---



Consolidated Financial Statements

For the Years Ended December 31, 2010, 2009 and 2008

---

Management Report

Managements Responsibility for Consolidated Financial
Statements

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

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

Managements Assessment of Internal Control over Financial
Reporting

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

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

Management has assessed the effectiveness of the Companys
internal control over financial reporting as at December 31, 2010. In making its
assessment, Management has used the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) framework in Internal ControlIntegrated
Framework to evaluate the effectiveness of the Companys internal control
over financial reporting. Based on our evaluation, management has concluded that
the Companys internal control over financial reporting was effective as at that
date.

Ernst & Young LLP, a registered public accounting firm, was
appointed by a vote of shareholders at the Companys last annual meeting to
audit and provide independent opinions on both the consolidated financial
statements and the Companys internal control over financial reporting as at
December 31, 2010, as stated in their Auditors Report. Ernst & Young LLP
has provided such opinions.

|Raghunath Reddy                               | Gil C. Clausen                   
|----------------------------------------------- | -----------------------------------
|                                                |                                    
|Raghunath Reddy                                 | Gil C. Clausen                     
|Senior Vice-President & Chief Financial Officer | President & Chief Executive Officer
|                                                |                                    
|March 29, 2011                                  |                                    
|Vancouver, Canada                               |                                    

- 2 -

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INDEPENDENT AUDITORS REPORT OF REGISTERED 
  PUBLIC
  ACCOUNTING FIRM

To the Shareholders of Augusta Resource Corporation

We have audited the accompanying consolidated financial
  statements of Augusta Resource Corporation, which comprise the
  consolidated balance sheets as at December 31, 2010 and 2009, and the
  consolidated statements of operations, comprehensive loss, cash flows and
  shareholders' equity for each of the years in the three-year period ended
  December 31, 2010, and a summary of significant accounting policies and other
  explanatory information.

Managements responsibility for the consolidated financial
  statements

Management is responsible for the preparation and fair
  presentation of these consolidated financial statements in accordance with
  Canadian generally accepted accounting principles, and for such internal control
  as management determines is necessary to enable the preparation of consolidated
  financial statements that are free from material misstatement, whether due to
  fraud or error.

Auditors responsibility

Our responsibility is to express an opinion on these
  consolidated financial statements based on our audits. We conducted our audits
  in accordance with Canadian generally accepted auditing standards and the
  standards of the Public Company Accounting Oversight Board (United States).
  Those standards require that we comply with ethical requirements and plan and
  perform the audit to obtain reasonable assurance about whether the consolidated
  financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit
  evidence about the amounts and disclosures in the consolidated financial
  statements. The procedures selected depend on the auditors judgment, including
  the assessment of the risks of material misstatement of the consolidated
  financial statements, whether due to fraud or error. In making those risk
  assessments, the auditors consider internal control relevant to the entity's
  preparation and fair presentation of the consolidated financial statements in
  order to design audit procedures that are appropriate in the circumstances. An
  audit also includes examining, on a test basis, evidence supporting the amounts
  and disclosures in the consolidated financial statements, evaluating the
  appropriateness of accounting policies used and the reasonableness of accounting
  estimates made by management, as well as evaluating the overall presentation of
the consolidated financial statements.

We believe that the audit evidence we have obtained in our
  audits is sufficient and appropriate to provide a basis for our audit
  opinion.

Opinion

In our opinion, the consolidated financial statements present
  fairly, in all material respects, the financial position of Augusta Resource
    Corporation as at December 31, 2010 and 2009, and the results of its
  operations and its cash flows for each of the years in the three-year period
  ended December 31, 2010 in accordance with Canadian generally accepted
  accounting principles.

Other matter

We have also audited, in accordance with the standards of the
  Public Company Accounting Oversight Board (United States), Augusta Resource
    Corporation's internal control over financial reporting as of December 31,
  2010, based on the criteria established in Internal Control  Integrated
  Framework issued by the Committee of Sponsoring Organizations of the Treadway
  Commission and our report dated March 29, 2011 expressed an unqualified opinion
  on Augusta Resource Corporations internal control over financial
  reporting.

|Vancouver, Canada, |                          
|------------------ | -------------------------
|March 29, 2011.    | Charted
      Accountants



- 3 -

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REPORT OF INDEPENDENT REGISTERED 
  PUBLIC ACCOUNTING FIRM

To the Shareholders of Augusta Resource Corporation

We have audited Augusta Resource Corporations [the
  Company] internal control over financial reporting as of December 31, 2010,
  based on criteria established in Internal ControlIntegrated Framework issued by
  the Committee of Sponsoring Organizations of the Treadway Commission [the COSO
  criteria]. The Companys management is responsible for maintaining effective
  internal control over financial reporting, and for its assessment of the
  effectiveness of internal control over financial reporting included in the
  accompanying Managements Assessment of Internal Control over Financial
  Reporting. Our responsibility is to express an opinion on the Companys
  internal control over financial reporting based on our audit.

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

A companys internal control over financial reporting is a
  process designed to provide reasonable assurance regarding the reliability of
  financial reporting and the preparation of financial statements for external
  purposes in accordance with generally accepted accounting principles. A
  companys internal control over financial reporting includes those policies and
  procedures that [1] pertain to the maintenance of records that, in reasonable
  detail, accurately and fairly reflect the transactions and dispositions of the
  assets of the company; [2] provide reasonable assurance that transactions are
  recorded as necessary to permit preparation of financial statements in
  accordance with generally accepted accounting principles, and that receipts and
  expenditures of the company are being made only in accordance with
  authorizations of management and directors of the company; and [3] provide
  reasonable assurance regarding prevention or timely detection of unauthorized
  acquisition, use or disposition of the companys assets that could have a
  material effect on the financial statements.

Because of its inherent limitations, internal control over
  financial reporting may not prevent or detect misstatements. Also, projections
  of any evaluation of effectiveness to future periods are subject to the risk
  that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the Company maintained, in all material
  respects, effective internal control over financial reporting as of December 31,
  2010, based onthe COSO criteria.

We also have audited, in accordance with Canadian generally
  accepted auditing standards and the standards of the Public Company Accounting
  Oversight Board (United States), the consolidated balance sheets as at December
  31, 2010 and 2009 and the consolidated statements of operations, comprehensive
  loss, cash flows and shareholders equity for each of the years in the
  three-year period ended December 31, 2010 of the Company and our report dated
  March 29, 2011 expressed an unqualified opinion thereon.

|Vancouver, Canada, |                          
|------------------ | -------------------------
|March 29, 2011.    | Charted
      Accountants



- 4 -

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|Augusta Resource Corporation    
|--------------------------------
|Consolidated Balance Sheets     
|As at December 31, 2010 and 2009
|(in U.S. dollars)               

|                                                         |   | 2010        |   |   | 2009        |  
|-------------------------------------------------------- | - | ----------- | - | - | ----------- | -
|ASSETS                                                   |   |             |   |   |             |  
|Current                                                  |   |             |   |   |             |  
|Cash and cash equivalents                                | $ | 31,505,341  |   | $ | 6,247,217   |  
|Accounts receivable                                      |   | 110,402     |   |   | 18,476      |  
|Due from related parties - Note 12                       |   | 6,142       |   |   | 252,444     |  
|Prepaids and deposits                                    |   | 135,235     |   |   | 313,714     |  
|Current
      portion of other assets - Note 7           |   | 626,793     |   |   | 250,000     |  
|Total current assets                                     |   | 32,383,913  |   |   | 7,081,851   |  
|Capital assets - Note 6                                  |   | 9,177,096   |   |   | 7,645,724   |  
|Deposits on long-lead equipment - Note 6                 |   | 59,523,633  |   |   | 35,490,072  |  
|Other assets - Note 7                                    |   | 2,235,076   |   |   | 2,238,851   |  
|Mineral properties - Note 8                              |   | 24,688,364  |   |   | 25,665,438  |  
|Deferred
      development costs - Note 8                |   | 98,608,818  |   |   | 64,516,724  |  
|Total assets                                             | $ | 226,616,900 |   | $ | 142,638,660 |  
|                                                         |   |             |   |   |             |  
|LIABILITIES                                              |   |             |   |   |             |  
|Current                                                  |   |             |   |   |             |  
|Accounts payable and accrued
      liabilities - Note 12 | $ | 5,100,819   |   | $ | 12,386,174  |  
|Current
      portion of long-term debt - Note 9         |   | -           |   |   | 42,177,512  |  
|Total current liabilities                                |   | 5,100,819   |   |   | 54,563,686  |  
|Deferred gain - Note 5                                   |   | 27,866,378  |   |   | -           |  
|Long-term debt - Note 9                                  |   | 42,033,327  |   |   | 3,590,439   |  
|Total liabilities                                        |   | 75,000,524  |   |   | 58,154,125  |  
|SHAREHOLDERS' EQUITY                                     |   |             |   |   |             |  
|Share capital - Notes 10 and 19                          |   | 196,827,289 |   |   | 123,386,017 |  
|Contributed surplus                                      |   | 18,652,492  |   |   | 17,513,815  |  
|Accumulated other comprehensive income                   |   | (5,534,505  | ) |   | (5,534,505  | )
|Deficit                                                  |   | (58,328,900 | ) |   | (50,880,792 | )
|Total
      shareholders' equity                         |   | 151,616,376 |   |   | 84,484,535  |  
|                                                         |   |             |   |   |             |  
|Total liabilities
      and shareholders' equity         | $ | 226,616,900 |   | $ | 142,638,660 |  

Commitments - Note 15

On Behalf of the Board of Directors

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

See accompanying notes to the consolidated financial
statements

- 5 -

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|Augusta Resource Corporation                        
|----------------------------------------------------
|Consolidated Statements of Operations               
|For the years ended December 31, 2010, 2009 and 2008
|(in US dollars)                                     

|                                                                        |   | 2010        |   |   | 2009       |   |   | 2008        |  
|----------------------------------------------------------------------- | - | ----------- | - | - | ---------- | - | - | ----------- | -
|                                                                        |   |             |   |   |            |   |   |             |  
|                                                                        |   |             |   |   |            |   |   |             |  
|EXPENSES                                                                |   |             |   |   |            |   |   |             |  
|Salaries and benefits                                                   | $ | 1,692,925   |   | $ | 1,913,506  |   | $ | 2,738,718   |  
|Stock-based compensation                                                |   | 1,229,926   |   |   | 1,120,555  |   |   | 2,378,054   |  
|Legal, Accounting and Audit                                             |   | 1,505,182   |   |   | 822,650    |   |   | 3,397,442   |  
|Travel                                                                  |   | 223,968     |   |   | 148,907    |   |   | 447,766     |  
|Consulting and Advisory services                                        |   | 230,422     |   |   | 76,947     |   |   | 636,892     |  
|Filing and Regulatory fees                                              |   | 120,338     |   |   | 80,834     |   |   | 151,813     |  
|Recruiting fees and relocation costs                                    |   | 55,500      |   |   | 53,405     |   |   | 161,622     |  
|Office and Administration                                               |   | 226,925     |   |   | 250,933    |   |   | 309,069     |  
|Rent                                                                    |   | 168,211     |   |   | 161,194    |   |   | 150,018     |  
|Investor Relations                                                      |   | 118,325     |   |   | 157,171    |   |   | 152,483     |  
|Directors' fees                                                         |   | 134,094     |   |   | 109,296    |   |   | 134,823     |  
|Insurance                                                               |   | 168,379     |   |   | 170,133    |   |   | 159,175     |  
|Memberships and Conferences                                             |   | 12,148      |   |   | 25,191     |   |   | 34,009      |  
|Amortization                                                            |   | 181,499     |   |   | 154,854    |   |   | 87,894      |  
|Fiscal and Advisory services                                            |   | 15,363      |   |   | 12,968     |   |   | 12,169      |  
|Loss from operations                                                    |   | (6,083,205  | ) |   | (5,258,544 | ) |   | (10,951,947 | )
|Interest and other income                                               |   | 669,718     |   |   | 242,664    |   |   | 148,201     |  
|Other expenses                                                          |   | (706,311    | ) |   | (502,244   | ) |   | (575,302    | )
|Litigation settlement                                                   |   | -           |   |   | -          |   |   | (2,626,004  | )
|Gain on held-for-trading securities - Note 4                            |   | 118,462     |   |   | -          |   |   | -           |  
|Foreign exchange gains (losses)                                         |   | 612,840     |   |   | 596,880    |   |   | (2,985,504  | )
|Loan interest and
      finance charges                                 |   | (50,684     | ) |   | (98,312    | ) |   | (239,005    | )
|Loss from continuing operations                                         |   | (5,439,180  | ) |   | (5,019,556 | ) |   | (17,229,561 | )
|Gain (loss) from
      discontinued operations - Note 4                 |   | -           |   |   | (508,385   | ) |   | 543,177     |  
|Net loss for the year                                                   | $ | (5,439,180  | ) | $ | (5,527,941 | ) | $ | (16,686,384 | )
|                                                                        |   |             |   |   |            |   |   |             |  
|Basic and diluted loss per share                                        |   |             |   |   |            |   |   |             |  
|Continuing operations                                                   | $ | (0.04       | ) | $ | (0.05      | ) | $ | (0.19       | )
|Discontinued operations                                                 |   | -           |   |   | (0.01      | ) |   | 0.01        |  
|Basic and
      diluted loss per share                                  | $ | (0.04       | ) | $ | (0.06      | ) | $ | (0.19       | )
|                                                                        |   |             |   |   |            |   |   |             |  
|Weighted average number of
      shares outstanding - basic and diluted |   | 123,283,762 |   |   | 96,409,230 |   |   | 88,643,084  |  

