONS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    | During the year ending December 31, 2006, the Company
      incurred expenses of $17,500 (2005 - $30,000; 2004 - $30,000) for
      administrative services provided by a company in which a director of the
      Company has a 25% interest.                                                                                                                                                                                                                                                                                                                                                                                                            
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    | At December 31, 2006, $56,066 of accounts payable and
      accrued liabilities (2005 - $17,675) and $17,643 of accounts receivable
      (2005 - $Nil) was due to (from) related companies, which share office
      space and certain common directors with the Company. Also, included in
      accounts receivable at December 31, 2006 is an amount of $44,134 (2005 -
      $1,369 accounts payable) due from a company in which a director of the
      Company has a 25% interest. At December 31, 2006, $40,000 (2005 - $75,000)
      is due to the Vice President Administration of the Company for salaries
      accrued in the current year.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    | All related party transactions are recorded at the
      exchange value.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|12. | FINANCIAL INSTRUMENTS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    | The carrying values of cash and cash equivalents,
      accounts receivable, accounts payable and accrued liabilities and notes,
      advances and other as reflected in the balance sheet approximate their
      fair values. The company has no significant concentrations of credit
      risk.                                                                                                                                                                                                                                                                                                                                                      



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

---

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSDECEMBER 31, 2006, 2005 AND 2004

|13. | 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:

| |                                                                      |   | 2006       |   |   | 2005       |   |   | 2004     |  
| | -------------------------------------------------------------------- | - | ---------- | - | - | ---------- | - | - | -------- | -
| | Net loss                                                             | $ | 6,659,591  |   | $ | 5,337,837  |   | $ | 866,057  |  
| | Statutory tax rate                                                   |   | 34.21%     |   |   | 34.87%     |   |   | 35.60%   |  
| |                                                                      |   |            |   |   |            |   |   |          |  
| | Recovery of income taxes computed at Standard
      rates            |   | (2,272,252 | ) |   | (1,861,304 | ) |   | (305,379 | )
| | Permanent differences                                                |   | 761,967    |   |   | 568,269    |   |   | -        |  
| | Tax losses not recognized in the period that
      the benefit arose |   | 1,510,285  |   |   | 1,291,897  |   |   | 302,029  |  
| | Other                                                                |   | -          |   |   | 1,138      |   |   | 3,350    |  
| |                                                                      | $ | -          |   | $ | -          |   | $ | -        |  

As of December 31, 2006, the Company
has loss carry forwards of approximately $6,717,000 and US loss carry forwards
of approximately $1,895,000 available to reduce future years income for tax
purposes. The tax loss carry forwards expire at various times between 2007 and
2026.

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, 2006, 2005
and 2004 are as follows:

| | Future income tax assets:                                |   | 2006        |   |   | 2005        |   |   | 2004       |  
| | -------------------------------------------------------- | - | ----------- | - | - | ----------- | - | - | ---------- | -
| |                                                          |   |             |   |   |             |   |   |            |  
| | Non-capital
      losses and other future tax deductions | $ | 3,899,000   |   | $ | 910,000     |   | $ | 66,747     |  
| | Mineral properties and deferred
      development        |   | 805,000     |   |   | 791,000     |   |   | 1,197,049  |  
| | Other                                                    |   | -           |   |   | 36,000      |   |   | 44,318     |  
| |                                                          |   | 4,704,000   |   |   | 1,737,000   |   |   | 1,308,114  |  
| | Valuation allowance for
      future income tax assets   |   | (4,704,000  | ) |   | (1,737,000  | ) |   | (1,308,114 | )
| | Net future income tax assets                             |   | -           |   |   | -           |   |   | -          |  
| | Future income tax
      liabilities:                     |   |             |   |   |             |   |   |            |  
| | Mineral properties and deferred
      development        |   | (2,200,000  | ) |   | (2,200,000  | ) |   | -          |  
| |                                                          |   |             |   |   |             |   |   |            |  
| | Future income tax liabilties, net                        |   | ($2,200,000 | ) |   | ($2,200,000 | ) | $ | -          |  

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. The Company has a $2,200,000
  due in future income tax liability, which reflects the tax gross-up,
  required to be recorded on acquisition and represents the difference between
  the allocated accounting fair value and the tax bases of assets acquired.

