**MANAGEMENT’S
      DISCUSSION AND ANALYSIS**


**YEAR
      ENDED DECEMBER 31, 2006**





**INTRODUCTION**





The
      Management’s discussion and analysis **** of
      financial condition and results of operations (“MD&A”) provides a detailed
      analysis of Canadian Zinc’s business and compares its 2006 financial results
      with those of the previous two years. In order to better understand the
      MD&A, it should be read in conjunction with the Financial Statements for the
      year ended December 31, 2006 and related notes. The Company’s financial
      statements are prepared in accordance with Canadian generally accepted
      accounting principles (“GAAP”) and filed with appropriate regulatory authorities
      in Canada. This MD&A has been prepared as of March 30, 2007.





Management’s
      discussion and analysis contains certain forward-looking statements with respect
      to the Company’s activities and future financial results that are subject to
      risks and uncertainties that may cause the results or events predicted in this
      discussion to differ materially from actual results or events.





**ADDITIONAL
      INFORMATION**





Additional
      information relating to the Company, including the Company’s Annual Information
      Form for the year 2006, dated March 30, 2007, is available under the Company’s
      profile on SEDAR at **www.sedar.com** ,
      and on
      the Company’s website at **www.canadianzinc.com** **.**





**TABLE
                OF CONTENTS****1.**
            **Overview****2.**
              
              **3.**
            **Selected
                Annual Financial Information**
              
              **Review
                of Operations and Financial Results**
              Exploration
                and Development
              Revenue
                and Interest Income
              Administrative
                Expenses
              Stock
                Based Compensation
              Amortization
                and Write-offs
              Asset
                Retirement Obligations
              Income
                Tax
              Related
                Party Transactions
              Financial
                Instruments
            
            
            **6.**
              
              
              
              
              
              
              
              **7.**
            **Liquidity
                and Capital Resources**
              Cash
                Flow
              Source
                of Cash - Financing Activities
              Use
                of Cash - Investing Activities
              Liquidity,
                Financial Condition and
              Capital
                Resources
              Off-Balance
                Sheets Arrangements
              Contractual
                and Other Arrangements
              
              **Critical
                Accounting Policies and****Estimates**
              Use
                  of Estimates
                Resource
                  Interests**4.**
            **Risks
                and Uncertainties**
              Political
                and Legislative
              Permitting
                and Environment
              Exploration
                and Development
              Metal
                Prices and Market
                Sentiment
            
            
            **8.**
              **9.**
                **10.**
            Asset
                Retirement Obligations
              Stock
                Based Compensation
              Metal
                Prices and Exchange Rates
              **Disclosure
                Controls and Procedures**
              **Internal
                  Controls over Financial Reporting**
                **Outlook****5.**
            **Summary
                of Quarterly Results****and
                Fourth Quarter 2006**
            
            
            **11.**
            **Cautionary
                Note - Forward Looking Information**






1


**1.**  **OVERVIEW**





Canadian
      Zinc Corporation is a development stage company listed on the Toronto Stock
      Exchange under the symbol “CZN” and is engaged in the business of exploration
      and development of natural resource properties. The Company's principal focus
      is
      the exploration and development of the Prairie Creek mine, a large high-grade
      zinc/lead/silver property located in the Northwest Territories of
      Canada .





The
      Prairie Creek Mine is partially developed with an existing 1000 tpd mill and
      related infrastructure. In 2001 the Company completed a preliminary scoping
      study designed to outline and guide the redevelopment of the existing mine and
      mill on the Prairie Creek Property.





Throughout
      the years 2004, 2005 and 2006, the Company’s principal focus was its efforts to
      advance the Prairie Creek Project towards development, In 2006 the Company
      carried out major programs at Prairie Creek including sinking a new internal
      decline about 400 metres long and starting a major underground exploration
      and
      infill drilling program which is continuing into the first half of 2007. A
      total
      of $7.9 million was invested in Prairie Creek in 2006. Steady progress in
      permitting the mine was also made during 2006. A new Land Use Permit for the
      Phase 3 Exploration program was obtained which entitles the Company, for the
      first time, to explore and drill anywhere on the extensive Prairie Creek
      Property.





