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UNITED STATESSECURITIES AND EXCHANGECOMMISSIONWASHINGTON, D.C. 20549

FORM10-QSB

(Mark One)

[  X  ] QUARTERLY REPORT PURSUANT TO SECTION 13
  OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED
  SEPTEMBER 30, 2006

[    ] TRANSITION REPORT PURSUANT TO SECTION 13
OR 15(D) OF THE SECURITIES EXCHANGE ACT

For the transition period from _____________ to
_______________

____________________

Commission File Number:
0-20430____________________

AZCO MINING
INC.(Exact name of Registrant as specified in its
charter)

|Delaware                        | 84-1094315                       
|------------------------------- | ---------------------------------
|(State or other jurisdiction of | (IRS Employer Identification No.)
|incorporationor organization)   |                                  

7239 North El Mirage RoadGlendale, AZ
85307(Address of principal executive offices)

(623) 935-0774(Issuers telephone
number)

Check whether the issuer (1)
filed all reports required to be filed by Section 13 or 15(d) of the Exchange
Act during the past 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

Yes [    ] No [ X ]

Indicate by check mark whether
  the registrant is a shell company (as referred in Rule 12b-2 of the Exchange
  Act). Yes ______  No [  X  ]

The number of shares outstanding
  of each of the issuers classes of common equity was 68,513,712 shares
  of common stock, par value $0.002, as of February 16, 2007.

Transitional Small Business Disclosure Format (check
one):

Yes [    ] No [ 
X  ]

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AZCO MINING INC.INDEX TO FORM
10-QSBFOR THE QUARTER ENDED SEPTEMBER 30,

TABLE OF CONTENTS

PART IFINANCIAL
INFORMATION

|                  | Page                                                              
|----------------- | ------------------------------------------------------------------
|                  |                                                                   
|Item 1.           | Financial Statements                                              
|                  | Consolidated Balance Sheet, September 30,
      2006 (Unaudited)  
|                  | Consolidated Statements of Operations                             
|                  | For the Three Months Ended September 30, 2006 and 2005 (Unaudited)
|                  | Consolidated Statements of Cash Flows                             
|                  | For the Three Months Ended September 30, 2006 and 2005 (Unaudited)
|                  | Notes to the Consolidated Financial Statements (Unaudited)        
|                  |                                                                   
|Item 2.           | Managements Discussion and Analysis and Plan of Operations       
|                  |                                                                   
|Item 3.           | Controls and Procedures                                           
|                  |                                                                   
|PART II          
|OTHER INFORMATION
|                 
|Item 2.           | Changes in Securities and Use of Proceeds                         
|                  |                                                                   
|Item 4.           | Submission of Matters to a Vote of Security Holders               
|                  |                                                                   
|Item 6.           | Exhibits                                                          
|                  |                                                                   
|SIGNATURES        | 15                                                                
|                  |                                                                   
|CERTIFICATIONS    |                                                                   

1

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Part I - Financial Information

Item 1. Financial Statements

AZCO MINING INC.CONSOLIDATED BALANCE SHEETSeptember 30, 2006(Unaudited)

|ASSETS                                                            |  
|----------------------------------------------------------------- | -
|CURRENT ASSETS:                                                   |  
|Cash and
      cash equivalents                                   | $
|Prepaid expenses                                                  |  
|Total Current Assets                                              |  
|                                                                  |  
|CAPITAL ASSETS:                                                   |  
|Land                                                              |  
|Mineral properties                                                |  
|Machinery and equipment,
      net                                |  
|Buildings,
      net                                              |  
|                                                                  |  
|                                                                  |  
|OTHER ASSETS:                                                     |  
|Idle plant
      and equipment, net                               |  
|Restricted cash                                                   |  
|Deferred
      financing costs                                    |  
|                                                                  |  
|                                                                  | $
|                                                                  |  
|LIABILITIES AND STOCKHOLDERS'
      (DEFICIT)                     |  
|CURRENT LIABILITIES:                                              |  
|Accounts
      payable and accrued liabilities                    | $
|Accrued interest payable,
      related party                     |  
|Line of credit                                                    |  
|Accrued financing lease payments
      payable                    |  
|Convertible debentures
      payable, less discount of $3,356,631 |  
|Derivative instrument liabilities                                 |  
|Total Current Liabilities                                         |  
|                                                                  |  
|LONG TERM LIABILITIES:                                            |  
|Financing lease payable,
      net of discount of $1,653,968      |  
|Note payable,
      related party                                 |  
|Asset retirement obligation                                       |  
|                                                                  |  
|Total Liabilities                                                 |  
|                                                                  |  
|STOCKHOLDERS' (DEFICIT):                                          |  
|Common stock,
      $.002 par value, 100,000,000 shares           |  
|authorized
      and 63,963,712 shares issued and outstanding     |  
|Additional
      paid in capital                                  |  
|Deferred compensation                                             |  
|Accumulated
      (deficit)                                       |  
|Total Stockholders' (Deficit)                                     |  
|                                                                  |  
|                                                                  | $

The accompanying notes are an integral part of the consolidated
  financial statements.