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

---

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSDECEMBER 31, 2006, 2005 AND 2004

|14. | COMMITMENTS                                                                                                                                                                              
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                          
|    | The Company leases building premises recorded as
      operating leases. The terms of the leases extend through to June 30, 2009.
      The future minimum lease payments are as
follows:

Year2007
    $
    106,2502008
    
    97,4122009
    
    48,706Total
    $
    252,368


|15. | SEGMENTED INFORMATION                                                                                                                                                                                                                                                                                                                
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                      
|    | The Company operates in one industry. As at December 31,
      2006, the Companys long-lived assets were in Canada, $24,800 (2005 -
      $37,200) and in the United States, $48,259,800 (2005 -
  $18,169,000).                                                                                                                    
|    |                                                                                                                                                                                                                                                                                                                                      
|16. | 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, 2006 |  
| | --------------------------------- | - | ----------------- | -
| |                                   |   |                   |  
| | Balance Sheets                    |   | Total Assets      |  
| | Reported under Canadian GAAP      | $ | 58,538,531        |  
| | Mineral property expenditures (a) |   | (16,038,783       | )
| | Warrants (b)                      |   | -                 |  
| | Reported under US GAAP            | $ | 42,499,748        |  

| |                                   |   | December 31, 2005 |  
| | --------------------------------- | - | ----------------- | -
| |                                   |   |                   |  
| |                                   |   |                   |  
| | Balance Sheets                    |   | Total Assets      |  
| | Reported under Canadian GAAP      | $ | 20,807,850        |  
| | Mineral property expenditures (a) |   | (3,035,560        | )
| | Warrants (b)                      |   | -                 |  
| | Convertible debenture (c)         |   | 134,835           |  
| | Reported under US GAAP            | $ | 17,907,125        |  



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

---

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTSDECEMBER 31, 2006, 2005 AND 2004

|16. | DIFFERENCES BETWEEN UNITED STATES AND CANADIAN
      GENERALLY ACCEPTED ACCOUNTING PRINCIPLES(continued)
|--- | --------------------------------------------------------------------------------------------------------

December 31, 2006AccumulatedOtherCommon
      
      
      Subscriptions
      
      
      Contributed
      
      
      
      
      
      ComprehensiveStatements of Shareholders' Equity
      
      Shares
      
      
      Received
      
      
      Surplus
      
      
      Deficit
      
      
      Loss
      
      
      TotalReported under Canadian GAAP
      $
      60,332,348
      
      $
      -
      
      $
      14,764,927
      
      $
      (22,268,110
      )
      $
      -
      
      $
      52,829,165Mineral property expenditures (a)
      
      -
      
      
      -
      
      
      -
      
      
      (16,038,783
      )
      
      -
      
      
      (16,038,783
      )Warrants (b)
      
      -
      
      
      -
      
      
      (465,163
      )
      
      (8,206,783
      )
      
      -
      
      
      (8,671,946
      )Convertible debenture (c)
      
      -
      
      
      -
      
      
      (1,478,083
      )
      
      1,478,083
      
      
      -
      
      
      -Share issue costs (d)
      
      (5,357,647
      )
      
      -
      
      
      -
      
      
      5,357,647
      
      
      -
      
      
      -Accretion expense on debenture (c)
      
      (299,125
      )
      
      -
      
      
      -
      
      
      299,125
      
      
      -
      
      
      -Reported under US GAAP
      $
      54,675,576
      
      $
      -
      
      $
      12,821,681
      
      $
      (39,378,821
      )
      $
      -
      
      $
      28,118,436December 31, 2005Accumulated(restated)
      
      
      (restated)
      
      
      OtherCommon
      
      
      Subscriptions
      
      
      Contributed
      
      
      
      
      
      ComprehensiveStatements of Shareholders' Equity
      
      Shares
      
      
      Received
      
      
      Surplus
      
      
      Deficit
      
      
      Loss
      
      
      TotalReported under Canadian GAAP
      $
      18,437,248
      
      $
      -
      
      $
      6,226,110
      
      $
      (11,702,633
      )
      $
      -
      
      $
      12,960,725Mineral property expenditures (a)
      
      -
      
      
      -
      
      
      -
      
      
      (3,035,560
      )
      
      -
      
      
      (3,035,560
      )Warrants (b)
      
      -
      
      
      -
      
      
      (465,163
      )
      
      (4,110,282
      )
      