See accompanying notes to the consolidated financial
statements

- 6 -

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|Augusta Resource Corporation                        
|----------------------------------------------------
|Consolidated Statements of Comprehensive Loss       
|For the years ended December 31, 2010, 2009 and 2008
|(in U.S. dollars)                                   

|                                      |   | 2010       |   |   | 2009       |   |   | 2008        |  
|------------------------------------- | - | ---------- | - | - | ---------- | - | - | ----------- | -
|                                      |   |            |   |   |            |   |   |             |  
|Net loss for the year                 | $ | (5,439,180 | ) | $ | (5,527,941 | ) | $ | (16,686,384 | )
|Other comprehensive loss in the year  |   |            |   |   |            |   |   |             |  
|Cumulative translation adjustments    |   | -          |   |   | -          |   |   | (16,430,577 | )
|Comprehensive
      loss for the year | $ | (5,439,180 | ) | $ | (5,527,941 | ) | $ | (33,116,961 | )

See accompanying notes to consolidated financial
statements

- 7 -

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|Augusta Resource Corporation                        
|----------------------------------------------------
|Consolidated Statements of Cash Flows               
|For the years ended December 31, 2010, 2009 and 2008
|(in US dollars)                                     

|                                                                       |   | 2010        |   |   | 2009        |   |   | 2008        |  
|---------------------------------------------------------------------- | - | ----------- | - | - | ----------- | - | - | ----------- | -
|Cash flows used in operating activities                                |   |             |   |   |             |   |   |             |  
|Loss from continuing operations                                        | $ | (5,439,180  | ) | $ | (5,019,556  | ) | $ | (17,229,561 | )
|Items not involving cash                                               |   |             |   |   |             |   |   |             |  
|Amortization                                                           |   | 181,499     |   |   | 154,854     |   |   | 87,894      |  
|Foreign exchange losses (gains)                                        |   | (655,938    | ) |   | (621,956    | ) |   | 4,008,876   |  
|Accretion income                                                       |   | (481,487    | ) |   | -           |   |   | -           |  
|Stock-based compensation                                               |   | 1,229,926   |   |   | 1,120,555   |   |   | 2,378,054   |  
|Gain on held-for-trading securities                                    |   | (118,462    | ) |   | -           |   |   | -           |  
|Litigation settlement                                                  |   | -           |   |   | -           |   |   | 2,626,004   |  
|Other                                                                  |   | 24,311      |   |   | 83,415      |   |   | (68,856     | )
|                                                                       |   | (5,259,331  | ) |   | (4,282,688  | ) |   | (8,197,589  | )
|Changes in
      non-cash working capital items - Note 11              |   | 688,794     |   |   | (60,001     | ) |   | 724,400     |  
|Cash used in operating activities                                      |   | (4,570,537  | ) |   | (4,342,689  | ) |   | (7,473,189  | )
|Financing activities                                                   |   |             |   |   |             |   |   |             |  
|Shares issued for cash                                                 |   | 71,413,613  |   |   | 30,806,064  |   |   | 283,962     |  
|Share issue costs                                                      |   | (2,008,928  | ) |   | (2,190,327  | ) |   | -           |  
|Deferred financing costs                                               |   | (1,476,732  | ) |   | -           |   |   | -           |  
|Joint venture partner's contribution                                   |   | 34,719,193  |   |   | -           |   |   | -           |  
|Loan from related party                                                |   | 3,000,000   |   |   | -           |   |   | -           |  
|Repayment of loan from related party                                   |   | (3,000,000  | ) |   | -           |   |   | -           |  
|Proceeds from loan facility                                            |   | 43,990,000  |   |   | 8,940,150   |   |   | 30,996,067  |  
|Repayment of
      long-term debt                                      |   | (46,782,262 | ) |   | (556,945    | ) |   | (554,667    | )
|Cash provided by financing activities                                  |   | 99,854,884  |   |   | 36,998,942  |   |   | 30,725,362  |  
|                                                                       |   |             |   |   |             |   |   |             |  
|Investing activities                                                   |   |             |   |   |             |   |   |             |  
|Mineral property expenditures                                          |   | (80,904     | ) |   | (86,358     | ) |   | (2,339,330  | )
|Deposits on long-lead equipment                                        |   | (31,867,522 | ) |   | (14,991,717 | ) |   | (17,854,903 | )
|Deferred development expenditures                                      |   | (36,866,300 | ) |   | (17,673,855 | ) |   | (19,753,244 | )
|Capital asset additions                                                |   | (2,121,874  | ) |   | (2,853,653  | ) |   | (1,654,255  | )
|Cash used in
      investing activities                                |   | (70,936,600 | ) |   | (35,605,583 | ) |   | (41,601,732 | )
|Proceeds received from discontinued
      operations                   |   | 250,000     |   |   | 1,000,000   |   |   | 1,597,356   |  
|Effect of exchange rate changes on cash and cash
      equivalents     |   | 660,377     |   |   | 633,357     |   |   | (1,579,756  | )
|Increase (decrease) in cash and cash equivalents during the
      year |   | 25,258,124  |   |   | (1,315,973  | ) |   | (18,331,959 | )
|Cash and cash equivalents, beginning of year                           |   | 6,247,217   |   |   | 7,563,190   |   |   | 25,895,149  |  
|Cash and cash
      equivalents, end of year                           | $ | 31,505,341  |   | $ | 6,247,217   |   | $ | 7,563,190   |  

Supplemental cash flow information on non-cash transactions
- Note 11

See accompanying notes to consolidated financial
statements

- 8 -

---

|Augusta Resource Corporation                   
|-----------------------------------------------
|Consolidated Statements of Shareholders' Equity
|December 31, 2010                              
|(in U.S. dollars except for shares)            

|                                                                             |  |                       |  |   |             |  |   |               |   |   | Accumulated |   |   |               |   |   |             |  
|---------------------------------------------------------------------------- |  | --------------------- |  | - | ----------- |  | - | ------------- | - | - | ----------- | - | - | ------------- | - | - | ----------- | -
|                                                                             |  | Common Shares without |  |   |             |  |   | Other         |   |   |             |   |   | Total         |  
|                                                                             |  | Par Value             |  |   | Contributed |  |   | Comprehensive |   |   |             |   |   | Shareholders' |  
|                                                                             |  | Shares                |  |   | Amount      |  |   | Surplus       |   |   | Income      |   |   | Deficit       |   |   | Equity      |  
|                                                                             |  |                       |  |   |             |  |   |               |   |   |             |   |   |               |   |   |             |  
|Balance, December 31, 2007                                                   |  | 88,588,061            |  | $ | 92,130,108  |  | $ | 12,870,530    |   | $ | 10,896,072  |   | $ | (26,144,936   | ) | $ | 89,751,774  |  
|Issued pursuant to stock options exercised                                   |  | 146,200               |  |   | 484,423     |  |   | (199,663      | ) |   | -           |   |   | -             |   |   | 284,760     |  
|Stock-based compensation expense                                             |  | -                     |  |   | -           |  |   | 2,378,054     |   |   | -           |   |   | -             |   |   | 2,378,054   |  
|Stock-based compensation capitalized                                         |  | -                     |  |   | -           |  |   | 417,554       |   |   | -           |   |   | -             |   |   | 417,554     |  
|Cumulative translation adjustments                                           |  | -                     |  |   | -           |  |   | -             |   |   | (16,430,577 | ) |   | -             |   |   | (16,430,577 | )
|Net loss for the
      year                                                  |  | -                     |  |   | -           |  |   | -             |   |   | -           |   |   | (16,686,384   | ) |   | (16,686,384 | )
|Balance, December 31, 2008                                                   |  | 88,734,261            |  |   | 92,614,531  |  |   | 15,466,475 -  |   |   | 5,534,505   |   |   | (42,831,320   | ) |   | 59,715,181  |  
|Issued pursuant to private placement                                         |  | 3,350,000             |  |   | 3,740,210   |  |   | 251,052       |   |   | -           |   |   | -             |   |   | 3,991,262   |  
|Issued pursuant to prospectus financing                                      |  | 14,237,000            |  |   | 26,218,197  |  |   | 237,845       |   |   | -           |   |   | -             |   |   | 26,456,042  |  
|Issued pursuant to exercise of stock compensation
      options and warrants |  | 280,555               |  |   | 711,252     |  |   | (123,944      | ) |   | -           |   |   | -             |   |   | 587,308     |  
|Issued pursuant to stock options exercised                                   |  | 100,000               |  |   | 13,487      |  |   | (4,190        | ) |   | -           |   |   | -             |   |   | 9,297       |  
|Share issue costs for prospectus financing                                   |  | -                     |  |   | -           |  |   | -             |   |   | -           |   |   | (2,428,169    | ) |   | (2,428,169  | )
|Share issue costs for private placement                                      |  | 67,000                |  |   | 88,340      |  |   | 5,022         |   |   | -           |   |   | (93,362       | ) |   | -           |  
|Stock-based compensation expense                                             |  | -                     |  |   | -           |  |   | 1,120,555     |   |   | -           |   |   | -             |   |   | 1,120,555   |  
|Stock-based compensation capitalized                                         |  | -                     |  |   | -           |  |   | 561,000       |   |   | -           |   |   | -             |   |   | 561,000     |  
|Net loss for the
      year                                                  |  | -                     |  |   | -           |  |   | -             |   |   | -           |   |   | (5,527,941    | ) |   | (5,527,941  | )
|Balance, December 31, 2009                                                   |  | 106,768,816           |  |   | 123,386,017 |  |   | 17,513,815    |   |   | (5,534,505  | ) |   | (50,880,792   | ) |   | 84,484,535  |  
|Issued pursuant to private placement                                         |  | 10,905,590            |  |   | 27,593,016  |  |   | 844,658       |   |   | -           |   |   | -             |   |   | 28,437,674  |  
|Issued pursuant to prospectus financing                                      |  | 11,820,000            |  |   | 31,908,315  |  |   | -             |   |   | -           |   |   | -             |   |   | 31,908,315  |  
|Share issue costs for equity offerings                                       |  | -                     |  |   | -           |  |   | -             |   |   | -           |   |   | (2,008,928    | ) |   | (2,008,928  | )
|Stock-based compensation expense                                             |  | -                     |  |   | -           |  |   | 1,229,926     |   |   | -           |   |   | -             |   |   | 1,229,926   |  
|Stock-based compensation capitalized                                         |  | -                     |  |   | -           |  |   | 1,211,368     |   |   | -           |   |   | -             |   |   | 1,211,368   |  
|Fair value of warrants issued pursuant to
      Red                          |  |                       |  |   |             |  |   |               |   |   |             |   |   |               |   |   |             |  
|Kite loan                                                                    |  | -                     |  |   | -           |  |   | 725,042       |   |   | -           |   |   | -             |   |   | 725,042     |  
|Restricted shares issued                                                     |  | 466,665               |  |   | 341,900     |  |   | (341,900      | ) |   | -           |   |   | -             |   |   | -           |  
|Issued pursuant to stock options exercised                                   |  | 2,220,565             |  |   | 5,580,561   |  |   | (2,243,688    | ) |   | -           |   |   | -             |   |   | 3,336,873   |  
|Issued pursuant to warrants exercised                                        |  | 3,414,066             |  |   | 8,017,480   |  |   | (286,729      | ) |   | -           |   |   | -             |   |   | 7,730,751   |  
|Net loss for the
      year                                                  |  | -                     |  |   | -           |  |   | -             |   |   | -           |   |   | (5,439,180    | ) |   | (5,439,180  | )
|Balance, December 31, 2010                                                   |  | 135,595,702           |  | $ | 196,827,289 |  | $ | 18,652,492    |   | $ | (5,534,505  | ) | $ | (58,328,900   | ) | $ | 151,616,376 |  