2

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AZCO MINING INC.CONSOLIDATED STATEMENTS OF OPERATIONS(Unaudited)

|                                                                  |   | Three Months Ended |  
|----------------------------------------------------------------- | - | ------------------ | -
|                                                                  |   | September 30,      |  
|                                                                  |   | 2006               |  
|SALES                                                             | $ | -                  |  
|                                                                  |   |                    |  
|OPERATING COSTS AND EXPENSES:                                     |   |                    |  
|Exploration and
      mining costs                                |   | 70,256             |  
|General and administrative                                        |   | 370,725            |  
|General and administrative
      - stock compensation             |   | 11,165             |  
|Depreciation and amortization                                     |   | 6,384              |  
|Accretion of asset
      retirement obligation                    |   | 1,250              |  
|                                                                  |   | 459,780            |  
|                                                                  |   |                    |  
|(LOSS) FROM OPERATIONS                                            |   | (459,780           | )
|                                                                  |   |                    |  
|OTHER INCOME (EXPENSE):                                           |   |                    |  
|Foreign currency
      translation (loss)                         |   | 3                  |  
|(Loss) on derivative instrument
      liabilities                 |   | (1,064,859         | )
|Interest income                                                   |   | 12,483             |  
|Accretion of discounts on notes
      payable and lease liability |   | (382,217           | )
|Interest expense                                                  |   | (126,761           | )
|                                                                  |   | (1,561,351         | )
|                                                                  |   |                    |  
|(LOSS) BEFORE PROVISION FOR INCOME TAXES                          |   | (2,021,131         | )
|                                                                  |   |                    |  
|PROVISION FOR INCOME TAXES                                        |   | -                  |  
|                                                                  |   |                    |  
|NET (LOSS)                                                        | $ | (2,021,131         | )
|                                                                  |   |                    |  
|Basic and Diluted (Loss) Per Common Share                         | $ | (0.03              | )
|                                                                  |   |                    |  
|Basic and Diluted - Weighted Average Number of                    |   |                    |  
|Common Shares Outstanding                                         |   | 63,963,712         |  

The accompanying notes are an integral part of the consolidated
  financial statements.

3

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AZCO MINING INC.CONSOLIDATED STATEMENTS OF CASH FLOWS(Unaudited)

|                                                    |   | Three months ended |  
|--------------------------------------------------- | - | ------------------ | -
|                                                    |   | September 30,      |  
|                                                    |   | 2006               |  
|CASH FLOWS FROM OPERATING ACTIVITIES:               |   |                    |  
|Net (loss)                                          | $ | (2,021,131         | )
|                                                    |   |                    |  
|Adjustments
      to reconcile net (loss) to        |   |                    |  
|net cash (used in) operating
      activities:      |   |                    |  
|Depreciation and amortization                       |   | 6,384              |  
|Stock compensation                                  |   | 11,165             |  
|Accretion of asset retirement liability             |   | 1,250              |  
|Accretion of discount on debt liabilities           |   | 382,217            |  
|Foreign currency translation(gain) loss             |   | (3                 | )
|Loss on derivative instrument liability             |   | 1,064,859          |  
|Net change
      in current assets and liabilities: |   |                    |  
|Prepaid expense                                     |   | 34,082             |  
|Deferred finance costs                              |   | 43,049             |  
|Accounts payable and accrued liabilities            |   | 5,246              |  
|Accrued interest - related party                    |   | 22,500             |  
|Accrued interest - other                            |   | 35,000             |  
|Accrued lease payments                              |   | 135,000            |  
|Net Cash (Used in) Operating Activities             |   | (280,382           | )
|                                                    |   |                    |  
|CASH FLOWS FROM INVESTING ACTIVITIES:               |   |                    |  
|Fixed asset addition                                |   | (5,500             | )
|Net Cash (Used in) Investing Activities             |   | (5,500             | )
|                                                    |   |                    |  
|CASH FLOWS FROM FINANCING ACTIVITIES:               |   |                    |  
|Proceeds from sale of common
      stock            |   | -                  |  
|Proceeds from convertible
      debentur notes      |   | 1,000,000          |  
|Deferred finance costs                              |   | (100,000           | )
|Net Cash Provided by Financing Activities           |   | 900,000            |  
|                                                    |   |                    |  
|NET INCREASE IN CASH AND CASH EQUIVALENTS           |   | 614,118            |  
|                                                    |   |                    |  
|CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD      |   | 1,265,392          |  
|                                                    |   |                    |  
|CASH AND CASH EQUIVALENTS, END OF PERIOD            | $ | 1,879,510          |  

The accompanying notes are an integral part of the consolidated
  financial statements.

4

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AZCO MINING INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSSEPTEMBER 30, 2006(UNAUDITED)

NOTE 1  NATURE OF OPERATIONS

Azco Mining Inc. (the Company) is a mining company incorporated
in Delaware in August 1991. The Companys general business strategy is to
acquire, explore and develop mineral properties. The Companys principal assets
are the leased Ortiz gold project in New Mexico, the 100% owned Black Canyon
mica project in Arizona and the 100% owned Summit silver-gold property located
in New Mexico.

In November 2002, the Company ceased crushing and concentration
activities at its Black Canyon project due to economic constraints. Limited
marketing and sales have continued at its Glendale mica processing facility
using inventoried mica, while the Company looks for a joint-venture partner to
help finance and operate the project.

In May 2006, for a cash price of $1.3 million, the Company
acquired 100% of the shares of The Lordsburg Mining Company (Lordsburg), a New
Mexico corporation. With the acquisition of Lordsburg, the Company acquired the
Summit project, consisting of approximately 117.6 acres of patented and
approximately 520 acres of unpatented mining claims in Grant County, New Mexico;
approximately 257 acres of patented mining claims in Hidalgo County, New Mexico;
and milling equipment including a ball mill and flotation plant in Sierra
County, New Mexico. The milling equipment has been idle for several years
following its use by a subsidiary of the seller. If feasibility and engineering
studies are positive, the Company intends to relocate the milling equipment to
its mining claims in Hidalgo County and use it to process mineralized material
to be mined from its mining claims in Grant County. Lordsburg holds two permits
issued by the state of New Mexico for mining and milling operations. The Summit
silver-gold project is subject to a property identification agreement between
the Company and its President and Chief Executive Officer.