      -
      
      
      (4,575,445
      )Convertible debenture (c)
      
      -
      
      
      -
      
      
      (1,478,083
      )
      
      1,115,883
      
      
      -
      
      
      (362,200
      )Share issue costs (d)
      
      (1,451,761
      )
      
      -
      
      
      -
      
      
      1,451,761
      
      
      -
      
      
      -Accretion expense on debenture (c)
      
      (299,125
      )
      
      -
      
      
      -
      
      
      299,125
      
      
      -
      
      
      -Reported under US GAAP
      $
      16,686,362
      
      $
      -
      
      $
      4,282,864
      
      $
      (15,981,706
      )
      $
      -
      
      $
      4,987,520December 31, 2004AccumulatedOtherCommon
      
      
      Subscriptions
      
      
      Contributed
      
      
      
      
      
      ComprehensiveStatements of Shareholders' Equity
      
      Shares
      
      
      Received
      
      
      Surplus
      
      
      Deficit
      
      
      Loss
      
      
      TotalReported under Canadian GAAP
      $
      4,611,331
      
      $
      1,050,000
      
      $
      104,500
      
      $
      (4,991,105
      )
      $
      -
      
      $
      774,726Mineral property expenditures (a)
      
      -
      
      
      -
      
      
      -
      
      
      (19,785
      )
      
      -
      
      
      (19,785
      )Share issue costs (d)
      
      (78,070
      )
      
      -
      
      
      -
      
      
      78,070
      
      
      -
      
      
      -Accretion expense on debenture (c)
      
      (299,125
      )
      
      -
      
      
      -
      
      
      299,125
      
      
      -
      
      
      -Reported under US GAAP
      $
      4,234,136
      
      $
      1,050,000
      
      $
      104,500
      
      $
      (4,633,695
      )
      $
      -
      
      $
      754,941  Augusta Resource Corporation
      32


---

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSDECEMBER 31, 2006, 2005 AND 2004

|16. | DIFFERENCES BETWEEN UNITED STATES AND CANADIAN
      GENERALLY ACCEPTED ACCOUNTING PRINCIPLES(continued)
|--- | --------------------------------------------------------------------------------------------------------