See accompanying notes to consolidated financial
statements

- 9 -

---

|Augusta Resource Corporation                                  
|--------------------------------------------------------------
|Notes to Consolidated Financial Statements                    
|For the years ended December 31, 2010 and 2009                
|(All amounts are
      in U.S. dollars unless otherwise noted)

|1.        | NATURE OF OPERATIONS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|--------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|          | Augusta Resource Corporation (Augusta or the Company)
      is a development stage enterprise engaged in the exploration and
      development of mineral properties in North America. The Companys most
      significant asset is the Rosemont copper project (Rosemont) near Tucson,
      Arizona. The realization of the Companys investment in Rosemont is
      dependent upon various factors, including the ability to obtain the
      necessary financing to complete the development of Rosemont, future
      profitable operations, or, alternatively, upon disposal of the property at
      amounts sufficient to recover capitalized expenditures.                                                                                                                                                                                                                                                                                                                                                                                                                
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|          | The Company incurred a loss of $5.4 million for the year
      ended December 31, 2010 (2009 - $5.5 million; 2008 - $16.7 million) and
      had an accumulated deficit of $58.3 million as at December 31, 2010. The
      losses have been funded primarily from proceeds of equity and debt issues.
      The Company generates minimal revenue from its operations and does not
      expect to generate any significant revenue until Rosemont commences
      commercial production. The Companys planned activities for 2011
      anticipate significant Rosemont expenditures which will be funded by cash
      contributions from Rosemonts joint venture partner, current cash reserves
      and possibly through additional equity issues. The Companys failure to
      meet its ongoing obligations on a timely basis or to raise the additional
      funds that it requires to meet ongoing permitting and other business
      expenditures could result in the delay in the development of Rosemont and
      may lead to an impairment charge on Rosemonts assets.
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|          | The Company is also listed on the NYSE Amex, and as such,
      a reconciliation from Canadian to United States (US) GAAP is required 
      Note 18.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|2.        | SUMMARY OF SIGNIFICANT ACCOUNTING
  POLICIES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|          | These consolidated financial statements have been
      prepared by the Company in accordance with Canadian generally accepted
      accounting principles (Canadian GAAP) using the following significant
      accounting policies.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|***(a)*** | Basis of consolidation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|          | These consolidated financial statements include the
      accounts of the Company, all of its subsidiaries and 95.9% interest in the
      Rosemont joint venture. All intercompany transactions and balances with
      the Companys subsidiaries have been eliminated. Intercompany transactions
      and balances with the Companys joint venture have been eliminated to the
      extent of the Companys interests.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|          | Certain comparative figures have been reclassified to
      conform to the basis of presentation adopted in the current
  period.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|***(b)*** | Cash and cash equivalents                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|          | Cash and cash equivalents consist of deposits in banks
      and guaranteed investment certificates (GICs) with an original maturity
      of three months or less.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

- 10 -

---

|Augusta Resource Corporation                                  
|--------------------------------------------------------------
|Notes to Consolidated Financial Statements                    
|For the years ended December 31, 2010 and 2009                
|(All amounts are
      in U.S. dollars unless otherwise noted)

|(c) | Capital assets                                                                                                                                                                                                                          
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                         
|    | Capital assets are carried at cost, less accumulated
      amortization. Amortization begins when the asset is substantially put into
      service and is primarily calculated on a straight line basis over the
      following terms:

Land
    N/AWater rights
    Unit-of-productionBuildings
    10 yearsComputer hardware
    5 yearsFurniture and equipment
    5 yearsVehicles
    5 years


|    | Water rights will be amortized on a unit-of-production
      basis over the estimated proven and probable ore reserves upon
      commencement of commercial production at Rosemont. Furniture and equipment
      will be amortized over straight line.. When debt is incurred to finance
      the purchase of plant and equipment, the interest and financing costs
      associated with such debt are capitalized. Upon commencement of commercial
      production, the interest and financing costs are amortized on a
      units-of-production basis over the life of the asset.                                                                                                                                                                                                                                                                                                                                                                    
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|(d) | Mineral properties and deferred development
      costs                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    | Mineral properties are carried at cost less accumulated
      depletion and any accumulated impairment charges. Mineral property
      expenditures consists of payments to acquire property rights and leases,
      exploration and evaluation costs on a property once a determination has
      been made that a property has potentially recoverable resources and there
      is a reasonable expectation that costs can be recovered by future
      exploitation or sale of the property. Exploration expenditures made prior
      to this determination that a property has economically recoverable
      resources are expensed as incurred.                                                                                                                                                                                                                                                                                                     
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    | Development costs incurred on a mineral property are
      deferred once management has determined that, based on a feasibility
      study, a property is capable of economical commercial production as a
      result of having established proven and probable reserves.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    | Once a mine has achieved commercial production, mineral
      properties and deferred development costs are depleted on a
      units-of-production basis.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    | The Company reviews the carrying values of mineral
      properties and deferred development costs regularly with a view to
      assessing whether there has been any impairment in value, or whenever
      events or changes in circumstances indicate that the carrying value may
      not be recoverable. In the event the estimated undiscounted cash flows
      expected from its use or eventual disposition is determined to be
      insufficient to recover the carrying value of any property, the carrying
      value will be written down to the estimated fair value.                                                                                                                                                                                                                                                                                                                                                                      
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|(e) | Reclamation and closure costs                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    | The Company recognizes liabilities for statutory,
      contractual or legal obligations associated with the retirement of
      property, plant and equipment, when those obligations result from the
      acquisition, construction, development or normal operations of the assets.
      Initially, a liability for an asset retirement obligation is recognized at
      its fair value in the period in which it is incurred. Upon initial
      recognition of the liability, the corresponding asset retirement cost is
      added to the carrying value of the asset and the cost is amortized as an
      expense over the economic life of the related asset. Following the initial
      recognition of the asset retirement obligation, the carrying amount of the
      liability is increased for the passage of time and adjusted for changes to
      the amount or timing of the underlying cash flows needed to settle the
  obligation.

- 11 -

---

|Augusta Resource Corporation                                  
|--------------------------------------------------------------
|Notes to Consolidated Financial Statements                    
|For the years ended December 31, 2010 and 2009                
|(All amounts are
      in U.S. dollars unless otherwise noted)

|    | The present value of the reclamation liabilities may be
      subject to change based on managements current estimates, changes in
      remediation technology or changes to the applicable laws and regulations
      by regulatory authorities, which affects the ultimate cost of remediation
      and reclamation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    | As at December 31, 2010 and 2009, the Company did not
      have any asset retirement obligations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|(f) | Capitalized financing costs                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    | Financing costs, including interest, are capitalized when
      they arise from indebtedness incurred to finance development and
      construction activities on properties that are not yet subject to
      depreciation or depletion. On commencement of commercial production,
      financing costs are amortized over the life of the mine.                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|(g) | Share issue costs                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    | Share issue costs are recorded as an increase to the
      deficit in the year in which they are incurred.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|(h) | Loss per share                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    | Basic net loss per share is computed using the weighted
      average number of common share equivalents outstanding during the year.
      The Company uses the treasury stock method for the calculation of diluted
      loss per share.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|(i) | Foreign currencies                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    | Effective January 1, 2009, the Company changed its
      reporting currency from Canadian dollars to the U.S. dollars. The
      functional currency of the Company is also U.S. dollars. Transactions
      undertaken in foreign currencies are translated into U.S. dollars at
      exchange rates prevailing at the time the transaction occurred. Monetary
      assets and liabilities denominated in foreign currencies are translated
      into equivalent U.S. dollars at the exchange rates in effect at the
      balance sheet date with any resulting gain or loss being recognized in the
      consolidated statement of operations and deficit. The effect of
      fluctuations in exchange rates between the dates of transactions and the
      settlements is reflected in the statement of operations.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    | The financial statements of Canadian dollar subsidiaries
      are translated into U.S. dollars using the temporal method for integrated
      operations, as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

- monetary assets and liabilities using the exchange rate
      in effect at the balance sheet date;
- non-monetary assets and liabilities are translated at
      historical exchange rates, unless the item is carried at fair market
      value, in which case the item will be translated at the exchange rate in
      effect at the balance sheet date;
- revenue and expense items are translated at exchange rate
      prevailing at the date of the transaction;
- depreciation or amortization of assets translated at
      historical exchange rates; and
- translation gains and losses on monetary items or
      non-monetary items carried at market are included in the current years
      statement of operations.

- 12 -

---

|Augusta Resource Corporation                                  
|--------------------------------------------------------------
|Notes to Consolidated Financial Statements                    
|For the years ended December 31, 2010 and 2009                
|(All amounts are
      in U.S. dollars unless otherwise noted)

|(j) | Stock-based compensation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    | The fair value method of accounting is used for
      stock-based awards. Under this method, stock options and restricted share
      units are recorded at their estimated fair value on the grant date and are
      charged either to earnings or capitalized to the deferred development
      costs over the vesting period with a corresponding credit to contributed
      surplus. If the stock options are exercised, the proceeds are credited to
      share capital and the fair value of the options exercised is reclassified
      from contributed surplus to share capital. Restricted shares are issued
      from treasury at date on the grant and are fair valued at the date of
      grant. The fair value is charged to either earnings or capitalized over
      the vesting period. On the vesting date, the fair value is transferred
      from contributed surplus to share capital. For options subject to graded
      vesting, the Company calculates the fair value of the award as if it was
      one single award with one expected life and amortizes the calculated
      expense for the entire award on a straight-line basis over the vesting
      period of the award.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|(k) | Income taxes                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    | Income taxes are provided for in accordance with the
      liability method. Under the liability method of accounting for income
      taxes, future tax assets and liabilities are determined based on
      differences between the financial reporting and tax basis of assets and
      liabilities and are measured using the substantively enacted tax rates and
      laws that will be in effect when the differences are expected to
      reverse.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|(l) | Use of estimates                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    | These consolidated financial statements have been
      prepared in accordance with GAAP which require management to make
      estimates and assumptions that affect reported amounts of assets and
      liabilities and disclosure of contingent assets and liabilities at the
      date of the financial statements and the reported amounts expensed during
      the reporting year. Actual results may differ from those estimates.
      Estimates and assumptions are reviewed on an ongoing basis based on
      historical experience and other factors that are considered to be relevant
      under the circumstances. Revisions to estimates and assumptions are
      accounted for prospectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    | Significant estimates and assumptions made in the
      preparation of these consolidated financial statements include, but not
      limited to:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    | i)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    | ii)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    | iii)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|(m) | Financial instruments  recognition and
      measurements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    | Financial assets and liabilities are recognized on the
      balance sheet when the Company becomes party to the contractual provisions
      of the instrument. Financial instruments are initially recognized and
      subsequently measured based on their classification as held-for-trading,
      available for sale financial assets, held-to- maturity, loans and
      receivables, or other financial liabilities as
follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

- 13 -

---

|Augusta Resource Corporation                                  
|--------------------------------------------------------------
|Notes to Consolidated Financial Statements                    
|For the years ended December 31, 2010 and 2009                
|(All amounts are
      in U.S. dollars unless otherwise noted)

- Held-for-trading financial instruments are
  purchased with the intention of generating income in the near term. These
  instruments are measured at their fair value with change in fair value
  recognized in the statement of operations.
- Available for sale financial assets are financial
  assets that are designated as available for sale and are not categorized into
  any other financial instrument category. These instruments are measured at
  their fair value and changes in fair value are included in other comprehensive
  income until the asset is removed from the balance sheet.
- Held-to-maturity investments are financial assets
  with fixed or determinable payments that the Company has the intention and
  ability to hold-to-maturity. These are initially recognized at fair value and
  are measured at amortized cost using the effective interest rate method.
- Loans and receivables are initially recognized at
  fair value including direct and incremental transaction costs and are
  subsequently measured at amortized cost, using the effective interest method.
- Other financial liabilities are initially
  recognized at fair value and are measured at amortized cost using the
  effective interest rate method.

|    | Transaction costs incurred to acquire financial
      instruments are included in the underlying balance and the resulting
      difference between the fair value of the instrument and the adjusted
      balance is amortized using the effective interest rate method.                                                             
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                        
|(n) | Interest in Joint Venture                                                                                                                                                                                                                                                                                                              
|    |                                                                                                                                                                                                                                                                                                                                        
|    | The Company conducts its business through a joint venture
      which the joint venture participants are bound by a contractual agreement
      establishing joint control over the joint venture. The Company records its
      proportionate share of assets, liabilities, revenue and operating expenses
      of the joint venture.

|3. | FUTURE ACCOUNTING STANDARDS
|-- | ---------------------------

|a) | Business Combinations                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   | In January 2009, the CICA issued CICA Handbook Section
      1582, Business Combinations, which replaces former guidance on business
      combinations. Section 1582 establishes principles and requirements of the
      acquisition method and related disclosures. In addition, the CICA issued
      Section 1601 Consolidated Financial Statements, and Section 1602,
      Non-Controlling Interest, which replaces existing guidance. Section 1601
      establishes standards for the preparation of consolidated financial
      statements and Section 1602 provides guidance on accounting for
      non-controlling interest in a subsidiary in consolidated financial
      statements subsequent to a business combination. These standards apply
      prospectively to business combinations for which the acquisition date is
      on or after the beginning of the first annual reporting period beginning
      on or after January 1, 2011 and early adoption is permitted. The Company
      will adopt these pronouncements at January 1, 2011and the result of this
      adoption does not have any impact on the consolidated financial
      statements.

