BASIS OF PRESENTATION

The accompanying interim consolidated financial statements of Augusta Resource Corporation (the “Company”) have been prepared in accordance with Canadian generally accepted accounting principles for interim financial statements and accordingly do not include all disclosures required for annual financial statements.

These interim consolidated financial statements follow the same significant accounting policies and methods of application as the Company’s annual consolidated financial statements for the year ended December 31, 2005 (the “Annual Financial Statements”). The interim consolidated financial statements should be read in conjunction with the Annual Financial Statements.

In the opinion of management, all adjustments (including normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for interim periods are not necessarily indicative of the result that may be expected for the full fiscal year ending December 31, 2006.

RESTATMENT

During the preparation of the Form 40-F filing document, a requirement of an American Stock and Options Exchange (AMEX) listing the Company is pursuing, the Company discovered non- cash errors relating to its financial statements (including the audited year end financial statements) for the first quarter ended March 31, 2006 as well as for the each quarter of 2005. In the previously released financial statements the Company had not properly accounted for the convertible debenture issued on June 1, 2005. Canadian Institute of Chartered Accountants (“CICA”) Handbook Section 3860 requires that the proceeds received from the issuance of convertible debt be allocated between its equity and debt components. The Company had treated all the proceeds as debt. Further, upon review of the option pricing model (Black-Scholes) used for valuing stock options and warrants issued during 2005, the Company concluded that the time period used to calculate the volatility assumption required adjustment.

RESTATEMENT (continued)

Through and as at March 31, 2006 the impact of the restatement was:

RESTATEMENT (continued)

OFFICE EQUIPMENT

MINING ASSETS

On March 31, 2006 the Company exercised its option to purchase the Rosemont property in Pima County Arizona. The Company has paid the remaining $16.1 million, under its purchase option agreement. Augusta now owns a 100% interest in the Rosemont property subject to a 3% NSR.

The purchase price has been allocated based on the fair value of the consideration provided which equates the fair value of the Rosemont property land and mineral rights acquired based on management’s best estimates and takes into account all available information at the time these consolidated financial statements were prepared. The process has been conducted in accordance with the recent accounting pronouncement relating to “Mining Assets – Impairment and Business Combinations” (Emerging Issue Committee Abstract 152).

MINING ASSETS (continued)

LONG TERM NOTES AND ADVANCES

LONG TERM NOTES AND ADVANCES (continued)

The purchase of the Mount Hamilton property included cash consideration of $3,000,000 USD ($3,103,438 CDN). The initial installment payment of $500,000 USD ($620,100 CDN) was accrued in April 2005 and paid. On the purchase of the Mount Hamilton property two non- interest bearing US$ notes were given totaling $2,500,000 USD ($2,655,695 CDN) and has been discounted using an interest rate of 15%.

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

CONVERTIBLE DEBENTURE

On June 1, 2005, in connection with the Rosemont acquisition, the Company issued a convertible debenture for $6,000,000. The debenture has a one-year term, with half due within six-months, and is convertible at the option of the lender into 2,181,818 common shares of the Company at a price of $2.75 per share. The convertible debenture bears an interest rate of 9% annually and the Company has the option to repay the convertible debenture on the specified repayment dates in cash or stock. Any accrued interest owing under the convertible debenture may be converted into common shares at the discretion of the lender. The convertible debenture was issued with 363,363 common shares of the Company to the lender at a fair market value at the date of the transaction of $2.805 per common share (after a discount of 15% to reflect a hold period that expired on October 2, 2005.).

In accordance with CICA Handbook Section 3860, and following the fair value allocation approach, the Company allocated the proceeds as follows:

CONVERTIBLE DEBENTURE (continued)

The difference between the debt allocation of $3,502,684 and the repayment amount of $6,000,000 is interest expense which is accrued over the term of the debenture. Through March 31, 2006, $2,149,478 of the interest expense had been accrued including $448,130 for the first quarter of 2006.

On November 17, 2005 the Company renegotiated the terms of its convertible debenture to allow for repayment in the form of cash and stock, as opposed to cash or stock. As consideration, the Company agreed to issue 750,000 warrants with an exercise price of $1.44 expiring in one year, for which regulatory approval was received on March 15, 2006. The fair value of the warrants issued was $288,938 which was allocated to debt ($203,193) and equity ($85,745). The fair value of the warrants was calculated using the Black-Scholes option pricing model for warrant valuation, assuming an average volatility of 85% on the underlying shares, a risk free interest rate of 4.25%, a one year term to expiry and no annual dividends. The Company has the right to force conversion of the warrants if the Company’s shares trade over $2.00 for a period of 30 days.