| |                                                            |   | Cumulative from    |   |   |             |   |   |             |   |   |            |  
| | ---------------------------------------------------------- | - | ------------------ | - | - | ----------- | - | - | ----------- | - | - | ---------- | -
| |                                                            |   | dormancy (1985) to |   |   |             |   |   | (restated)  |   |   |            |  
| | Statements of Operations                                   |   | December 31, 2006  |   |   | 2006        |   |   | 2005        |   |   | 2004       |  
| | Net loss reported under
      Canadian GAAP                | $ | (16,782,715        | ) | $ | (6,659,591  | ) | $ | (5,337,837  | ) | $ | (866,057   | )
| | Mineral property expenditures (a)                          |   | (16,038,783        | ) |   | (13,003,223 | ) |   | (3,015,775  | ) |   | 154,764    |  
| | Warrants (b)                                               |   | (8,206,566         | ) |   | (4,096,284  | ) |   | (4,110,282  | ) |   | -          |  
| | Accretion expense on debenture (c)                         |   | 299,125            |   |   | -           |   |   | -           |   |   | -          |  
| | Debt issue costs (c)                                       |   | (252,147           | ) |   | (134,835    | ) |   | (117,312    | ) |   | -          |  
| | Interest and finance charges (c)                           |   | 1,477,790          |   |   | 497,035     |   |   | 980,755     |   |   | -          |  
| | Net loss reported under US GAAP                            | $ | (39,503,296        | ) | $ | (23,396,898 | ) | $ | (11,600,451 | ) | $ | (711,293   | )
| |                                                            |   |                    |   |   |             |   |   |             |   |   |            |  
| | Basic and fully diluted loss
      per share under US GAAP |   |                    |   | $ | (0.40       | ) | $ | (0.36       | ) | $ | (0.05      | )
| |                                                            |   |                    |   |   |             |   |   |             |   |   |            |  
| | Weighted average number of
      common shares outstanding |   |                    |   |   |             |   |   |             |   |   |            |  
| | under both Canadian GAAP and US GAAP                       |   |                    |   |   | 59,219,428  |   |   | 32,282,246  |   |   | 13,973,134 |  
| | Comprehensive loss                                         |   |                    |   |   |             |   |   |             |   |   |            |  
| |                                                            |   |                    |   |   |             |   |   |             |   |   |            |  
| | Net loss under US GAAP                                     |   | (39,503,296        | ) | $ | (23,396,898 | ) | $ | (11,600,451 | ) | $ | (711,293   | )
| | Other comprehensive income (e)                             |   | -                  |   |   | -           |   |   | -           |   |   | -          |  
| | Comprehensive loss                                         | $ | (39,503,296        | ) | $ | (23,396,898 | ) | $ | (11,600,451 | ) | $ | (711,293   | )
| |                                                            |   |                    |   |   |             |   |   |             |   |   |            |  
| |                                                            |   | Cumulative from    |   |   |             |   |   | December 31 |   |   |            |  
| |                                                            |   | dormancy (1985) to |   |   |             |   |   |             |   |   |            |  
| | Statements of Cash Flows                                   |   | December 31, 2006  |   |   | 2006        |   |   | 2005        |   |   | 2004       |  
| |                                                            |   |                    |   |   |             |   |   |             |   |   |            |  
| | Operating activities                                       |   |                    |   |   |             |   |   |             |   |   |            |  
| | Operating activities under Canadian GAAP                   | $ | (6,209,906         | ) | $ | (3,431,316  | ) |   | (1,682,705  | ) | $ | (418,132   | )
| | Mineral property expenditures (a)                          |   | (16,381,665        | ) |   | (12,475,561 | ) |   | (2,597,707  | ) |   | (57,591    | )
| | Operating activities under US GAAP                         | $ | (22,591,571        | ) | $ | (15,906,877 | ) | $ | (4,280,412  | ) | $ | (475,723   | )
| |                                                            |   |                    |   |   |             |   |   |             |   |   |            |  
| | Investing activities                                       |   |                    |   |   |             |   |   |             |   |   |            |  
| | Investing activities under Canadian GAAP                   | $ | (43,715,130        | ) | $ | (29,816,919 | ) |   | (11,699,289 | ) | $ | (94,748    | )
| | Mineral property expenditures (a)                          |   | 16,381,665         |   |   | 12,475,561  |   |   | 2,597,707   |   |   | 57,591     |  
| | Investing activities under US GAAP                         | $ | (27,333,465        | ) | $ | (17,341,358 | ) | $ | (9,101,582  | ) | $ | (37,157    | )



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

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSDECEMBER 31, 2006, 2005 AND 2004

|16. | DIFFERENCES BETWEEN UNITED STATES AND CANADIAN
      GENERALLY ACCEPTED ACCOUNTING PRINCIPLES(continued)
|--- | --------------------------------------------------------------------------------------------------------

| | a) | Mineral Property Expenditures                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    | Mineral property expenditures under Canadian GAAP allow
      exploration costs to be capitalized during the search for a commercially
      mineable body of ore. The Company has incurred exploration expenses that
      were added to the carrying value of mineral properties as it is
      anticipated that there is a continuing benefit of such expenditures. Under
      US GAAP exploration expenditures can only be deferred subsequent to the
      establishment of proven and probable reserves.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    | Under Canadian GAAP, investment in mining exploration
      expenditures, net of related payables, during year ended December 31, 2006
      of $12,475,561 are classified as investing activities (2005  $2,597,707;
      2004 - $57,591) on the consolidated statements of cash flows, whereas
      under US GAAP, these expenditures would have been classified as operating
      activities.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | b) | US Dollar Share Purchase Warrants
  (Restated)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    | Under Canadian GAAP share purchase warrants are accounted
      for as equity. Under US GAAP, as required by the Financial Accounting
      Standards Board (FASB) Statement 133 Accounting for Derivative
      Instruments and Hedging Activities, as amended, and EITF 01-6 The meaning
      of Indexed to a Companys Own Stock, share purchase warrants denominated
      in a currency that is not the functional currency of the Company are
      accounted for as a liability, with the change in fair value recorded
      through the statement of operations. A loss (gain) would be recorded when
      the fair value of the share purchase warrants increases (decreases). Based
      on the initial fair value determination in May 2005 on issuance, the share
      purchase warrants denominated in US dollars were recorded as a liability
      of $465,163. As at December 31, 2005 and December 31, 2006 the liabilitys
      fair value determination was $4,575,445 and $8,671,729, respectively. The
      change in fair value of $4,110,282 and $4,096,284 was recorded in the
      statement of operations for the 2005 and 2006 respective years. The
      significant increase in fair values reflects the improvement in the
      Companys share price over the corresponding periods.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    | The Company became aware of this difference between
      Canadian and US GAAP during the preparation of the 2006 Consolidated
      Financial Statements. The 2005 loss increased by $4,110,282 or $0.13 per
      share (basic and diluted), and has been restated to reflect this
      reconciling item. Current liabilities increased by $4,110,282 and
      shareholders equity decreased by the same amount. As at December 31, 2005
      the fair value liability for the warrants totaled $4,575,445. The warrant
      fair value was calculated using the Black Scholes option pricing model
      using the following assumptions: expected term (years) of 0.33 (2005 
      1.33) expected volatility of 24% ( 2005  163%), expected dividend yield
      of 0% (2005  0%) and risk free arte of 3.95% (2005 
  3.81%).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      