The unaudited interim consolidated financial statements of the
Company included herein have been prepared in accordance with generally accepted
accounting principles for interim financial information and in accordance with
the instructions for Form 10-QSB under the Security Exchange Act of 1934.These
statements do not include all of the information and notes to the financial
statements required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three-month period ended September 30,
2006, are not necessarily indicative of the results that may be expected for the
year ended June 30, 2007. The unaudited consolidated financial statements should
be read in conjunction with the audited consolidated financial statements and
notes thereto for the fiscal year ended June 30, 2006, included in the Companys
Annual Report on Form 10-KSB, as filed with Securities and Exchange
Commission.

NOTE 2-SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation and Going Concern

The financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and satisfaction of
liabilities and commitments in the normal course of business. Should the Company
be unable to continue as a going concern, it may be unable to realize the
carrying value of its assets and to meet its liabilities as they become due.

The Company incurred a net loss of ($2,021,131) for the quarter
ended September 30, 2006, and has a total accumulated deficit of ($45,348,882)
at September 30, 2006. To continue as a going concern, the

5

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Company is dependent on continued fund raising for project
development. However, the Company has no commitment from any party to provide
additional capital and there is no assurance that such funding will be available
when needed, or if available, that its terms will be favorable or acceptable to
the Company.

The Companys financial statements do not include any
adjustment relating to the recoverability and classification of recorded asset
amounts and classification of liabilities that might be necessary should the
Company be unable to continue in existence.

Derivative Financial Instruments

The Company does not use derivative instruments to hedge
exposures to cash flow, market, or foreign currency risks.

The Company reviews the terms of convertible debt, equity
instruments and other financing arrangements to determine whether there are
embedded derivative instruments, including embedded conversion options that are
required to be bifurcated and accounted for separately as a derivative financial
instrument. Also, in connection with the issuance of financing instruments, the
Company may issue freestanding options or warrants that may, depending on their
terms, be accounted for as derivative instrument liabilities, rather than as
equity. The Company may also issue options or warrants to non-employees in
connection with consulting or other services they provide.

Derivative financial instruments are initially measured at
their fair value. For derivative financial instruments that are accounted for as
liabilities, the derivative instrument is initially recorded at its fair value
and is then re-valued at each reporting date, with changes in the fair value
reported as charges or credits to income. For option-based derivative financial
instruments, the Company uses the Black-Scholes option pricing model to value
the derivative instruments. To the extent that the initial fair values of the
freestanding and/or bifurcated derivative instrument liabilities exceed the
total proceeds received, an immediate charge to income is recognized, in order
to initially record the derivative instrument liabilities at their fair
value.

The discount from the face value of the convertible debt or
equity instruments resulting from allocating some or all of the proceeds to the
derivative instruments, together with the stated interest on the instrument, is
amortized over the life of the instrument through periodic charges to income,
usually using the effective interest method.

The classification of derivative instruments, including whether
such instruments should be recorded as liabilities or as equity, is reassessed
at the end of each reporting period. If reclassification is required, the fair
value of the derivative instrument, as of the determination date, is
reclassified. Any previous charges or credits to income for changes in the fair
value of the derivative instrument are not reversed. Derivative instrument
liabilities are classified in the balance sheet as current or non-current based
on whether or not net-cash settlement of the derivative instrument could be
required within 12 months of the balance sheet date.

Net (Loss) per Common Share

The Company calculates net income (loss) per share as required
by Statement of Financial Accounting Standards (SFAS) No. 128, Earnings per
Share. Basic earnings (loss) per share are calculated by dividing net income
(loss) by the weighted average number of common shares outstanding for the
period. Diluted earnings (loss) per share are calculated by dividing net income
(loss) by the weighted average number of common shares and dilutive common stock
equivalents outstanding. During the periods when they are anti-dilutive, common
stock equivalents, if any, are not considered in the computation. The impact of
outstanding stock options and warrants has not been included in the computation
of diluted loss per common share as it would be anti-dilutive.

6

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Stock-Based Compensation  Transition and Disclosure

The Company accounts for equity instruments issued to employees
for services based on the fair value of the equity instruments issued and
accounts for equity instruments issued to other than employees based on the fair
value of the consideration received or the fair value of the equity instruments,
whichever is more reliably measurable. The Company had no stock based
compensation to employees for the three months ended September 30, 2006 and
2005.

The Company accounts for stock based compensation in accordance
with SFAS 123, "Accounting for Stock-Based Compensation." The provisions
of SFAS 123 allow companies to either expense the estimated fair value of stock
options or to continue to follow the intrinsic value method set forth in
Accounting Principles Board Opinion 25, "Accounting for Stock Issued to
Employees" (APB 25") but disclose the pro forma effects on net income
(loss) had the fair value of the options been expensed. The Company has elected
to continue to apply APB 25 in accounting for its stock option incentive
plans.