The
      Prairie Creek Property hosts a major mineral deposit containing an estimated,
      in
      situ, 3 billion pounds of zinc, 2.2 billion pounds of lead and approximately
      70
      million ounces of silver, with significant exploration potential. Zone 3 of
      the
      deposit, as currently known, contains a historically estimated resource of
      3.6
      million tonnes (measured and indicated) grading 11.8% zinc, 9.7% lead, 0.3%
      copper and 141.5 grams silver, per tonne and 8.3 million tonnes (inferred)
      grading 12.8% zinc, 10.4% lead and 0.4% copper and 169.2 grams silver per
      tonne.





The
      Prairie Creek Project is located in an environmentally sensitive remote area
      in
      the Mackenzie Mountains, within the watershed of the South Nahanni River and
      in
      proximity to, but outside the Nahanni National Park Reserve. The mine is located
      in the Northwest Territories in an area which is claimed by the Deh Cho First
      Nations as their traditional territory. No land claim settlement agreement
      has
      been reached between Canada and the Deh Cho. Although the Company holds permits
      for the exploration and development of the Prairie Creek Property, the Company
      does not have all the permits necessary to operate the mine. The Company’s
      operations are potentially subject to a number of political, legislative,
      permitting and environmental risks. The Company has experienced long delays
      in
      obtaining permits to date and anticipates continuing delays and difficulties
      with its permitting activities [see Item 4. “Risks and Uncertainties”
below].





The
      principal minerals in the Prairie Creek deposit are zinc, lead and silver.
      Demand for zinc and lead increased in 2006 with strong global economic growth
      led by China and other Asian countries. The price of zinc rose throughout 2006
      from a price of US$0.87 per pound at the beginning of the year to US $1.96
      per
      pound at year end, averaging US$1.43 per pound for the year, up significantly
      from an average of US$0.63 per pound in 2005. LME stocks of zinc fell by over
      300,000 tonnes to about 88,000 tonnes. The price of lead increased from US$0.50
      per pound at the beginning of the year to US$0.80 per pound at year end. The
      market for lead was also strong in 2006 with demand exceeding supply resulting
      in a reduced level of stocks. The price of silver improved strongly during
      2006
      from US$8.83 per ounce at the start of the year, reaching a high of US$14.94
      per
      ounce in May, ending the year at US$12.90 per ounce and averaging US$11.55
      per
      ounce for the year.





The
      prices of zinc, silver and lead are expected to remain strong over the medium
      term. Economic growth in China will continue to be the major factor influencing
      global supply and demand of zinc and lead while the silver price will be
      influenced by investment and speculative economic
      considerations.


2


Canadian
      Zinc is in strong financial condition. At December 31, 2006 the Company had
      cash, cash equivalents and short term investments of $29.6 million and is debt
      free. During 2006 the Company raised $22.0 million (net) through the private
      placement of shares and exercise of share purchase warrants and
      options.








**2.**
            **SELECTED
                ANNUAL
                FINANCIAL INFORMATION**





The
      following selected annual financial information has been derived from the
      financial statements of the Company, which have been prepared in accordance
      with
      Canadian generally accepted accounting principles. All amounts are in Canadian
      dollars.





2006
            2005
            2004Net
                earnings (loss
            $(1,486,416)
            $(1,967,312)
            $(679,127)Per
                common share:
              Net
                earnings (loss)
              Diluted
                net earnings (loss)
            (0.02)
              (0.02)
            (0.03)
              (0.03)
            (0.01)
              (0.01)Total
                assets
            $56,762,186
            $34,694,580
            $29,963,979Cash
                and term deposits
            $29,087,082
            $16,063,876
            $12,907,997Long-term
                debt and capital leases
            Nil
            Nil
            NilShareholders
                equity
            $53,783,719
            $33,343,959
            $28,590,903





The
      Company is at the exploration and development stage and does not generate
      revenue or cash flow. The loss for each of the years 2004, 2005 and 2006 largely
      represents administrative expense. Cash, term deposits and short term
      investments increased as a result of financings completed during the years.
      Total assets increased as a result of increases in cash and expenditures on
      resource properties.