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

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSDECEMBER 31, 2006, 2005 AND 2004

|16. | DIFFERENCES BETWEEN UNITED STATES AND CANADIAN
      GENERALLY ACCEPTED ACCOUNTING PRINCIPLES(continued)
|--- | --------------------------------------------------------------------------------------------------------
|    |                                                                                                         
|    | c)                                                                                                      
|    |                                                                                                         
|    |                                                                                                         
|    |                                                                                                         
|    |                                                                                                         
|    |                                                                                                         
|    | d)                                                                                                      
|    |                                                                                                         
|    |                                                                                                         
|    |                                                                                                         
|    | e)                                                                                                      
|    |                                                                                                         
|    |                                                                                                         



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

---

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSDECEMBER 31, 2006, 2005 AND 2004

|16. | DIFFERENCES BETWEEN UNITED STATES AND CANADIAN
      GENERALLY ACCEPTED ACCOUNTING PRINCIPLES(continued)
|--- | --------------------------------------------------------------------------------------------------------
|    |                                                                                                         
|    | (e)                                                                                                     
|    |                                                                                                         
|    |                                                                                                         
|    |                                                                                                         
|    | **(f)**                                                                                                 
|    |                                                                                                         
|    |                                                                                                         
|    |                                                                                                         
|    | **(g)**                                                                                                 
|    |                                                                                                         
|    |                                                                                                         
|    |                                                                                                         
|    |                                                                                                         
|    |                                                                                                         
|    |                                                                                                         



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

---

|CORPORATE
      INFORMATION
|---------------------------

|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      | Donald B. Clark                                                      
|               | Gil Clausen                                                          
|               | W. Durand Eppler                                                     
|               | Christopher M.H. Jennings                                            
|               | Michael A. Steeves                                                   
|               | Robert P. Wares                                                      
|               | Richard W. Warke
      (Chairman)                                    
|               |                                                                      
|               |                                                                      
|OFFICERS       | Gil Clausen ~ President and Chief
      Executive Officer            
|               | Bruce Nicol ~ Senior Vice
      President and Chief Financial Officer
|               | Donald B. Clark ~ Vice President
      Administration                
|               | Mike Clarke ~ Vice President
      Exploration                       
|               | Lance Newman ~ Vice President
      Metallurgical Operations         
|               | James Sturgess ~ Vice President
      Projects and Environment       
|               | Richard Warke ~ Vice President
      Corporate Development           
|               | Purni Parikh ~ Corporate
      Secretary                             
|               |                                                                      
|               |                                                                      
|REGISTRAR AND  | Computershare Trust Company of
      Canada                          
|TRANSFER AGENT | #401 - 510 Burrard Street                                            
|               | Vancouver, BC   
      V6C 3B9                                       
|               |                                                                      
|               |                                                                      
|AUDITORS       | Ernst & Young, LLP                                                   
|               | 700  West Georgia Street                                            
|               | Vancouver, BC  
       V7Y 1C7                                       
|               |                                                                      
|               |                                                                      
|SOLICITORS     | Gowling Lafleur Henderson LLP                                        
|               | 1055 Dunsmuir Street                                                 
|               | Vancouver, BC   
      V7X 1J1                                       
|               |                                                                      
|               |                                                                      
|SHARES LISTED  | Toronto Stock Exchange                                               
|               | American Stock Exchange                                              
|               | Trading Symbol ~ AZC                                                 



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

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