On December 1, 2005, the Company retired $3,000,000 of the convertible debenture plus interest of $270,000 through payment of $1,620,000 in cash and the issuance of 1,500,000 common shares at a price of $1.10 per share. As the shares were issued at discount of 20% to the market value in accordance with the terms of the convertible debenture agreement, a loss on repayment of the convertible debenture of $390,000 occurred which was recorded in the statement of operations.

In connection with the issuance of the convertible debenture and common shares, the Company also paid a fee in the amount of 6% cash and 218,181 warrants to Northern Securities Inc. The fair value of the warrants of $247,769, which was allocated to debt ($144,643) and equity ($103,126), was calculated using the Black-Scholes option pricing model for warrant valuation, assuming an average volatility of 72% on the underlying shares, a risk free interest rate of 3.17%, a one year term to expiry and no annual dividends. Each warrant is exercisable to acquire one common share at $2.75 per warrant for a period of one year expiring on June 14, 2006. The warrants had a hold period expiring on October 15, 2005.

The debenture is repayable on June 1, 2006. As of May 25, 2006 the Company has placed the repayment amount, including the accrued interest in trust to complete the debenture retirement.

CONVERTIBLE DEBENTURE (continued)

SHARE CAPITAL

(a)           Authorized: Unlimited number of common shares without par value.

SHARE CAPITAL (continued)

Issued:

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

Private Placement

The proceeds from the following special warrants were allocated to special warrants and contributed surplus based on the relative fair value of the underlying common shares and warrants at the dates of issuance.

On March 17, 2006 the Company closed a brokered private placement of 23,210,000 special warrants with gross proceeds of $44,099,000.

Each Special Warrant is convertible, without payment of additional consideration, into a unit consisting of one common share (23,210,000 shares) and one-half transferable common share purchase warrant (11,605,000 warrants). Each whole warrant will entitle the holder to acquire, at any time within two years, one common share of the Company at a price of $3.10 expiring on March 17, 2007 and $4.10 expiring on March 17, 2008.

In consideration for their services, the agents received a cash commission equal to 6% of the gross proceeds, totaling $2,645,940 from the offering and 1,392,600 agent’s warrants exercisable into common shares which is equal to 6% of the number of Special Warrants sold. Each agent’s warrant will entitle the holder to acquire one common share of the

SHARE CAPITAL (continued)

Private Placement (continued)

Company at a price of $3.10 expiring March 17, 2007 and $4.10 expiring March 17, 2008. Fair value of the agent’s warrants is $905,190. The fair value of the warrants was calculated using the Black-Scholes option pricing model for warrant valuation, assuming an average volatility of 97.29% on the underlying shares, a risk free interest rate of 4.00%, a two year term to expiry and no annual dividends.

Options

On March 31, 2006, certain directors and officers of the Company held 3,214,334 stock options, and certain employees of the Company held 12,500 stock options to purchase common shares of the Company.

The following table summarizes the status of the Company’s stock option plans as at March 31, 2006:

SHARE CAPITAL (continued)

Options (continued)

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

Warrants

The following table summarizes information about warrants outstanding at March 31, 2006. Each warrant is exercisable into one common share.

SHARE CAPITAL (continued)

Contributed Surplus

On March 31, 2006, the contributed surplus was as follows:

RELATED PARTY TRANSACTIONS

During the period ended March 31, 2006, the Company incurred expenses of $7,500 (2005 - $7,500) for administrative services provided by a company in which a director of the Company has a 25% interest. During the period ended March 31, 2006, the Company incurred salaries of $37,500 (2005 - $37,500) to the Chairman of the Company, $63,499 (2005 - $Nil) to the President and CEO of the Company, $38,965 (2005 - $Nil) to the Vice President Exploration and $18,750 (2005 – $18,750) to the CFO.

At March 31, 2006, $6,291 of accounts receivable (2005 - $17,675 of accounts payable) is due to a related company, which share office space and certain common directors with the Company. At March 31, 2006, $93,750 (2005 - $18,750) is due to the CFO of the Company for salaries accrued in the current and prior year. Also included in accounts receivable at March 31, 2006 is an amount of $23,917 (2005 - $57,186) due to a related company with common directors.

All related party transactions are recorded at the exchange value.

FINANCIAL INSTRUMENTS

The carrying values of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, notes, advances and convertible debenture as reflected in the balance sheet approximate their fair values. The company has no significant concentrations of credit risk.

COMMITMENTS

The lease for the office space in Denver started on June 1, 2005 and ends on May 31, 2008. The future minimum lease payments are as follows:

SUBSEQUENT EVENTS

On April 11, 2006 the Company granted 816,000 stock options to directors, officers and employees of the Company at an exercise price of $2.07 per share for a period of five years expiring on April 11, 2011.

On May 15, 2006 the Company granted 654,000 stock options to directors, officers, employees and consultants of the Company at an exercise price of Cdn$2.20 per common share for a period of five years expiring on May 15, 2011.

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