**3.**
            **REVIEW
                OF OPERATIONS AND FINANCIAL
                RESULTS**





For
      2006,
      the Company reported a net loss of $1,486,416, compared to a net loss of
      $1,967,312 in 2005 and a loss of $679,127 in 2004. The loss for 2006 included
      a
      non-cash charge of $1,023,000, compared to $1,314,000 in 2005 and nil in 2004,
      in respect of stock based compensation arising on the issue during the year
      of
      stock options to employees and directors.





Interest
      income increased to $948,148 in 2006 from $329,115 in 2005 and from $330,076
      in
      2004, with the increase attributable to higher cash balances invested as a
      result of funds raised through financing activities.





**Exploration
      and Development**





The
      Company capitalizes all exploration and development costs relating to its
      resource interests. During 2006 the Company expended $7,871,494 (excluding
      amortization and accretion) on exploration and development on the Prairie Creek
      Property, the principal components of which were underground exploration and
      drilling. During 2005 the Company expended $1,426,212 (excluding amortization
      and accretion) on exploration and  development
      on the Prairie Creek Property, the principal components of which were site
      preparation, camp operations, metallurgy, transportation, lease rentals and
      permitting. During 2004 the Company expended $2,120,663, on the Prairie Creek
      Property.





Full
      particulars of the deferred exploration and development costs are shown in
      Note
      4 attached to the Financial Statements.





3


The
      2006
      programs included sinking a new internal decline about 400 metres long from
      the
      end of the existing workings on the 870 metre level, from which new drill
      stations were established at 50 metre intervals. A total of 10,000 metres of
      underground drilling is planned in the program, of which 1,800 metres had been
      completed by year end. The 2006/07 underground drill program is focused on
      further defining the Main Zone (Zones 1-3) of mineralization in order to upgrade
      the resource category where previous wide spaced surface diamond drilling has
      outlined a large inferred mineral resource. The bulk of this drilling is
      targeted on detailing the vein style mineralization, however, some deeper
      drilling exploring for additional stratabound mineralization is also
      included.


This
      program has extended into 2007 and will continue until at least
      mid-year.





During
      2006 a new bulk metallurgical sample was collected from multiple headings of
      the
      vein within the existing underground development. These samples were composited
      and blended to create representative samples of the ore that will provide feed
      to a future operating mill. The current program has to date shown that the
      heavy
      media separation, demonstrated in preliminary tests in 2005, is repeatable
      and
      that higher grade concentrates can be produced by processing the upgraded
      material.





A
      surface
      diamond drill exploration program was started in Zone 8 located a distance
      of 5
      kilometers south of the minesite. This drill program totaled 600 m and returned
      significant mineralized intercepts which will be followed up on in the upcoming
      2007 season.





During
      2005 the Company carried out an extensive site preparation program at the
      Prairie Creek Property investing a total of $1.4 million on mine development
      and
      infrastructure. The underground workings were rehabilitated and a new electrical
      substation installed underground in preparation for the planned decline and
      underground drilling program. Important site maintenance and environmental
      work
      was also carried out including the installation of a new water treatment plant
      and construction of a new water polishing pond. A major metallurgical testing
      program was also carried out with encouraging results.





Steady
      progress in permitting the Prairie Creek mine was made during 2006.





The
      environmental assessment of the Company’s application for a Land Use Permit for
      its Phase 3 Exploration Program at Prairie Creek was completed in December
      2005
      with the issue of a report by the Mackenzie Valley Environmental Impact Review
      Board recommending that the project be approved. In February 2006 the report
      of
      the Review Board was approved by the Minister of Indian Affairs and Northern
      Development and the permit was issued by the Water Board in May 2006. This
      Land
      Use Permit is valid until May 2011 and enables the Company, for the first time,
      to explore and drill anywhere on the extensive Prairie Creek
      property.