- 14 -

---

|Augusta Resource Corporation                                  
|--------------------------------------------------------------
|Notes to Consolidated Financial Statements                    
|For the years ended December 31, 2010 and 2009                
|(All amounts are
      in U.S. dollars unless otherwise noted)

|b) | International Financial Reporting Standards                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   | In February 2008, the Canadian Accounting Standards Board
      confirmed January 1, 2011 as the date that International Financial
      Reporting Standards (IFRS) will replace Canadian GAAP for publicly
      accountable enterprises, with a transition date of January 1, 2010. Early
      adoption is permitted. The Company will issue its first IFRS annual
      consolidated financial statements for the fiscal year ending December 31,
      2011, with restatement of comparative balance sheets as at December 31,
      2010 and January 1, 2010 and statement of operations for the year ended
    December 31, 2010. During the year ending December 31, 2011, the Company
      will issue interim consolidated IFRS financial statements prepared in
      accordance with IAS 34 Interim Financial Reporting for the periods ended March
      31, 2011, June 30, 2011 and September 30, 2011, with restatement of
      comparative balance sheets as at December 31, 2010 and January 1, 2010 and
    statements of operations for the comparative periods presented.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|4. | DISCONTINUED OPERATIONS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   | On May 1, 2007, the Company entered into a Letter of
      Intent (LOI) with Ely Gold & Minerals Inc. (Ely) (formerly known
      as Ivana Ventures Inc.) for the sale of the Companys interest in the
      Mount Hamilton, Shell and Monte Cristo properties. Following the
      completion of a definitive sale agreement in November 2007, the Company
      reclassified the consolidated results of DHI Minerals to discontinued
      operations. The transaction closed on February 29, 2008 (Note
7).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   | In accordance with the definitive agreement the
      consideration for the sale was $6.625 million in cash and warrants
      exercisable to purchase up to 3,000,000 shares of Ely for eighteen months
      after closing at the price of Cdn$0.50 per share. The cash portion of the
      purchase price is payable in instalments over five years, with $1.625
      million paid on closing and $1.0 million payable each 12 months
      thereafter. The shares of the subsidiaries and the properties sold to Ely
      were pledged to the Company as its sole recourse for non- payment of any
      portion of the purchase price.                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|5. | INTERESTS IN JOINT VENTURE                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   | On September 16, 2010, Rosemont Copper Company (RCC),
      the Companys wholly-owned subsidiary, and United Copper & Moly LLC
      (UCM) executed an Earn-In Agreement (EI Agreement) whereby UCM can
      earn up to a 20% interest in the unincorporated Rosemont joint venture
      (Rosemont JV) by funding $176 million of Rosemont expenditures. Under
      the terms of the EI Agreement, UCM will contribute cash into the joint
      venture as follows: Tranche 1 - a maximum $70 million for permitting,
      engineering, deposits on long- lead equipment purchases and on-going
      support activities (collectively Pre-Construction Costs) until such time
      as the material permits are granted and Tranche 2 - $106 million for
      construction costs. Once UCM has earned its 20% interest in the joint
      venture, Rosemont expenditures will be shared pro-rata 80/20. As at
      December 31, 2010, UCM has contributed $36.2 million into the Rosemont JV
      and earned a 4.1% interest in the joint venture.                            
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   | RCC and UCM also signed a
      joint venture agreement which governs the roles and responsibilities of
      the operator, management committee and the contribution and disposals of
    assets of the joint venture.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   | The Company has elected to apply proportionate
      consolidation to account for the Rosemont JV in accordance with CICIA HB
      3055 Interests in Joint Ventures. Management has concluded that joint
      control existed in accordance with the joint venture agreement.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   | Under the EI Agreement, the Company will contribute
      Rosemont at a fair value of $704 million and UCM will contribute up to
      $176 million in cash to earn their respective interest in the joint
      venture. The Company has recognized a deferred gain of $27.9 million based
      on UCMs $36.2 million cash contribution into the joint venture as at
      December 31, 2010. The Company will recognize a total deferred gain of
      $107.5 million once UCM has contributed $176 million of cash into the
      joint venture. Upon commencement of commercial production, the Company
      will amortize the deferred gain into earnings over the life of the
      Rosemont mine.                                                                                                                                                                                                                                                                                                                                                                                       

- 15 -

---

|Augusta Resource Corporation                                  
|--------------------------------------------------------------
|Notes to Consolidated Financial Statements                    
|For the years ended December 31, 2010 and 2009                
|(All amounts are
      in U.S. dollars unless otherwise noted)

The following table summarizes the
Companys proportionate share of the assets, liabilities, revenues and expenses
of the Rosemont joint venture as at December 31, 2010.

| | Deposits on long-lead equipment                         | $ | 14,237,314  |  
| | ------------------------------------------------------- | - | ----------- | -
| | Capital assets                                          |   | 284,845     |  
| | Mineral properties and deferred development
      costs |   | 16,591,642  |  
| | Current liabilities                                     |   | (3,005,428  | )
| | Other expenses                                          |   | 396,261     |  
| | Net investment in joint venture                         | $ | 34,719,193  |  
| |                                                         |   |             |  
| | Statement of Cash Flows                                 |   |             |  
| | Cash used in operating activities                       | $ | (396,261    | )
| | Cash provided by financing activities                   |   | 34,719,193  |  
| | Cash used in investing activites                        |   | (28,176,107 | )
| | Cash, end of period                                     | $ | 6,146,825   |  

|6. | CAPITAL ASSETS AND DEPOSITS ON LONG-LEAD
      EQUIPMENT
|-- | --------------------------------------------------------

Capital assets

| |                         |   | December 31, 2010 |  |   | December 31, 2009 | 
| | ----------------------- | - | ----------------- |  | - | ----------------- | 
| |                         |   |                   |  |   | Accumulated       | 
| |                         |   | Cost              |  |   | Amortization      | 
| | Land                    | $ | 4,802,918         |  |   | -                 | 
| | Water rights            |   | 3,649,249         |  |   | -                 | 
| | Vehicles                |   | 339,814           |  |   | 133,704           | 
| | Buildings               |   | 444,896           |  |   | 39,852            | 
| | Furniture and equipment |   | 83,673            |  |   | 44,400            | 
| | Computer hardware       |   | 133,293           |  |   | 58,791            | 
| |                         | $ | 9,453,843         |  | $ | 276,747           | 

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

| | Deposits on long-lead equipment                            |   |            |   |   |            |  
| | ---------------------------------------------------------- | - | ---------- | - | - | ---------- | -
| |                                                            |   | 2010       |   |   | 2009       |  
| |                                                            |   |            |   |   |            |  
| | Balance, December 31, 2009 and 2008                        | $ | 35,490,072 |   | $ | 15,282,230 |  
| | Deposits made during the year                              |   | 26,613,307 |   |   | 14,991,717 |  
| | Sale of interest - Note 5                                  |   | (2,579,746 | ) |   | -          |  
| | Contractual obligations to be paid in the following period |   | -          |   |   | 5,254,215  |  
| | Reclassifications                                          |   | -          |   |   | (38,090    | )
| | Balance, December
      31, 2010 and 2009                  | $ | 59,523,633 |   | $ | 35,490,072 |  

During the year ended December 31,
2010, the Company made deposits totalling $26.6 million (2009 -$15.0 million)
primarily on a SAG mill and two ball mills, three mill drives and three electric
mining shovels.

- 16 -

---

|Augusta Resource Corporation                                  
|--------------------------------------------------------------
|Notes to Consolidated Financial Statements                    
|For the years ended December 31, 2010 and 2009                
|(All amounts are
      in U.S. dollars unless otherwise noted)

|7. | OTHER ASSETS
|-- | ------------

| |                                                          |   | 2010      |   |   | 2009      |  
| | -------------------------------------------------------- | - | --------- | - | - | --------- | -
| | Long-term receivable                                     | $ | 2,617,821 |   | $ | 2,144,664 |  
| | Held-for-trading
      securities                        |   | 126,793   |   |   | 250,000   |  
| | Long-term receivable                                     |   | 2,744,614 |   |   | 2,394,664 |  
| | Computer software,
      net of accumulated amortization |   | 117,255   |   |   | 94,187    |  
| | Total other assets                                       |   | 2,861,869 |   |   | 2,488,851 |  
| | Less: current
      portion of long-term receivable      |   | (626,793  | ) |   | (250,000  | )
| |                                                          | $ | 2,235,076 |   | $ | 2,238,851 |  

Long-term receivable

On February 28, 2008, the Company
completed the sale of its interest in the Mount Hamilton, Shell and Monte Cristo
properties for cash consideration of $6.625 million of which $1.625 million was
paid on closing and the remaining $5.0 million is payable in annual instalments
of $1 million (Annual Payment) over a five year period and share purchase
warrants (the Warrants) to purchase up to 3,000,000 shares of Ely for eighteen
months at a price of Cdn$0.50 per share. The fair value of the consideration was
$3.6 million comprising $3.5 million fair value relating to the $5.0 million
receivable (Ely Receivable), which was calculated using a 15% discount rate,
and $0.1 million fair value for the Warrants calculated using the Black-Scholes
option-pricing model and based on the following assumptions: expected life of
0.66 years; annualized volatility of 40%, a risk free rate of 1.11% and no
dividends. The first Annual Payment of $1 million due on February 28, 2009 was
received. On August 28, 2009, the warrants expired unexercised and the carrying
value was written off to loss from discontinued operations.

On November 16, 2009, the Company
agreed to extend the Annual Payment for an additional two years as follows:

|Due Date                               |   | Amount Due |  
|-------------------------------------- | - | ---------- | -
|                                       |   |            |  
|June 1, 2010 (Paid)                    | $ | 250,000    |  
|June 1, 2011                           |   | 500,000    |  
|June 1, 2012                           |   | 750,000    |  
|June 1, 2013                           |   | 750,000    |  
|June 1, 2014                           |   | 750,000    |  
|June 1, 2015                           |   | 1,000,000  |  
|                                       |   | 4,000,000  |  
|Less: amount paid                      |   | (250,000   | )
|                                       |   |            |  
|Balance due at
      December 31, 2010 | $ | 3,750,000  |  

In consideration for the extension, Ely
paid the Company $0.04 million and granted share purchase warrants for the
purchase of up to 2,000,000 Ely common shares at a price of Cdn$0.25 per common
share expiring on May 16, 2011. The fair value of the Ely warrants on the date
of grant was $0.01 million based on the following assumptions: expected life of
1.5 years, expected volatility of 40%, risk free interest rate of 1.34% and no dividends. The Company classifies the share
      purchase warrants as heldfor- trading with changes in the fair value
      recognized in the statement of operations. As at December 31, 2010, the
      Company has recorded a $0.1 million gain on held-for-trading
securities.

- 17 -

---

|Augusta Resource Corporation                                  
|--------------------------------------------------------------
|Notes to Consolidated Financial Statements                    
|For the years ended December 31, 2010 and 2009                
|(All amounts are
      in U.S. dollars unless otherwise noted)

|8. | MINERAL PROPERTIES AND DEFERRED DEVELOPMENT
      COSTS
|-- | -------------------------------------------------------
|   |                                                        
|   | Mineral properties consist
of:                         

| |                                     |   | 2010       |   |   | 2009       | 
| | ----------------------------------- | - | ---------- | - | - | ---------- | 
| | Balance, December 31, 2009 and 2008 | $ | 25,665,438 |   | $ | 25,462,869 | 
| | Sale of interest - Note 5           |   | (1,057,978 | ) |   | -          | 
| | Acquisition costs                   |   | 63,991     |   |   | 86,358     | 
| | Capitalized
      interest          |   | 16,913     |   |   | 116,211    | 
| | Balance, December 31, 2010 and 2009 | $ | 24,688,364 |   | $ | 25,665,438 | 

Deferred development costs consist
of:

| |                                                                    |   | 2010       |   |   | 2009       | 
| | ------------------------------------------------------------------ | - | ---------- | - | - | ---------- | 
| |                                                                    |   |            |   |   |            | 
| | Balance, December 31, 2009 and 2008                                | $ | 64,516,724 |   | $ | 41,717,224 | 
| | Permitting, engineering and on-going support activities,
      net |   | 31,298,587 |   |   | 21,147,900 | 
| | Sale of interest - Note 5                                          |   | (2,829,158 | ) |   | -          | 
| | Capitalized loan interest and financing charges                    |   | 4,435,745  |   |   | 1,091,500  | 
| | Capitalized stock compensation expense                             |   | 1,186,919  |   |   | 560,100    | 
| | Balance, December
      31, 2010 and 2009                          | $ | 98,608,817 |   | $ | 64,516,724 | 

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

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

During the year ended December 31,
2010, the Company spent $31.3 million (2009 - $21.1 million) on permitting,
basic engineering and design, project salaries and benefits and ongoing support
activities.