In December 2004, FASB issued SFAS No. 123(R), Share-based
Payment (SFAS No. 123R) and requires companies to measure all stock
compensation awards using a fair value method and recognize the related
compensation cost in its financial statements. This statement replaces SFAS No.
123 Accounting for Stock Based Compensation, and supersedes ABP Opinion
No. 25, Accounting for Stock Issued to Employees. Beginning with the
Companys quarterly period that begins on July 1, 2006, the Company adopted the
provisions of SFAS No. 123R and will be required to expense the fair value of
employee stock options and similar awards in the financial statements. The
Company has no compensation cost relating to unvested portion of awards granted
prior to the date of adoption to recognize at the time of adoption.

NOTE 3 - DERIVATIVE INSTRUMENT LIABILITIES

On March 21, 2006, the Company completed a private placement of
senior secured convertible notes, additional investment rights and warrants to
institutional investors for an aggregate purchase price of $2,500,000. These
notes were evaluated using Emerging Issues Task Force (EITF) issue No. 00-19,
Accounting for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Companys Own Stock (EITF 00-19) and it was determined that the
warrants, embedded conversion and interest components and additional investment
rights should be accounted for as derivative instrument liabilities.
Accordingly, they are to be marked to market each reporting period, with the
corresponding non-cash gain or loss reflected in the Companys current period
statement of operations.

On September 6, 2006, the Company amended the terms of the
private placement of the senior secured convertible notes that were issued on
March 21, 2006. The common stock, warrants and additional investment rights held
by the investors were also amended. In connection with the amendment, the
investors agreed to purchase in the aggregate an additional $1,000,000 of notes
under the amended terms, bringing the total outstanding principal, including
interest and liquidated damages, due under the notes to $3,781,662.

The Company uses the Black-Scholes option pricing model to value
  options, warrants, imbedded conversion option components and additional investment
  rights that are recorded as derivative liabilities. The fair values calculated
  on the original placement of senior secured convertible notes were re-computed
  for the amended terms of the placement agreement for the increased principal
  amount of the convertible notes and the cost of reducing the conversion price
  of the existing convertible notes, warrants and additional investment rights
  from $1.58 to $1.00. The aggregate fair values exceeded the additional proceeds
  received and the difference of $2,400,000 was charged to loss on derivative
  liabilities in the quarter ended September 30, 2006. The initial convertible
  notes had no carrying value and the modifications made to the notes resulted
  in no additional carrying value, as the fair value of the derivative instruments
  issued exceeded the proceeds received. As of the date of the amendment, the
  Company re-computed the effective interest rate on

7

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the convertible notes to accrete the carrying value of the
notes to their redemption dates, based on the revised repayment schedule and
amounts.

The fair value of the derivative instruments liability at June
30, 2006, was determined to be $3,983,960 with the following assumptions, (1)
risk free interest rate of 5.1% to 5.24%, (2) remaining contractual life between
..55 - 4.7 years, (3) expected stock price volatility of 114.07% and (4) expected
dividend yield of zero. The fair market value of the derivative instruments
liability at September 30, 2006, was determined to be $6,330,481 with the
following assumptions, (1) risk free interest rate of 4.59% to 4.98%, (2)
remaining contractual life between .3 - 4.9 years, (3) expected stock price
volatility of 114.16% and (4) expected dividend yield of zero. Based upon the
change in fair value, the Company has recorded a non-cash loss on derivative
instruments for the three-months ended September 30, 2006, of $(1,064,859) and a
corresponding increase in the derivative instruments liability. The impact of
EITF 00-19 on the financial statements as of and through September 30, 2006, was
as follows:

|                                   |   | Derivative          |  |   | Derivative         |  |   | Derivative         |  
|---------------------------------- | - | ------------------- |  | - | ------------------ |  | - | ------------------ | -
|                                   |   | Liability as of     |  |   | Liability as of    |  |   | (Loss) Through     |  
|                                   |   | June
      30, 2006 |  |   | September 30, 2006 |  |   | September 30, 2006 |  
|Financing Lease Payable Derivative | $ | 1,814,990           |  | $ | 1,314,501          |  | $ | 500,489            |  
|                                   |   |                     |  |   |                    |  |   |                    |  
|Convertible Debenture:             |   |                     |  |   |                    |  |   |                    |  
|Compound Embedded Derivatives      |   | 790,368             |  |   | 1,867,142          |  |   | (1,076,774         | )
|Additional Investment Rights       |   | 672,578             |  |   | 1,636,991          |  |   | (964,413           | )
|Purchase Agreement Warrants        |   | 706,024             |  |   | 1,511,847          |  |   | (805,823           | )
|Totals                             | $ | 3,983,960           |  | $ | 6,330,481          |  |   | (2,346,521         | )
|                                   |   |                     |  |   |                    |  |   |                    |  
|Derivative Expense Related to      |   |                     |  |   |                    |  |   |                    |  
|Convertible Debenture Issuance     |   |                     |  |   |                    |  |   | 1,281,662          |  
|                                   |   |                     |  |   |                    |  | $ | (1,064,859         | )

NOTE 4  CONVERTIBLE DEBENTURE NOTES PAYABLE

On March 21, 2006, the Company completed a private placement of
senior secured convertible notes, additional investment rights and warrants to
institutional investors for an aggregate purchase price of $2,500,000. The
Company received net proceeds of approximately $2,270,000 after deducting fees
and expenses. The convertible notes have a term of 17 months and amortize over
12 months beginning on September 1, 2006. Interest on the principal amount
outstanding accrues at a rate of 7% per annum. The Company may pay principal and
accrued interest in cash or, at the Companys option, in shares of its common
stock. The holder of each convertible note, at the holders option, may convert
the note into the Companys common stock at a conversion price of $1.58 per
share. The Company also granted additional investment rights to the investors,
giving each the right for 12 months to purchase, under the same terms, an
additional convertible note for 50% of the amount initially purchased. Warrants
were also issued to the note holders, giving the right for a period of 5 years
to purchase in the aggregate 791,139 shares of the Companys common stock at a
price of $1.58 per share.

