Back-to-back defeats to World Cup hosts France in warm-up internationals last month suggests England are very much an outside bet to become the first side to win successive world titles.
But 35-year-old Dallaglio is confident of the team's chances going into his final World Cup.
"We are still world champions. I believe we have a credible chance of defending that trophy," Dallaglio told the BBC's Inside Sport programme.
"We know very definitively what we've got to do. And when I turned up in the England squad for the first time in a while, I was pleasantly surprised by the faces that I saw in the room because there had been all this doom and gloom about England and the results hadn't been great and whatever.
"And I looked around the room and saw Jonny (Wilkinson) there and thought 'You've always got a chance with him on the team'.
"And you see guys like Simon Shaw and Phil Vickery and a lot of people that I've played with and I was pleasantly optimistic. I think on paper we've got a lot stronger team than perhaps people are giving us credit for."
Asked whether he saw himself as a squad member or part of the first XV, Dallaglio added: "I'd love to be in the team. I want to start the game.
"I hope we don't have anyone in the squad who is just happy to be in the squad. You have to want to be in the team."
Dallaglio insists he is full of motivation and dismisses the theory that a player who has won the tournament before cannot have the same hunger as one who has not got their hands on the top prize.
"I think when you come back in there's a feeling in this country of 'Why should he come back and play?'.
"And I think there is this feeling of 'Well, you've won the World Cup, why would you want to come back and do it again?'.
"If you're a rugby fan you want to put on an England shirt and go and play for England."