- 18 -

---

|Augusta Resource Corporation                                  
|--------------------------------------------------------------
|Notes to Consolidated Financial Statements                    
|For the years ended December 31, 2010 and 2009                
|(All amounts are
      in U.S. dollars unless otherwise noted)

|9. | LONG-TERM DEBT             
|-- | ---------------------------
|   |                            
|   | Long-term debt consists of:

| |                               |   | 2010       |  |   | 2009        |  
| | ----------------------------- | - | ---------- |  | - | ----------- | -
| | Long-term note (a)            | $ | -          |  | $ | 1,547,384   |  
| | ASARCO production payment (b) |   | -          |  |   | 2,600,000   |  
| | Red Kite loan (c)             |   | 42,033,327 |  |   | -           |  
| | Loan facility (d)             |   | -          |  |   | 41,620,567  |  
| | Total debt                    |   | 42,033,327 |  |   | 45,767,951  |  
| | Current portion               |   | -          |  |   | (42,177,512 | )
| | Long-term portion             | $ | 42,033,327 |  | $ | 3,590,439   |  

|a) | Long-term note                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   | On February 20, 2007, the Company entered into an
      agreement to purchase 53-acre parcel of land located 15 kilometers south
      of Tucson. The property will be used for a water-well field, pump station,
      and as a possible water recharge location. The purchase agreement required
      an immediate cash payment of $0.99 million as well as the assumption of a
      promissory note, bearing interest at 8%, for $2.22 million. The promissory
      note, which is secured by a trust deed on the property, requires five
      equal payments for principal and interest of $0.56 million on the February
      20 anniversary date. On February 20, 2010 the third payment of $0.56
      million was made. On April 23, 2010, the Company made a $1.0 million
      payment to settle the outstanding promissory note.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   | During the year ended December 31, 2010, the Company had
      capitalized interest of $0.02 million (2009 - $0.12 million) to deferred
      development costs.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|b) | ASARCO production payment                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   | On January 16, 2009, the Company reached an agreement
      with ASARCO to settle a lawsuit ASARCO had filed against the Company on
      August 8, 2007 in the ASARCO Chapter 11 bankruptcy proceeding in the
      Southern District of Texas, Corpus Christi Division. The proceeding sought
      the return of the Rosemont property, which the Company acquired in 2006
      from a real-estate development company that had purchased the property
      from ASARCO in 2004. On March 26, 2009, the Company was granted an Order
      of Dismissal by the United States Bankruptcy Court with each party to bear
      its own fees, costs and expenses.                                                                                                                                                                             
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   | As part of the settlement, the Company made a $0.25
      million cash payment to ASARCO, which was paid in the first quarter of
      2009, and specified annual production payments (production payments)
      over an eight year period once Rosemont reaches commercial production. The
      Company also has the right of a pre- production, pre-payment option for
      the production payments at the net present value of the aggregate annual
      payments, using an 18% discount rate, as mutually agreed with
    ASARCO.                                                                                                                                                                                                                                                                                                    
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   | The ASARCO production payments arose from a contingency
      that can be reasonably measured and existed at December 31, 2008. As a
      result, the Company recorded a $2.60 million liability for the
      pre-production payment option.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   | On September 24, 2010, the Company exercised its
      pre-production, pre-payment option to settle the Companys obligation
      arising from the ASARCO settlement agreement with a one-time payment of
    $2.68 million.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

- 19 -

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|Augusta Resource Corporation                                  
|--------------------------------------------------------------
|Notes to Consolidated Financial Statements                    
|For the years ended December 31, 2010 and 2009                
|(All amounts are
      in U.S. dollars unless otherwise noted)

|c) | Red Kite loan                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | On April 23, 2010, the Company completed a $43 million
      senior secured loan (the Loan) and copper concentrate off-take agreement
      with Red Kite Explorer Trust (Red Kite). The proceeds from the Loan were
      used in part to retire the Sumitomo loan facility.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | The Loan bears interest at 3-month LIBOR plus 4.5%
      (December 31, 2010  4.78%) and matures on the earlier of April 21, 2012
      or the date of closing of a Rosemont senior debt project financing
      facility. The Loan can be repaid without penalty at any time prior to
      maturity, and the Company has a one-time option, expiring on October 22,
      2011, to extend the maturity date by one year for a fee of 2% of the Loan
      amount.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | Under the terms of the off-take agreement, the Company
      will supply Red Kite with 16.125% of Rosemonts copper concentrates
      production per year when Rosemont commences commercial production and ends
      when 483,750 dry metric tonnes have been delivered to Red Kite. The
      off-take agreement includes market pricing and competitive payables for
      metals including benchmarked treatment and refining charges. The Loan is
      collateralized against Augustas assets, including the shares of the
      Companys subsidiary which holds the Rosemont assets.                                                                                                                                                                                                                                                                                                                                                                                                                 
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | As part of the loan agreement, the Company paid an
      origination fee of 2% of the Loan amount and issued to Red Kite 1,791,700
      warrants (fair value - $0.73 million) exercisable at Cdn$3.90 per share
      for a three year period. The Company also incurred financing costs of
      $2.20 million which were netted against the Loan. The Loan is accreted to
      its face value over the term of the Loan using the effective interest
      method. During the year ended December 31, 2010, the Company recorded
      $2.17 million of loan interest and financing charges which have been
      capitalized to deferred development costs.                                                                                                                                                                                                                                                                                                                                                
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | The Company required Red Kites consent to execute the
      Joint Venture Agreement between the RCC and UCM and, in exchange for the
      consent, the Company agreed to pay Red Kite $0.93 million for accrued
      interest to October 1, 2010 and to cancel the one-time option to extend
      the maturity date for one additional year. As at December 31, 2010, $0.51
      million of loan interest was outstanding and payable.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|d) | Loan facility                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | On June 17, 2008 the Company announced that RCC had
      entered into a $40 million loan agreement (Loan Facility) with Sumitomo
      Corporation of America (Sumitomo), a wholly owned subsidiary of Sumitomo
      Corporation. The Loan Facility can be drawn down by RCC over a twelve
      month period to June 30, 2009 to fund major equipment purchase contracts
      ($27 million) and general working capital ($13 million). Repayment of the
      Loan Facility was for the principal amount plus interest at a rate of
      3-month LIBOR + 1.50%. There were no other fees associated with the Loan
      Facility. The Loan Facility was guaranteed by the Company and secured
      against RCCs assets, including the deposits on long-lead time equipment
      that are on order and will mature on June 17, 2010. In exchange for the
      loan, Augusta granted Sumitomo certain rights to negotiate a minority
      ownership interest in Rosemont, which expired unexercised.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | On April 23, 2010, the Company paid out the Loan Facility
      and accrued interest from the Red Kite proceeds.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

- 20 -

---

|Augusta Resource Corporation                                  
|--------------------------------------------------------------
|Notes to Consolidated Financial Statements                    
|For the years ended December 31, 2010 and 2009                
|(All amounts are
      in U.S. dollars unless otherwise noted)

|10. | 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      | 
| | Balance at December 31, 2007                                             |  | 88,588,061  |  | $ | 92,130,108  | 
| | Issued pursuant to exercise of stock options                             |  | 146,200     |  |   | 484,423     | 
| | Balance at December 31, 2008                                             |  | 88,734,261  |  |   | 92,614,531  | 
| | Issued pursuant to private placement                                     |  | 3,350,000   |  |   | 3,740,210   | 
| | Issued pursuant to prospectus
      offering                             |  | 14,237,000  |  |   | 26,218,197  | 
| | Issued pursuant to exercise of stock options                             |  | 100,000     |  |   | 9,297       | 
| | Issued pursuant to exercise of
      broker warrants and options         |  | 280,555     |  |   | 587,308     | 
| | Transfer fair value of exercised stock options                           |  | -           |  |   | 128,134     | 
| | Issued as compensation pursuant to private
      placement               |  | 67,000      |  |   | 88,340      | 
| | Balance at December 31, 2009                                             |  | 106,768,816 |  |   | 123,386,017 | 
| | Issued pursuant to private
      placement                               |  | 10,905,590  |  |   | 27,593,016  | 
| | Issued pursuant to prospectus offering                                   |  | 11,820,000  |  |   | 31,908,315  | 
| | Issued pursuant to exercise of
      stock options                       |  | 2,220,565   |  |   | 3,336,873   | 
| | Issued pursuant to exercise of broker warrants
      and options         |  | 3,414,066   |  |   | 7,730,751   | 
| | Issued pursuant to restricted
      share and restricted share unit plan |  | 466,665     |  |   | 341,900     | 
| | Transfer fair value of exercised options and warrants                    |  | -           |  |   | 2,530,417   | 
| | Balance at December 31, 2010                                             |  | 135,595,702 |  | $ | 196,827,289 | 

|c) | Issuance of common shares                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   | On March 12, 2010, the Company issued 11,820,000 common
      shares by way of a prospectus filing to a syndicate of underwriters at a
      price of Cdn$2.75 for gross proceeds of Cdn$32.51 million. Share issue
      costs of $1.9 million related to this financing were charged to
      deficit.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   | On August 27, 2010, the Company completed a non-brokered
      private placement with HudBay Minerals Inc. for 10,905,590 units at
      Cdn$2.75 per unit for gross proceeds of approximately Cdn$30.0 million.
      Each unit consists of one common share and one-half of one
      non-transferable common share purchase warrant with each warrant
      exercisable to acquire one common share at an exercise price of Cdn$3.90
      for a period of 18 months, expiring on February 27, 2012. The warrants may
      be subject to accelerated expiry in certain circumstances (Note 19 (a)).
      The fair value of the share purchase warrants was $0.84 million and was
      allocated to contributed surplus and deducted from the net proceeds from
      the issuance. The fair value was calculated using the Black-Scholes
      Pricing Option Model with the following assumptions: expected life of 1.5
      years, annual volatility of 40%, no dividend yield and risk-free interest
      rate of 1.25%.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|d) | Stock options                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   | The Company has a stock option plan providing for the
      issuance of options that, combined with the RSU Plan (as defined below),
      shall not at any time exceed 10% of the total number of issued and
      outstanding common shares of the Company as at the date of grant of the
      options. The Company may grant options to directors, officers, employees,
      consultants and other personnel of the Company or any of its subsidiaries.
      The exercise price of each option cannot be lower than the market price of
      the shares being the closing price of the Companys common shares on
the Toronto Stock Exchange the day before the grant date. Options generally vest
ratably over periods of up to three/four years and may expire within 5 years but
no later than 10 years from the date of grant as determined by the Board of
Directors.                                                                                                                                                  

- 21 -

---

|Augusta Resource Corporation                                  
|--------------------------------------------------------------
|Notes to Consolidated Financial Statements                    
|For the years ended December 31, 2010 and 2009                
|(All amounts are
      in U.S. dollars unless otherwise noted)

The following table summarizes the
Companys stock option plan as at December 31, 2010:

| |                                           |  |            |   |   | Weighted | 
| | ----------------------------------------- |  | ---------- | - | - | -------- | 
| |                                           |  |            |   |   | average  | 
| |                                           |  |            |   |   | exercise | 
| |                                           |  | Number of  |   |   | price    | 
| |                                           |  | Shares     |   |   | (Cdn$)   | 
| | Outstanding as at December 31, 2007       |  | 5,887,000  |   | $ | 1.89     | 
| | Granted                                   |  | 2,170,000  |   |   | 4.00     | 
| | Exercised                                 |  | (146,200   | ) |   | 2.02     | 
| | Forfeited                                 |  | (619,584   | ) |   | 2.80     | 
| | Outstanding as at December 31, 2008       |  | 7,291,216  |   |   | 2.44     | 
| | Granted                                   |  | 1,790,000  |   |   | 0.71     | 
| | Exercised                                 |  | (100,000   | ) |   | 0.10     | 
| | Forfeited                                 |  | (505,416   | ) |   | 2.10     | 
| | Outstanding as at December 31, 2009       |  | 8,475,800  |   |   | 2.14     | 
| | Granted                                   |  | 365,000    |   |   | 2.97     | 
| | Exercised                                 |  | (2,220,565 | ) |   | 1.55     | 
| | Forfeited                                 |  | (66,667    | ) |   | 2.43     | 
| | Expired                                   |  | (550,000   | ) |   | 2.10     | 
| | Outstanding as at
      December 31, 2010 |  | 6,003,568  |   | $ | 2.41     | 