As collateral security, the Company granted the investors a
security interest in (a) $6,000,000 in gold contained in mineralized materials
from the Ortiz Mine Grant over which the Company holds a lease on the mineral
estate underlying 57,267.04 acres (90 square miles) of segregated surface estate
located 30 miles by road northeast of Albuquerque, in Townships 12, 13 and 14
North, Ranges 7 and 8 East, N.M.P.M., Santa Fe County, New Mexico, which such
gold is as-extracted collateral (as such term is defined in the New York
Uniform Commercial Code) and (b) all proceeds, products and accessions thereof
and related thereto (including, without limitation, any proceeds of insurance
thereon), and, to the extent related to such as extracted collateral or such
proceeds, products and accessions thereof and related thereto.

On September 6, 2006, the Company amended the terms of the
private placement of the senior secured

8

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convertible notes that were issued on March 21, 2006. The
common stock warrants and Additional Investment Rights held by the investors
were also amended.

Under the terms of the amendment, the maturity of the
convertible notes has been deferred from August 31, 2007, to January 1, 2008.
The convertible notes amortize over 12 equal monthly installments but the date
of the first installment has been extended from September 1, 2006, to February
1, 2007. Interest on the principal amount outstanding will remain at the rate of
7% per annum and begins to accrue from February 1, 2007. Interest is payable on
the last day of each calendar quarter, beginning on March 31, 2007. The price at
which the holder of each convertible note may convert the principal and accrued
interest amount outstanding under each note into shares of the Companys common
stock has been reduced from $1.58 to $1.00 per share. In connection with the
amendment, the investors agreed to purchase in the aggregate an additional
$1,000,000 of notes under the amended terms, bringing the total outstanding
principal, including interest and liquidated damages, due under the notes to
$3,781,662.

In connection with the amendment, the Company issued additional
common stock warrants, increasing the number of warrants held by the investors
to 1,890,300, extended the expiry of those warrants to September 6, 2011 and
reduced the exercise price of the warrants from $1.58 to $1.00.

The Company also granted to the investors Additional Investment
Rights, increasing the Rights held by the investors, so that they may purchase
up to an additional $1,890,830 of convertible notes, under the same terms and
conditions as the amended notes. The Additional Investment Rights are
exercisable for a period of 12 months following the date of a registration
statement. Upon exercise of the Rights, the holders will also receive 945,416
warrants to purchase common stock. The conversion price of the notes issuable on
exercise of the Additional Investment Rights and the warrants issuable under the
Additional Investment Rights has been reduced from $1.58 to $1.00.

The Company is required to register for resale the shares of
  common stock issuable upon conversion of the convertible notes and upon exercise
  of the warrants. The Company has agreed to file a registration statement with
  the Securities and Exchange Commission within 60 days of the date of the amendment
  and to cause the registration statement to be declared effective within 150
  days of the date of the amendment. If the Company does not meet these required
  dates, or does not maintain the effectiveness of the registration statement,
  we are required to pay penalties of 1% per month of the principal amount of
  the notes outstanding. The Company is currently in default of the provision
  to file the registration statement within 60 days of the date of the amendment.

The Company used the Black-Scholes option model to determine
  the fair value of the additional warrants and Additional Investment Rights issued,
  the fair value of the embedded conversion option related to the increased principal
  amount of the convertible notes and the cost of reducing the conversion price
  of the existing convertible notes, warrants and Additional Investment Rights
  from $1.58 to $1.00. Because these aggregate fair values exceed the additional
  proceeds, the difference of $2,400,000 was charged to loss on derivative liabilities
  in the quarter ending September 30, 2006. Because the convertible note had no
  net initial carrying value and the modifications made to the notes resulted
  in no additional carrying value (because the fair value of the additional derivative
  instruments issued exceeded the proceeds received), the Company recomputed,
  as of the date of the amendment, the effective interest rate on the convertible
  notes to accrete the earring value of the notes to their redemption dates, based
  on the revised repayment schedule and amounts.

9

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NOTE 5 - STOCKHOLDERS (DEFICIT)

Stock Options and Warrants

In connection with the private placement of the convertible
debenture notes, the Company issued warrants for 75,001 shares of common stock
as part of the financial advisory fee associated with the transaction. The
warrants have an exercise price of $1.58 and a term of three years. The warrants
were valued at $67,266 using the Black-Scholes option pricing model using a
volatility of 111.95%, risk free interest rate of 4.62% and an expected life of
3.0 years. At June 30, 2006, $55,396 of this amount was classified as deferred
compensation. During the three months ended September 30, 2006, $11,165 has been
recorded as general and administrative stock compensation expense and the
balance of $44,231 was classified as deferred compensation at September 30,
2006.

On September 6, 2006, the Company amended the terms of the
March 21, 2006, private placement of senior secured convertible notes and in
connection with the amendment, the Company issued 1,099,159 additional common
stock warrants, extended the expiry date of the warrants to September 6, 2011,
and reduced the excise price from $1.58 to $1.00.