The
      Land
      Use Permit for the Phase 2 Exploration Program, originally issued to the Company
      in November 2001, was renewed by the Water Board in November 2006 for a further
      period of two years. This permit enables the Company to drill up to 60 surface
      holes within a 1,000 meter radius of the Prairie Creek mine site and is valid
      until November 30, 2008.





Following
      a decision of the Federal Court of Canada in December 2005 directing the Water
      Board to reissue the Licence, the Type ‘B’ Water Licence, originally issued in
      September 2003 was reissued to Canadian Zinc in February 2006 containing the
      amended terms which had been agreed between the Company and the Minister. The
      Water Licence is valid until September 2008 and is renewable
      thereafter.





**Revenue
      and Interest Income**





The
      Company is in the exploration and development stage and does not generate any
      cash flow. To date the Company has not earned any significant revenues other
      than interest income. Interest income in 2006 was $948,148 compared to $329,115
      in 2005 and $330,076 in 2004, the increase being attributable to higher cash
      balances invested throughout the full year .


4


**Administrative
      Expenses**





Administrative
      expenses for 2006 (excluding stock based compensation, write-off of mining
      equipment and amortization) were $1,380,481 compared to $979,310 in 2005 and
      $680,181 in 2004. The major components of expenses were management compensation,
      shareholder and investor communication and professional fees.





**Stock
      Based Compensation**





In
      2006
      the Company recorded stock based compensation expense of $1,023,000 on the
      grant
      of stock options to employees and directors. In 2005 the Company recorded a
      stock based compensation expense of $1,314,000. There was no similar expense
      in
      2004.





**Amortization
      and Write-offs**





Amortization
      of mining plant and equipment of $50,714 ($36,988 - 2005; $42,837 - 2004) and
      asset retirement obligation of $128,720 ($128,720 - 2005; $128,719 - 2004)
      was
      capitalized to deferred exploration and development costs. Amortization expense
      of $4,403 compared to $3,117 in 2005 and $3,794 in 2004 relates to the
      amortization of office furniture and equipment. A loss of $26,680 was recorded
      on the write off of a diesel generator used at the Prairie Creek
      mine.





**Asset
      Retirement Obligations**





The
      Company follows the policy of recognizing the fair value of liabilities for
      asset retirement obligations in the period in which they are incurred. A
      corresponding increase to the carrying amount of the related asset is generally
      recorded and amortized over the life of the asset. During 2004 the Company
      provided $1,110,006 in asset retirement obligations related to the Prairie
      Creek
      property and a corresponding increase in resource interests assets. At December
      31, 2006 this had increased to $1,380,120 compared to $1,302,212 at December
      31,
      2005 and $1,227,996 at December 31, 2004. Amortization of the asset retirement
      obligation of $128,720 and asset retirement accretion of $77,908 (totaling
      $206,628) was capitalized to deferred exploration and development costs in
      2006,
      compared to a total of $202,936 in 2005 and $195,536 in 2004. In addition,
      the
      Company has posted reclamation security deposits of $395,000.





**Income
      Tax**





The
      Company is currently not taxable and had no income tax expense for 2006, 2005
      or
      2004. The Company has applied the accounting treatment in EIC-146 requiring
      the
      tax effect of the renunciation of $5,675,000 upon the issue in 2005 of flow
      through shares to be recorded in the 2006 fiscal period. The net effect of
      the
      adoption of EIC-146 has resulted in the recognition of a future tax liability
      in
      respect of the issue of flow through shares of $1,134,000 and a corresponding
      reduction in shareholders’ equity.





**Transactions
      with Related Parties**





The
      Company had no related party transactions in 2006, 2005 or 2004 other than
      in
      respect of executive compensation, directors fees and consulting fees totaling
      $580,169, $356,433, and $235,312 respectively, paid to executives or directors
      or to corporations controlled by executives or directors.