The following table summarizes the
stock compensation expense and capitalized stock compensation expense for the
three years ended December 31, 2010, 2009 and 2008:

| |                                              |   | 2010      |  |   | 2009      |  |   | 2008      | 
| | -------------------------------------------- | - | --------- |  | - | --------- |  | - | --------- | 
| | Stock compensation expense                   | $ | 581,716   |  | $ | 1,120,555 |  | $ | 2,378,054 | 
| | Capitalized stock
      compensation expense |   | 793,248   |  |   | 561,000   |  |   | 417,554   | 
| |                                              | $ | 1,374,964 |  | $ | 1,681,555 |  | $ | 2,795,608 | 

The following assumptions were used in
the Black Scholes option pricing model to fair value of the stock options
granted during the twelve months ended December 31, 2010, 2009 and 2008:

| |                                        |   | 2010          |  |   | 2009          |  |   | 2008          | 
| | -------------------------------------- | - | ------------- |  | - | ------------- |  | - | ------------- | 
| | Expected life                          |   | 3.5           |  |   | 3.5           |  |   | 3.0           | 
| | Expected volatility                    |   | 90% - 93%     |  |   | 81% -90%      |  |   | 65  90%      | 
| | Expected dividend yield                |   | 0.0%          |  |   | 0.0%          |  |   | 0.0%          | 
| | Risk-free interest rate                |   | 2.09% - 2.90% |  |   | 1.81% - 2.34% |  |   | 1.79% - 4.09% | 
| | Weighted average risk free rate        |   | 2.43%         |  |   | 2.05%         |  |   | 3.09%         | 
| | Weighted average fair value per option | $ | 1.91          |  | $ | 0.46          |  | $ | 2.21          | 

- 22 -

---

|Augusta Resource Corporation                                  
|--------------------------------------------------------------
|Notes to Consolidated Financial Statements                    
|For the years ended December 31, 2010 and 2009                
|(All amounts are
      in U.S. dollars unless otherwise noted)

The following table summarizes stock
options outstanding as at December 31, 2010:

Options Outstanding
    
    
    Options ExercisableWeighted
    
    
    
    
    
    
    
    
    WeightedWeighted
    
    
    Average
    
    
    
    
    
    Weighted
    
    
    AverageAverage
    
    
    Remaining
    
    
    
    
    
    Average
    
    
    RemainingNumber of
    
    
    Exercise
    
    
    Contractual
    
    
    Number of
    
    
    Exercise
    
    
    ContractualOutstanding
    
    
    Price
    
    
    Life
    
    
    Exercisable
    
    
    Price
    
    
    LifeExercise Prices
      (Cdn$)
    
    Options
    
    
    (Cdn$)
    
    
    (Years)
    
    
    Options
    
    
    (Cdn$)
    
    
    (Years)$0.68 - $1.13
    
    1,705,001
    
    $
    0.73
    
    
    3.7
    
    
    744,995
    
    $
    0.72
    
    
    3.7$1.14 - $1.92
    
    236,900
    
    
    1.82
    
    
    0.6
    
    
    211,900
    
    
    1.80
    
    
    0.6$1.93 - $2.40
    
    1,766,667
    
    
    2.11
    
    
    0.8
    
    
    1,760,000
    
    
    2.11
    
    
    0.8$2.41- $3.61
    
    730,000
    
    
    3.24
    
    
    2.1
    
    
    200,000
    
    
    3.56
    
    
    2.1$3.62 - $4.97
    
    1,565,000
    
    
    4.27
    
    
    7.2
    
    
    1,163,324
    
    
    4.26
    
    
    7.26,003,568
    
    $
    2.41
    
    
    3.5
    
    
    4,080,219
    
    $
    2.52
    
    
    3.5


The following table summarizes the
outstanding share purchase warrants as at December 31, 2010:

ExercisePrice
    
    
    
    
    
    December
    
    
    
    
    
    
    
    
    
    
    
    December(Cdn$)
    
    
    Expiry Date
    
    
    31,
      2009
    
    
    Issued
    
    
    Exercised
    
    
    Expired
    
    
    31,
      2010Share purchase warrants
    $
    2.30
    
    
    April 17, 2010
    
    
    3,350,000
    
    
    -
    
    
    (3,350,000
    )
    
    -
    
    
    -Share purchase warrants
    $
    3.90
    
    
    April 21, 2013
    
    
    -
    
    
    1,791,700
    
    
    -
    
    
    -
    
    
    1,791,700Share purchase warrants
    $
    3.90
    
    
    February 27, 2012
    
    
    -
    
    
    5,452,795
    
    
    -
    
    
    -
    
    
    5,452,795Compensation
      options
    $
    2.19
    
    
    August
      6, 2010
    
    
    213,554
    
    
    -
    
    
    (64,066
    )
    
    (149,488
    )
    
    -3,563,554
    
    
    7,244,495
    
    
    (3,414,066
    )
    
    (149,488
    )
    
    7,244,495


|e) | Restricted Shares and Restricted Share Units                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   | The Restricted Shares and Restricted Share Units Plan
      (RSU Plan) was approved at the Companys Annual General Meeting held on
      June 11, 2009 and was created to align the directors, employees and
      consultants (collectively, the Participants) interest with the
      shareholders interest. The fair value of the shares issued under the RSU
      Plan can either be paid out in cash or in common shares at the sole
      discretion of the Board. However, the Companys policy is to payout in
      common shares. The RSU Plan, combined with the stock option plan, shall
      not at any time exceed 10% of the total number of issued and outstanding
      common shares of the Company as at the date of grant. The restricted
      shares are issued from treasury on grant date while the restricted share
      units are issued on each vesting date. The fair value of the restricted
      shares and restricted share units is recognized as an amortization charge
      to the statement of operations over its vesting period with a
      corresponding credit to contributed surplus. The fair value of restricted
      shares issued to project Participants is capitalized to deferred
      development costs. Upon vesting, the fair value of the restricted shares
      and restricted share units are transferred to share capital.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   | On February 4, 2010, the Company issued 336,665
      restricted shares and 243,334 restricted share units to its employees and
      directors at a price of $2.37 (Cdn$2.51) per share. They vest 40% upon
      receipt of the Record of Decision and 20% at the first, second and third
      anniversary of date of grant. During the fourth quarter ended December 31, 2010 a total
      of 31,667 restricted share units were forfeited leaving 211,667 units
  outstanding.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

- 23 -

---

|Augusta Resource Corporation                                  
|--------------------------------------------------------------
|Notes to Consolidated Financial Statements                    
|For the years ended December 31, 2010 and 2009                
|(All amounts are
      in U.S. dollars unless otherwise noted)

On March 29, 2010, the Company issued
130,000 restricted shares at a price of $2.63 per share which vested on June 11,
2010.

The following table summarizes the
stock-based compensation expense for the year ended December 31, 2010:

| |                        |  | Issue Date       |  |   | Capitalized |  |   | Expensed |  |   | Total     | 
| | ---------------------- |  | ---------------- |  | - | ----------- |  | - | -------- |  | - | --------- | 
| | Restricted shares      |  | February 4, 2010 |  | $ | 256,370     |  | $ | 65,899   |  | $ | 322,269   | 
| | Restricted share units |  | February 4, 2010 |  |   | -           |  |   | 404,523  |  |   | 404,523   | 
| | Subtotal               |  |                  |  |   | 256,370     |  |   | 470,422  |  |   | 726,792   | 
| | Restricted shares      |  | March 29, 2010   |  |   | 137,301     |  |   | 177,788  |  |   | 315,089   | 
| | Total                  |  |                  |  | $ | 393,671     |  | $ | 648,210  |  | $ | 1,041,881 | 

|11. | SUPPLEMENTAL CASH FLOW INFORMATION
|--- | ----------------------------------

| | Changes in non-cash working capital items consists
      of: |   |           |   |   |          |   |   |           |  
| | ------------------------------------------------------------ | - | --------- | - | - | -------- | - | - | --------- | -
| |                                                              |   | 2010      |   |   | 2009     |   |   | 2008      |  
| | Accounts receivable                                          | $ | (77,956   | ) | $ | 99,278   |   | $ | (65,173   | )
| | Due from related parties                                     |   | 254,305   |   |   | 50,432   |   |   | (33,310   | )
| | Prepaids and deposits                                        |   | 179,409   |   |   | 146,121  |   |   | (310,335  | )
| | Accounts payable
      and accrued liabilities               |   | 333,036   |   |   | (355,832 | ) |   | 1,133,218 |  
| |                                                              | $ | 688,794   |   | $ | (60,001  | ) | $ | 724,400   |  
| |                                                              |   |           |   |   |          |   |   |           |  
| | Interest Paid                                                | $ | 2,859,854 |   | $ | -        |   | $ |           |  

| | Supplemental Disclosure of Non-Cash
      Financing and Investing activities: |   |           |  |   |         |  |  
| | ----------------------------------------------------------------------------- | - | --------- |  | - | ------- |  | -
| |                                                                               |   |           |  |   |         |  |  
| |                                                                               |   | 2010      |  |   | 2009    |  |  
| |                                                                               |   |           |  |   |         |  |  
| | Fair value of Ely share purchase warrants
      issued                        | $ | -         |  | $ | 8,331   |  | $
| | Warrants issued pursuant to Red Kite loan                                     |   | 725,042   |  |   | -       |  |  
| | Warrants issued pursuant to equity financings                                 |   | 844,659   |  |   | 331,206 |  |  
| |                                                                               | $ | 1,569,701 |  | $ | 339,537 |  | $

|12. | RELATED PARTY TRANSACTIONS
|--- | --------------------------

The Company shares rent, salaries and
administrative services with companies related by common directors and officers.
As at December 31, 2010, included in due from related parties was $0.01 million
due from two companies for the recovery of rent, salaries and administration
expenses.

On July 1, 2010, the Company and the
related companies formed a management services company (ManCo.) to share
personnel costs, office rent and other administration costs to each of the
companies under a management services agreement. Each company holds an equal
share in ManCo. For the six months ended December 31, 2010, Manco charged the
Company $0.44 million for its share of salaries, rent and other administrative
expenses. As at December 31, 2010, there was no balance owing.

- 24 -

---

|Augusta Resource Corporation                                  
|--------------------------------------------------------------
|Notes to Consolidated Financial Statements                    
|For the years ended December 31, 2010 and 2009                
|(All amounts are
      in U.S. dollars unless otherwise noted)

On January 22, 2010 the Company
borrowed $3 million from a company, related by common directors and officers, to
complete a scheduled deposit on a long-lead equipment purchase. The amount
borrowed bore an interest rate of one-month LIBOR plus 4% and was repaid on
March 12, 2010. Interest paid on the loan was $0.02 million and was capitalized
to the related asset.

Included in accounts payable as at
December 31, 2010, was $0.07 million (December 31, 2009 - $0.01 million
receivable) owing an officer and other companies related to the officer.

All related party transactions are
recorded at the exchange amount.

|13. | MANAGEMENT OF CAPITAL RISK
|--- | --------------------------

The Companys objectives in managing
capital are to safeguard the Companys ability to continue as a going concern in
order to pursue the development of the Rosemont property and to maintain a
flexible capital structure which optimizes the costs of capital at an acceptable
risk level.

Similar to other mining companies in
the development stage, the Company is in discussions with certain parties to
provide funding for the Company to execute its business plan. On September 16,
2010, the Company entered into an EI Agreement with UCM to earn up to a 20%
interest in the Rosemont joint venture by contributing cash of up to $176
million into the joint venture to fund permitting, engineering and ongoing
Rosemont expenditures through to construction. The Updated Feasibility Study
estimated the capital cost of the mill and mining equipment and all related
construction costs at $897 million. Funding for the project could come from a
number of sources, including project financing, off-take agreements, sale of
future metal streams and from capital markets.