Stock option and warrant activity, both within the Plan and
outside of the Plan, for the three months ended September 30, 2006 are as
follows:

|                                  |  | Stock Options |  |   | Stock Warrants | 
|--------------------------------- |  | ------------- |  | - | -------------- | 
|                                  |  |               |  |   | Weighted       | 
|                                  |  |               |  |   | Average        | 
|                                  |  | Shares        |  |   | Price          | 
|                                  |  |               |  |   |                | 
|Outstanding at June 30, 2006      |  | 11,550,000    |  | $ | 0.11           | 
|Granted                           |  | ---           |  |   | ---            | 
|Canceled                          |  | ---           |  |   | ---            | 
|Expired                           |  | ---           |  |   | ---            | 
|Exercised                         |  | ---           |  |   | ---            | 
|Outstanding at September 30, 2006 |  | 11,550,000    |  | $ | 0.11           | 

Stock options and warrants outstanding and exercisable at
September 30, 2006, are as follows:

|OUTSTANDING AND EXERCISABLE |  |            |  | OUTSTANDING AND     
|--------------------------- |  | ---------- |  | --------------------
|OPTIONS                     |  |            |  | EXERCISABLE WARRANTS
|                            |  |            |  | Weighted            
|Exercise                    |  |            |  | Average             
|Price                       |  |            |  | Exercise            
|Range                       |  | Number     |  | Price               
|$0.10                       |  | 6,000,000  |  | $0.10               
|$ 0.11                      |  | 5,500,000  |  | $0.11               
|$1.24                       |  | 50,000     |  | $1.24               
|                            |  | 11,550,000 |  | $ 0.11              

NOTE 6  SUBSEQUENT EVENTS

Sale of Property and Settlement of Financing Lease

On November 3, 2006, the Company concluded a Real Property
Purchase Agreement with Muzz Investments, LLC (Muzz) for the sale of the
Company's 60% ownership interests in real estate and buildings at its Glendale,
Arizona location. The sale includes approximately five acres of land, a 5,000
sq. ft.

10

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office building and an 18,000 sq. ft. mill building. Under the
Agreement, the Company retains ownership of its mica processing equipment
currently installed in the mill building. The equipment will be removed and
transported to a storage site for future use. As part of the transaction, the
Company also agreed to provide for the exercise of 2,550,000 warrants granted to
Muzz in 2002 and to issue 2,550,000 unregistered shares of its common stock to
Muzz. In consideration for Companys entry into the Real Property Purchase
Agreement and the issue of the unregistered stock in settlement of the Muzz
warrants, Muzz agreed to terminate the 2002 financing lease agreement and to
cancel all of the outstanding financial obligations under the lease.

Issuances of Equity

On November 15, 2006, a director exercised options to purchase
1,000,000 shares of common stock at $0.10 and 1,000,000 shares at $0.11 per
share, in exchange for payment of accrued interest owed and reduction of
principal on the note payable to the director, aggregating $210,000. In
addition, the director agreed to contribute to capital the remaining unpaid
principal on the note of $600,000.

Royalty Agreement

The Company in connection with a directors contribution of
capital granted the director a 25% net proceeds royalty interest in the 67
unpatented mining claims located in Yavapai County toward an end settlement of
$600,000.

Office Lease

Effective March 1, 2007, the Company entered into a lease for
office space in Albuquerque, New Mexcio, for a period of three years. The terms
of the lease provide for the following minimum rental payments:

Fiscal year ending
      June 30, 2007
      $
      10,733June 30, 2008
      
      32,520June 30, 2009
      
      33,492June 30, 2010
      
      22,770Total
      $
      99,515


ITEM 2  MANAGEMENTS DISCUSSION AND ANALYSIS AND PLAN OF
OPERATION

THIS FORM 10-QSB MAY CONTAIN CERTAIN FORWARD-LOOKING
STATEMENTS AS SUCH TERM IS DEFINED IN THE PRIVATE SECURITIES LITIGATION REFORM
ACT OF 1995 AND BY THE SECURITIES AND EXCHANGE COMMISSION IN ITS RULES,
REGULATIONS AND RELEASES, WHICH REPRESENT THE COMPANYS EXPECTATIONS OR BELIEFS,
INCLUDING BUT NOT LIMITED TO, STATEMENTS CONCERNING THE COMPANYS OPERATIONS,
ECONOMIC PERFORMANCE, FINANCIAL CONDITION, GROWTH AND ACQUISITION STRATEGIES,
INVESTMENTS, AND FUTURE OPERATIONAL PLANS. FOR THIS PURPOSE, ANY STATEMENTS
CONTAINED HEREIN THAT ARE NOT STATEMENTS OF HISTORICAL FACT MAY BE DEEMED TO BE
FORWARD-LOOKING STATEMENTS. WITHOUT LIMITING THE GENERALITY OF THE FOREGOING,
WORDS SUCH AS MAY, WILL, EXPECT, BELIEVE, ANTICIPATE, INTENT,
COULD, ESTIMATE, MIGHT, PLAN, PREDICT OR CONTINUE OR THE NEGATIVE OR
OTHER VARIATIONS THEREOF OR COMPARABLE TERMINOLOGY ARE INTENDED TO IDENTIFY
FORWARD-LOOKING STATEMENTS. THESE STATEMENTS BY THEIR NATURE INVOLVE SUBSTANTIAL
RISKS AND UNCERTAINTIES, CERTAIN OF WHICH ARE BEYOND THE COMPANYS CONTROL, AND
ACTUAL RESULTS MAY DIFFER MATERIALLY DEPENDING ON A VARIETY OF IMPORTANT
FACTORS, INCLUDING UNCERTAINTY RELATED TO ACQUISITIONS, GOVERNMENTAL REGULATION,
MANAGING AND MAINTAINING GROWTH, THE OPERATIONS OF THE COMPANY AND ITS
SUBSIDIARIES, VOLATILITY OF STOCK PRICE AND ANY OTHER FACTORS DISCUSSED IN

11

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THIS AND OTHER REGISTRANT FILINGS WITH THE SECURITIES AND
EXCHANGE COMMISSION. THE COMPANY DOES NOT INTEND TO UNDERTAKE TO UPDATE THE
INFORMATION IN THIS FORM 10-QSB IF ANY FORWARD-LOOKING STATEMENT LATER TURNS OUT
TO BE INACCURATE. THE FOLLOWING SHOULD BE READ IN CONJUNCTION WITH THE
INFORMATION PRESENTED IN THE COMPANYS ANNUAL REPORT ON FORM 10-KSB FOR THE YEAR
ENDED JUNE 30, 2006.

GENERAL

Azco Mining Inc. (the Company, our or we) is a U.S.
mining company, incorporated in August 1991 in the state of Delaware, with a
general business strategy to acquire and develop mining properties amenable to
low cost production. We currently are focused on financing efforts to: (1)
conduct engineering studies on our Summit silver-gold property located in New
Mexico, (2) conduct further studies on our Ortiz gold project located in New
Mexico, (3) fund the re-opening and enhancement of our Black Canyon mica project
located in Arizona and (4) acquire high quality gold, silver and/or copper
properties.

Basis of Presentation and Going Concern

The financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and satisfaction of
liabilities and commitments in the normal course of business. Should the Company
be unable to continue as a going concern, it may be unable to realize the
carrying value of its assets and to meet its liabilities as they become due.

The Company incurred a net loss of ($2,021,131) for the quarter
ended September 30, 2006, and has a total accumulated deficit of ($45,348,882)
at September 30, 2006. To continue as a going concern, the Company is dependent
on continued fund raising for project development. However, the Company has no
commitment from any party to provide additional capital and there is no
assurance that such funding will be available when needed, or if available, that
its terms will be favorable or acceptable to the Company.

The Companys financial statements do not include any
adjustment relating to the recoverability and classification of recorded asset
amounts and classification of liabilities that might be necessary should the
Company be unable to continue in existence.

Derivative Financial Instruments

In connection with the issuance of debt or equity instruments,
we may issue options or warrants to purchase our common stock. In certain
circumstances, these options or warrants may be classified as derivative
liabilities, rather than as equity. Additionally, the debt or equity instruments
may contain embedded derivative instruments, such as conversion options, which
in certain circumstances may be required to be bifurcated from the associated
host instrument and accounted for separately as a derivative instrument
liability.

The identification of, and accounting for, derivative
instruments is complex. Company derivative instrument liabilities are re-valued
at the end of each reporting period, with changes in the fair value of the
derivative liability recorded as charges or credits to income, in the period in
which the changes occur. For warrants that are accounted for as derivative
instrument liability, we determined the fair value of these warrants using the
Black-Scholes option pricing model. That model requires assumptions related to
the remaining term of the instruments and risk-free rates of return, our current
common stock price and expected dividend yield, and the expected volatility of
our common stock price over the life of the warrants. The identification of, and
accounting for, derivative instruments and the assumptions used to value them
can significantly affect our financial statements.

12

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RESULTS OF OPERATIONS

Operating Results for the Three Months Ended September 30,
2006 and 2005

Sales

We had no sales for the quarter ended September 30, 2006, as
compared to $395 for the quarter ended September 30, 2005. The decrease in sales
is a result of reduced sales of mica-filled plastic pellets. The mica sold in
the prior year period was sourced from inventory from prior production which has
no carrying value. The Company is not actively marketing the mica pellets.

Operating Costs and Expenses

Mine related costs increased in the quarter ended September 30,
2006, to $70,250 from $11,082 for the comparable quarter ended in 2005, or an
increase of $59,174. This increase in the current quarter is attributable to
expenses attributable on the Summit aggregating $16,572; increased consulting
work on the Ortiz mine site amounting to $24,313; increased mine site lease
payments aggregating $4,500 and an increase of $10,729 for other professional
fees related to our various mineral properties..

General and administrative increased to $370,725 for the
quarter ended September 30, 2006, from $256,583 for the comparative quarter
ended September 30, 2005, an increase of $114,142. This increase in the current
quarter was mainly attributable to increased payroll burden of $16,802;
increased financing costs of $43,048: increased consulting costs of $7,150 and
increased costs in accounting and legal fees aggregating $43,949.

General and administrative stock compensation decreased to
$11,165 for the quarter ended September 30, 2006, from $1,017,496 for the
comparative quarter ended September 30, 2005, a decrease of $1,006,331. This
decrease is attributable to no stock compensation transactions in the area of
investor relations and related parties in the current quarter.

Other Income and Expenses

Other income and expenses for the quarter ended September 30,
2006 were $(496,492) as compared to $(98,107) for the comparable quarter ended
September 30, 2005. The increase in other expenses incurred in the current
quarter of $398,385 is mainly attributable to the increase in accretion of
discounts on notes payable and lease liability and interest expense aggregating
$411,748 and is offset by an increase of interest income of $11,808.