There are no externally imposed capital
requirements. In the management of capital, the Company includes the components
of shareholders equity, long term debt and current liabilities. The Company
manages the capital structure and makes adjustments in light of changes in
economic and market conditions (including receptivity of the capital markets to
new equity or debt issuances) and the risk characteristics of the underlying
assets. To maintain or adjust the capital structure, the Company may issue new
shares, issue new debt or dispose of assets and/or consider strategic alliances
including joint venture partners.

In order to facilitate the management
of its capital requirements, the Company prepares an annual budget that is
updated periodically to account for changes in the timing of expenditures and
market conditions. The annual budget is approved by the Board of Directors.

The Companys investment policy is to
invest its excess cash in highly liquid, short-term interest-bearing
investments. The investments are selected based on the expected timing of
expenditures from continuing operations. In order to maximize ongoing
development efforts, the Company does not pay out dividends.

The 2011 capital requirements will
include scheduled deposits for long-lead equipment purchases, the ongoing cost
of permitting, engineering and on-going support activities at the Rosemont
project as well as for administration expenses. A portion of the Rosemont
expenditures will be funded by UCM to earn its 20% interest in the Rosemont JV
with the balance being funded from the Companys existing cash reserves and if
necessary, additional equity issues to meet its ongoing commitments and capital
purchases.

- 25 -

---

|Augusta Resource Corporation                                  
|--------------------------------------------------------------
|Notes to Consolidated Financial Statements                    
|For the years ended December 31, 2010 and 2009                
|(All amounts are
      in U.S. dollars unless otherwise noted)

|14. | FINANCIAL INSTRUMENTS                                                                                                                                                                                                                                              
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                    
|    | Under Canadian GAAP, financial instruments are classified
      into one of the following five categories: held- for-trading, held to
      maturity investments, loans and receivables, available-for-sale financial
      assets and other financial liabilities.
|    |                                                                                                                                                                                                                                                                    
|    | The carrying values of the Companys financial
      instruments are classified into the following
categories:                                                                                                                                                     

Category
    Measurement
    2010
    2009Cash and cash equivalents Accounts receivables
      Held-for-trading securities Accounts payable and accrued
      liabilities Current and long-term debt
    Held for trading Loans and receivable
      Held for trading Other financial liabilities Loans
      and receivable
    Fair Value - Level 1 Amorized cost
      Fair Value - Level 2 Amorized cost Amorized cost
    $ 31,505,3412,734,365126,793
      (5,100,819)$ (42,033,327)
    $ 6,247,2172,657,2538,331
      (12,386,174)$ (45,767,951)


Financial instruments are initially
recognized at fair value and financial instruments designated as loans and
receivables and other financial liabilities are subsequently measured at
amortized cost, with gains and losses recognized in the statements of operations
in the period in which the gain or loss occurs.

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

Risks arising from financial
instruments and risk management

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

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

Foreign exchange risk

On January 1, 2009, the Company changed
its reporting currency from Canadian to U.S. dollars. As a result, the Company
is exposed to currency risks on its Canadian dollar denominated working capital
balances due to changes in the USD/CAD exchange rate.

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

- 26 -

---

|Augusta Resource Corporation                                  
|--------------------------------------------------------------
|Notes to Consolidated Financial Statements                    
|For the years ended December 31, 2010 and 2009                
|(All amounts are
      in U.S. dollars unless otherwise noted)

The Company is exposed to currency risk
through the following assets and liabilities denominated in Canadian dollars:

| |                                                |   | 2010       |   |   | 2009      |  
| | ---------------------------------------------- | - | ---------- | - | - | --------- | -
| | Cash and cash equivalents                      | $ | 9,391,768  |   | $ | 4,942,433 |  
| | Accounts receivable                            |   | 88,580     |   |   | 253,350   |  
| | Prepaid expenses                               |   | 53,336     |   |   | 9,966     |  
| | Accounts payable
      and accrued liabilities |   | (1,004,191 | ) |   | (512,029  | )
| |                                                | $ | 8,529,493  |   | $ | 4,693,720 |  

Based on the net Canadian dollar
denominated asset and liability exposures as at December 31, 2010, a 10% change
in the USD/CAD exchange rate will impact the Companys earnings by approximately
$0.78 million (2009 - $0.41 million).

Credit risk

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

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

The other asset and significant portion
of the accounts receivable relates to an Ely receivable, which has a fair value
of $2.7 million and is payable over the next five years to 2015. In the event
that Ely does not make the required payments (Note 7) Augusta can take back the
common shares of DHI Minerals and DHI Minerals US or the properties in question.
Should Augusta reacquire the DHI shares or properties, an asset impairment
assessment may be required.

Liquidity risk

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

Based on the our 2011 planned
permitting, engineering expenditures and on-going support activities at the
Rosemont project, the Company believes that our current cash reserves along with
continued funding by UCM to earn its 20% interest in the Rosemont project will
be sufficient to meet its obligations as they become due. However, additional
equity financing will be required to fund unplanned capital purchases.

- 27 -

---

|Augusta Resource Corporation                                  
|--------------------------------------------------------------
|Notes to Consolidated Financial Statements                    
|For the years ended December 31, 2010 and 2009                
|(All amounts are
      in U.S. dollars unless otherwise noted)

|15. | COMMITMENTS
|--- | -----------

The following table lists the known
contractual obligations as at December 31, 2010:

| | in
      thousands of U.S. dollars        |   | < Year 1 |  |   | 1 - 2 Years |  |   | 2 - 3 Years |  |   | 3 - 4 Years |  |   | 4 - 5 Years |  |   | Total   | 
| | ----------------------------------------- | - | -------- |  | - | ----------- |  | - | ----------- |  | - | ----------- |  | - | ----------- |  | - | ------- | 
| | Accounts payable and accrued liabilities  | $ | 5,209    |  | $ | -           |  | $ | -           |  | $ | -           |  | $ | -           |  | $ | 5,209   | 
| | Long-term debt                            |   | -        |  |   | 42,033      |  |   | -           |  |   | -           |  |   | -           |  |   | 42,033  | 
| | Deposits on long-lead equipment purchases |   | 50,978   |  |   | 59,232      |  |   | 2,229       |  |   | -           |  |   | -           |  |   | 112,439 | 
| | Land purchases                            |   | 360      |  |   | -           |  |   | -           |  |   | -           |  |   | -           |  |   | 360     | 
| | Operating lease obligations               |   | 174      |  |   | 71          |  |   | 55          |  |   | 38          |  |   | 38          |  |   | 376     | 
| |                                           | $ | 56,721   |  | $ | 101,336     |  | $ | 2,284       |  | $ | 38          |  | $ | 38          |  | $ | 160,417 | 

On December 19, 2007 the Company
announced that it had signed an agreement valued at approximately $29 million
with Polysius Corp. (Polysius) for the purchase and delivery of a SAG mill and
two ball mills needed for the construction of the Rosemont mine. The scheduled
payments are spread out over two and a half-year period starting in January 2008
with the final payment of $0.5 million due in 2011.

On April 8, 2008 the Company announced
the signing of a Letter Award with a subsidiary of ABB Ltd. for the supply of
three gearless mill drives for $40.6 million (€28.3 million) with the payments
spread out over a two and a half-year period. During 2010 the Company made
payments totaling $19.4 million (€14.6 million) (2009 - $8.7 million
(€6.4million)) . Payments for 2011 will total $12.9 million (€8.9 million).

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

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

On February 11, 2010 the Company signed
a definitive agreement with Silver Wheaton Corporation (Silver Wheaton) for
the sale of all of the Companys silver and gold produced from Rosemont. Silver
Wheaton will pay Augusta upfront cash payments of $230 million and production
payments of $3.90 per ounce of silver and $450 per ounce of gold delivered, or
the prevailing market price, if lower, during the mine life. The drawdown of the
cash payments is subject to Augusta receiving the ROD.

- 28 -

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|Augusta Resource Corporation                                  
|--------------------------------------------------------------
|Notes to Consolidated Financial Statements                    
|For the years ended December 31, 2010 and 2009                
|(All amounts are
      in U.S. dollars unless otherwise noted)

|16. | INCOME TAXES
|--- | ------------

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

| |                                                                      |   | 2010       |   |   | 2009       |   |   | 2008        |  
| | -------------------------------------------------------------------- | - | ---------- | - | - | ---------- | - | - | ----------- | -
| | Net loss from continuing operations for the
      year               | $ | (5,439,180 | ) | $ | (5,019,556 | ) | $ | (17,229,561 | )
| | Statutory tax rate                                                   |   | 28.50%     |   |   | 30.00%     |   |   | 31.00%      |  
| |                                                                      |   |            |   |   |            |   |   |             |  
| | Recovery of income taxes computed at standard rates                  |   | (1,550,166 | ) |   | (1,505,867 | ) |   | (5,341,164  | )
| | Differences in foreign tax rates                                     |   | (287,155   | ) |   | (278,899   | ) |   | (1,296,578  | )
| |                                                                      |   |            |   |   |            |   |   |             |  
| | Tax losses not recognized in the period
      that the benefit arose |   | 2,134,603  |   |   | 1,771,060  |   |   | 4,260,986   |  
| | Foreign exchange gains (losses)                                      |   | (160,024   | ) |   | (375,330   | ) |   | 2,207,473   |  
| | Stock based compensation                                             |   | (175,020   | ) |   | 166,238    |   |   | 505,960     |  
| | Other permanent
      differences                                    |   | 37,762     |   |   | 222,798    |   |   | (336,677    | )
| |                                                                      | $ | -          |   | $ | -          |   | $ | -           |  

As of December 31, 2010, the Company
has Canadian loss carry forwards of approximately $22.0 million (2009 - $15.1
million) and US loss carry forwards of approximately $47.4 million (2009 - $38.7
million) available to reduce future years income for tax purposes. The tax loss
carry forwards expire at various times between 2011 and 2030. The utilization of
the U.S. loss carry-forwards may be subject to certain annual limitations under
the provisions of the Internal Revenue Code Section 382 relating to a 50% change
in control over a three-year period.

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, 2010 and
2009 are as follows:

| |                                                                   |   | 2010        |   |   | 2009        |   |   | 2008       |  
| | ----------------------------------------------------------------- | - | ----------- | - | - | ----------- | - | - | ---------- | -
| | Future income tax assets                                          |   |             |   |   |             |   |   |            |  
| | Non-capital losses and other future tax deductions                | $ | 26,846,000  |   | $ | 21,138,000  |   | $ | 13,821,000 |  
| |                                                                   |   |             |   |   |             |   |   |            |  
| | Mineral properties, deferred development and capital assets       |   | -           |   |   | -           |   |   | 2,000      |  
| | Other assets                                                      |   | 11,165,000  |   |   | 202,000     |   |   | 109,000    |  
| | Long-term debt                                                    |   | 317,000     |   |   | 1,028,000   |   |   | 1,127,000  |  
| |                                                                   |   | 38,328,000  |   |   | 22,368,000  |   |   | 15,059,000 |  
| | Valuation
      allowances for future income tax assets           |   | (17,657,000 | ) |   | (11,385,000 | ) |   | (7,670,000 | )
| |                                                                   |   | 20,671,000  |   |   | 10,983,000  |   |   | 7,389,000  |  
| | Future income tax liabilities                                     |   |             |   |   |             |   |   |            |  
| | Working capital balances attributable to
      joint venturer     |   | (1,517,000  | ) |   | -           |   |   | -          |  
| | Mineral
      properties, deferred development and capital assets |   | (19,154,000 | ) |   | (10,983,000 | ) |   | (7,389,000 | )
| | Net future tax assets (liabilities)                               | $ | -           |   | $ | -           |   | $ | -          |  

As the criteria for recognizing future
income tax assets have not been met due to uncertainty of realization, a
valuation allowance has been recorded for each of the years.