Gain (loss) on Derivative Financial
Instruments

We recognized a loss on derivative financial instruments of
$(1,064,859) for the quarter ended September 30, 2006 as compared to a loss of
$(221,415) for the prior year comparable period. This non-cash loss arose from
adjustments to record the derivative financial instruments at fair values in
accordance with current accounting standards. The derivative financial
instruments arose in connection with a financing lease and convertible
debentures. Otherwise, we generally do not use derivative financial instruments
for other purposes, such as hedging cash-flow or fair-value risks. The increase
in the derivative loss in the quarter ended September 30, 2006, is mainly
attributable to additional funds raised and changes to the terms and conditions
of the senior secured convertible notes that were issued on March 21, 2006. We
use the Black-Scholes option pricing model to estimate the fair value of this
derivative. Because Black-Scholes uses the Companys stock price, changes in the
stock price will result in volatility in the earnings in future periods as the
Company continues to reflect the derivative financial instruments at fair
values.

PLAN OF OPERATIONS

13

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Liquidity and Capital Resources

To continue with the deployment of our business strategies, we
will require significant additional working capital. We also will require
additional working capital funds for continuing payments for necessary corporate
personnel, and related general and administrative expenses.

As of September 30, 2006, we had cash-on-hand of $1,879,510 and
a working capital deficit of $7,734,600, which is mainly attributable to the
current portion of our lease financing liability of $2,025,000 and non-cash
derivative instrument liabilities of $6,330,481, and an accumulated deficit of
$45,348,882.The improved cash position and working
capital at September 30, 2006 is a direct result of the Company completing a
secured convertible debenture debt facility on March 21, 2006, and a
modification and additional funding received under the facility on September 6,
2006.

The Company currently is pursuing a joint venture or sale of
the mica operation. Management has determined that in the long run it would be
significantly more beneficial for the Company to deploy its resources in the
area of precious metals based upon the current and projected market trends in
this area.

During our quarter ended September 30, 2006, we amended the
senior secured convertible notes, additional investment rights and warrants and
received additional funding of $1,000,000. We received net proceeds of $900,000
after deducting fees and expenses.

We anticipate that our operations through fiscal 2007 will be
funded from the balance of proceeds from these placements; sale of our
securities and possibly through the exercise of certain options and warrants.
While the Company believes it will be able to finance its continuing activities,
there are no assurances of success in this regard or in the Companys ability to
obtain continued financing through capital markets, joint ventures, or other
acceptable arrangements. If managements plans are not successful, operations
and liquidity may be adversely impacted. In the event that we are unable to
obtain additional required capital, we may be forced to reduce our exploration
and operating expenditures or to cease development operations altogether.

We intend to seek to have the Companys securities quoted on
the OTC Bulletin Board in 2007, which may provide a better ability to attract
investors. We are in process of completing the Companys Securities Act filings
to facilitate this process.

Factors Affecting Future Operating Results

Management has developed a plan to place the Company on an
improved financial footing. Important elements of the plan include becoming
compliant in the filing of our annual and quarterly financial statements,
continuing to raise interim funding to provide for deployment of operations on
our various property sites and restructuring of debt with secured creditors. An
important priority has been to bring the financial reports current. We completed
a $2,500,000 debt facility on March 21, 2006, to provide for interim financing
of our activities and initial deployment of our business strategies. This debt
facility was amended on September 6, 2006, and provided an additional funding of
$1,000,000. We have begun discussions with secured creditors concerning
restructuring of debt and believe such restructuring may be possible in
conjunction with a major financing if such financing can be arranged. If we are
able to continue to secure additional interim financing on terms acceptable to
us, restructure debt and obtain the additional required project financing, we
will be in a position to deploy our business plan on mining operations.

Off-Balance Sheet Arrangements

During the three months ended September 30, 2006, we did not
engage in any off-balance sheet arrangements as defined in Item 303(c) of the
SECs Regulation S-B.

14

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ITEM 3  CONTROLS AND PROCEDURES

We maintain disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934, as
amended (the Exchange Act)) that are designed to ensure that information
required to be disclosed by us in the reports that we file or submit under the
Exchange Act is recorded, processed, summarized and reported, within the time
periods specified in the Securities and Exchange Commission's rules and forms,
and is accumulated and communicated to our management as appropriate to allow
timely decisions regarding required disclosure. Under the supervision of, and
the participation of, our management, including our Chief Executive Officer, we
have conducted an evaluation of our disclosure controls and procedures as of
September 30, 2006. Based on this evaluation, our Chief Executive Officer has
concluded that our disclosure controls and procedures are effective.

During the quarter ended September 30, 2006, there were no
changes in our internal controls over financial reporting that have materially
affected, or are reasonably likely to materially affect, our internal controls
over financial reporting.

PART IIOTHER INFORMATION

ITEM 2 - UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF
PROCEEDS

None.

ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS

None.

ITEM 6 - EXHIBITS

| | (a) | The following exhibits are filed as part of
        this report:
| | --- | ----------------------------------------------------------------
| |     |                                                                 
| |     | 31.1                                                            
| |     |                                                                 
| |     | 32.1                                                            

SIGNATURES

In accordance with the requirements of the Securities Exchange
  Act of 1934, the Registrant has caused this report to be signed on its behalf
  by the undersigned, thereunto duly authorized.

|                         | **AZCO MINING INC**
|------------------------ | -------------------
|                         |                    
|Date: February 19 , 2007 | By:                
|                         |                    
|                         |                    
|                         |                    

15

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