- 29 -

---

|Augusta Resource Corporation                                  
|--------------------------------------------------------------
|Notes to Consolidated Financial Statements                    
|For the years ended December 31, 2010 and 2009                
|(All amounts are
      in U.S. dollars unless otherwise noted)

|17. | SEGMENTED INFORMATION
|--- | ---------------------

The Company operates in one industry.
As at December 31, 2010, the Companys long-lived assets were in Canada, $2.1
million (2009 - $2.2 million) and in the United States - $192.1 million (2009 -
$133.4 million).

|18. | DIFFERENCES BETWEEN UNITED STATES AND
      CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
|--- | ---------------------------------------------------------------------------------------------

These consolidated financial statements
are prepared in accordance with Canadian GAAP, which differ in certain material
respects from US GAAP. Material differences between Canadian GAAP and US GAAP
and their effect on the Companys consolidated financial statements are
summarized on the following tables:

| |                                   |   | December 31, 2010 |  
| | --------------------------------- | - | ----------------- | -
| |                                   |   |                   |  
| | Balance Sheets                    |   | Total Assets      |  
| | Reported under Canadian GAAP      | $ | 226,616,900       |  
| | Mineral property expenditures (a) |   | (20,594,363       | )
| | Fair value of warrants (b)        |   | -                 |  
| | Deferred financing costs (g)      |   | 1,480,671         |  
| | Gain on disposal of assets (e)    |   | 516,854,693       |  
| | Capitalized interest (d)          |   | 247,174           |  
| | Reported under US
      GAAP      | $ | 724,605,075       |  

| |                                   |   | December 31, 2009 |  
| | --------------------------------- | - | ----------------- | -
| |                                   |   |                   |  
| | Balance Sheets                    |   | Total Assets      |  
| | Reported under Canadian GAAP      | $ | 142,638,660       |  
| | Mineral property expenditures (a) |   | (20,577,680       | )
| | Deferred financing costs (g)      |   | 24,311            |  
| | Capitalized interest (d)          |   | 247,174           |  
| | Reported under US
      GAAP      | $ | 122,332,465       |  

- 30 -

---

|Augusta Resource Corporation                                  
|--------------------------------------------------------------
|Notes to Consolidated Financial Statements                    
|For the years ended December 31, 2010 and 2009                
|(All amounts are
      in U.S. dollars unless otherwise noted)

| |                                                |   | Years ended December 31, |  
| | ---------------------------------------------- | - | ------------------------ | -
| | Statements of Operations                       |   | 2010                     |  
| | Net loss reported under Canadian GAAP          | $ | (5,439,180               | )
| | Mineral property expenditures (a)              |   | (16,683                  | )
| | Warrants (b)                                   |   | (3,314,807               | )
| | Capitalized interest (d)                       |   | -                        |  
| | Gain on sale of assets (e)                     |   | 544,721,071              |  
| | Assets of discontinued operations (a)          |   | -                        |  
| | Net income (loss)
      reported under US GAAP | $ | 535,950,401              |  
| | Earnings (loss) per share                      |   |                          |  
| | Basic                                          | $ | 4.35                     |  
| | Diluted                                        | $ | 4.04                     |  
| | Weighted average number of shares outstanding  |   |                          |  
| | Basic                                          |   | 123,283,762              |  
| | Diluted                                        |   | 132,798,792              |  
| |                                                |   |                          |  
| |                                                |   | Years ended December 31, |  
| | Comprehensive loss                             |   | 2010                     |  
| | Net income (loss) reported under US GAAP       | $ | 535,950,401              |  
| | Other comprehensive income                     |   |                          |  
| | Cumulative translation adjustment              |   | -                        |  
| | Comprehensive income (loss) under US GAAP      | $ | 535,950,401              |  

| |                                    |   | December 31, 2010 |  
| | ---------------------------------- | - | ----------------- | -
| |                                    |   |                   |  
| |                                    |   |                   |  
| |                                    |   | Common            |  
| | Statements of Shareholders' Equity |   | Shares            |  
| | Reported under Canadian GAAP       | $ | 196,827,289       |  
| | Mineral property expenditures (a)  |   | -                 |  
| | Fair value of warrants (b)         |   | 8,807,804         |  
| | Convertible debenture              |   | -                 |  
| | Share issue costs ( c)             |   | (8,957,841        | )
| | Capitalized interest (d)           |   | -                 |  
| | Gain on sale of assets (e)         |   | -                 |  
| | Accretion expense on debenture (c) |   | (250,337          | )
| | Reported under US
      GAAP       | $ | 196,426,915       |  

- 31 -

---

|Augusta Resource Corporation                                  
|--------------------------------------------------------------
|Notes to Consolidated Financial Statements                    
|For the years ended December 31, 2010 and 2009                
|(All amounts are
      in U.S. dollars unless otherwise noted)

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

| |                                          |   | Years ended December 31, |  
| | ---------------------------------------- | - | ------------------------ | -
| | Statements of Cash
      Flows           |   | 2010                     |  
| | Operating activities                     |   |                          |  
| | Operating activities under Canadian GAAP | $ | (4,570,537               | )
| | Mineral property expenditures (a)        |   | (16,683                  | )
| | Operating
      activities under US GAAP | $ | (4,587,220               | )
| |                                          |   |                          |  
| | Investing activities                     |   |                          |  
| | Investing activities under Canadian GAAP | $ | (70,936,600              | )
| | Mineral property
      expenditures (a)  |   | 16,683                   |  
| | Operating activities under US GAAP       | $ | (70,919,917              | )

|a) | Mineral Property Expenditures                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   | Canadian GAAP allows exploration and development costs to
      be capitalized during the search for a commercially mineable body of ore.
      The Company has incurred exploration and development expenses that were
      added to the carrying value of mineral properties as it is anticipated
      that there is a continuing benefit of such expenditures. Under ASC Topic
      835, exploration expenditures can only be deferred subsequent to the
      establishment of proven and probable reserves. On August 28, 2007 the
      Company announced the results of the Feasibility Study for the Rosemont
      project and the approval by the Board of Directors to begin mine
      development.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   | During the year ended December 31, 2010, the Company
      deferred $0.02 million (2009 - $0.2 million; 2008 - $Nil) of expenditures
      under Canadian GAAP which would have been expensed under US GAAP and
      classified as operating activities on the consolidated statements of cash
      flows.                                                                                                                                                                                                                                                                                                                                                                                                      
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|b) | Share Purchase Warrants                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   | Under Canadian GAAP share purchase warrants are accounted
      for as equity. Under US GAAP, as required by the Financial Accounting
      Standards Board (FASB) issued ASC Topic 815 (formerly, SFAS 133
      Accounting for Derivative Instruments and Hedging Activities), as
      amended, and EITF 07-5 Determining Whether an Instrument (or Embedded
      Feature) is Indexed to an Entitys Own Stock, share purchase warrants
      denominated in a currency that is not the functional currency of the
      Company are accounted for as a liability, with the change in fair value
      recorded in the statement of operations.                                                         

- 32 -

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|Augusta Resource Corporation                                  
|--------------------------------------------------------------
|Notes to Consolidated Financial Statements                    
|For the years ended December 31, 2010 and 2009                
|(All amounts are
      in U.S. dollars unless otherwise noted)

|   | The Company had 7,244,495 warrants outstanding as at
      December 31, 2010. Under Canadian GAAP, the warrants have a fair value of
      $1.6 million whereas under US GAAP the warrants have a fair value of $5.1
      million, resulting in a charge of $3.5 million to the statement of
      operations and the reclassification of the fair value from contributed
      surplus to current liability. Under Canadian GAAP, the fair value of
      exercised warrants is reclassified from contributed surplus to share
      capital whereas under US GAAP, the exercised warrants are fair valued on
      the exercise date. Any changes in the fair value of the warrants are
      charged to the statement of operations. For the year ended December 31,
      2010, the Company recorded an additional $0.8 million charge to earnings
      from the change in the fair value of 3,350,000 warrants.
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|c) | Share Issue Costs                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | Under Canadian GAAP, share issue costs related to
      issuance of common shares can be either netted against share capital or
      charged to deficit whereas under US GAAP share issue costs are netted
      against share capital. For the year ended December 31, 2010, share issue
      costs of $2.0 million (2009 - $2.5 million) were charged to
  deficit.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|d) | Capitalized Interest                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | ASC Topic 835 provides for interest costs to be
      capitalized for qualifying assets under development. Under Canadian GAAP,
      interest is capitalized only on project specific debt. Following the
      August 2007 approval by the Board of Directors to develop the Rosemont
      project, interest amounting to $0.2 million in 2008 would have been
      capitalized under US GAAP. For years 2010 and 2009, there was no
      difference under Canadian and US GAAP.                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|e) | Interest in Joint Ventures                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | Under Canadian GAAP, investment in jointly controlled
      entities is accounted for using proportionate consolidation. Under US
      GAAP, investments in unincorporated joint ventures are to be accounted for
      using proportionate consolidation. Where there has been a change of
      control, US GAAP requires deconsolidation of the asset(s) sold at carrying
      value and reacquired at fair value.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | On September 16, 2010, the Company entered into a joint
      venture agreement with UCM whereby the Company would contribute Rosemont
      at an agreed value of $704 million and UCM would contribute cash of up to
      $176 million to earn up to 20% interest in the joint venture. Under
      Canadian GAAP, the Company recognized a deferred gain of $27.9 million to
      reflect the 4.11% that UCM had earned into the joint venture. Upon
      commencement of commercial production the deferred gain would be amortized
      into earnings over the life of the Rosemont mine. Under US GAAP, loss of
      control by virtue of the transfer of Rosemont into the joint venture was
      considered an asset sale at carrying value resulting in the Company
      recognizing a $544.7 million gain into income on execution of the EI
      Agreement.                                        

- 33 -

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|Augusta Resource Corporation                                  
|--------------------------------------------------------------
|Notes to Consolidated Financial Statements                    
|For the years ended December 31, 2010 and 2009                
|(All amounts are
      in U.S. dollars unless otherwise noted)

|f) | Uncertain Tax Positions                                                                                                                                                                                                                                                                                                                                                  
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                          
|   | On January 1, 2007, the Company adopted the U.S. GAAP
      standards regarding uncertain tax positions. The adoption did not result
      in any adjustment to the opening deficit or any further increase in the
      liability for unrecognized tax benefits. A reconciliation of the beginning
      and ending amount of unrecognized tax benefits is as
  follows:

| | Total unrecognized tax benefits at January
      1, 2010           | $ | 1,203,000 |  
| | ------------------------------------------------------------------ | - | --------- | -
| | Additions based on tax positions related to the current
      year |   | -         |  
| | Additions for tax positions of prior years                         |   | 86,000    |  
| | Reductions for tax
      positions of prior years                  |   | (848,000  | )
| | Total unrecognized tax benefits at December 31, 2010               | $ | 441,000   |  

|   | Due to the existence of tax assets subject to valuation
      allowance, no amount of the unrealized tax benefit would affect the annual
      effective tax rate. Additionally, due to the significant balance of loss
      carry-forwards of the Company in relation to the above uncertain tax
      positions, it has been determined that no interest and or penalties would
      apply. The Company or one of its subsidiaries files income tax returns in
      Canada and the U.S. federal jurisdictions and in various states. With few
      exceptions, the Company is no longer subject to examinations by U.S. or
      Canadian tax authorities for years prior to 2005.                                                                                                                                                                                                                                                       
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|g) | Deferred Financing Costs                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   | Under Canadian GAAP, deferred financing costs are netted
      against the loan whereas under US GAAP, deferring financing costs are
      reported in non-current assets as deferred charges. Under US GAAP, the
      Company reclassified $1.4 million (2009 - $0.02 million) of deferred
      financing costs from non-current liabilities to non-current
  assets.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|h) | New Accounting Pronouncements in the United
      States                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   | ASU Topic 820 Improving Disclosures about Fair Value
      Measurements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   | The Financial Accounting Standards Board (FASB) has
      issued Accounting Standards Update No. 2010-06 (ASU 2010-06), Fair
      Value Measurement and Disclosures (Topic 820): Improving Disclosures about
      Fair Value Measurements. This ASU requires some new disclosures and
      clarifies some existing disclosure requirements about fair value
      measurement as set forth in Codification Subtopic 820-10. ASU 2010-06
      amends Codification Subtopic 820-10 and now requires a reporting entity to
      use judgement in determining the appropriate classes of assets and
      liabilities and to provide disclosures about the valuation techniques and
      inputs used to measure fair value for both recurring and non-recurring
      fair value measurements. The current year adoption did not have an impact
      on the Companys consolidated financial position and results of
      operations.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   | ASC Topic 855 Subsequent Events                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   | In May 2009, the FASB issued ASC Topic 855, Subsequent
      Events (ASC 855). ASC 855 establishes principles and requirements for
      events that occur after the balance sheet date, but before the issuance of
      the financial statements. ASC 855 requires disclosure of the date through
      which subsequent events have been evaluated and disclosure of certain
      non-recognized subsequent events. ASC 855 is effective
  for interim and annual periods ending after June 15, 2009.
      The adoption of ASC 855 did not have a material impact on the Companys
  financial position, results of operations or cash flows.                                                                                                                                                                                                                                                                                         

- 34 -

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|Augusta Resource Corporation                                  
|--------------------------------------------------------------
|Notes to Consolidated Financial Statements                    
|For the years ended December 31, 2010 and 2009                
|(All amounts are
      in U.S. dollars unless otherwise noted)

|19. | SUBSEQUENT EVENTS                            
|--- | ---------------------------------------------
|    |                                              
|    | Subsequent to December 31, 2010, the Company:
|    |                                              
|    | a)                                           
|    |                                              
|    | b)                                           
|    |                                              
|    | c)                                           

- 35 -

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