5





**Financial
      Instruments**





Cash
      equivalents and short-term investments usually consist of liquid investments
      which are readily convertible into cash. The Company places its cash, cash
      equivalents and deposits with high credit quality financial institutions which
      invest the funds in high quality financial instruments. The Company is not
      exposed to significant interest or currency risks arising from these financial
      instruments.





**4.**
            **RISKS
                AND UNCERTAINTIES**





In
      conducting its business, Canadian Zinc faces a number of risks and
      uncertainties. These are described in detail under the heading “Risk Factors” in
      the Company’s Annual Information Form for the year 2006, dated March 30, 2007,
      which is filed on SEDAR and which may be found at **www.SEDAR.com** and
      which is incorporated herein by reference.





The
      principal risks and uncertainties faced by the Company are summarized
      below.





**Political
      and Legislative**





Canadian
      Zinc conducts its operations in the Mackenzie Valley in the Northwest
      Territories of Canada in an area which is claimed by the Deh Cho First Nations
      as their traditional territory. No land claim settlement agreement has been
      reached between Canada and the Deh Cho and title to the land is in dispute.
      The
      Company’s operations are potentially subject to a number of political and
      legislative risks and the Company is not able to determine the impact of these
      risks on its business. The Company’s operations and exploration activities are
      subject to extensive federal, provincial, territorial and local laws and
      regulations. Such laws and regulations are subject to change and can become
      more
      stringent and costly over time.





In
      2000
      there was a major change to the legislative and regulatory framework and
      regulations in the Mackenzie Valley. There can be no assurance that these laws
      and regulations will not change in the future in a manner that could have an
      adverse effect on the Company’s activities and financial condition.





**Permitting
      and Environment**





The
      Prairie Creek Project is located in an environmentally sensitive remote area
      in
      the Mackenzie Mountains, within the watershed of the South Nahanni River and
      in
      proximity to, but outside, the Nahanni National Park Reserve.





The
      Company is required to obtain various permits to carry on its activities and
      is
      subject to various reclamation and environmental conditions. Canadian Zinc
      does
      not have all of the permits necessary to operate the Prairie Creek Mine and
      there can be no assurance that it will be able to obtain those permits or obtain
      them within a reasonable time. The Company has experienced long delays in
      obtaining permits to date. The Company anticipates continuing difficulties
      and
      delays with its permitting activities and faces ongoing opposition and legal
      challenges from certain interests.





**Exploration
      and Development**





Exploration
      for minerals and development of mining operations involve many risks, most
      of
      which are outside the Company’s control. In addition to the normal and usual
      risks of exploration and mining, the Prairie Creek Property is situated in
      a
      remote location and does not have the benefit of infrastructure or easy
      access.


6


The
      development plan for the Prairie Creek Project is based upon a Scoping Study
      prepared internally by the Company in 2001. A Scoping Study is not a Feasibility
      Study. The Scoping Study outlined the plan for the development of the Prairie
      Creek Project based on the historical development and existing infrastructure
      at
      the Prairie Creek Property and on the resource estimation. The resource
      estimation does not constitute mineable reserves. The historical development
      was
      carried out principally in 1980 to 1982 and the infrastructure, including the
      mill, was constructed in the same period based on a feasibility study prepared
      by Kilborn Engineering (Pacific) Limited in 1980. The Kilborn feasibility study
      is outdated and cannot be relied upon. The existing infrastructure, including
      the mill, buildings, camp etc. is now twenty-five years old and, although it
      has
      been held under care and maintenance, it has lain idle for twenty-five years
      and
      was never operated. There is significant risk attaching to the proposed
      operation of aged equipment.





**Metal
      Prices and Market Sentiment**





The
      prices of metals fluctuate widely and are affected by many factors outside
      the
      Company's control. The relative prices of metals, and future expectations for
      such prices have a significant impact on the market sentiment for investment
      in
      mining and mineral exploration companies. Metal price fluctuations may be either
      exacerbated or mitigated by international currency fluctuations which affect
      the
      metal price received in terms of the domestic currency in which they are
      produced. The Company relies on equity financings for its working capital
      requirements and to fund its exploration, development and permitting activities.
      The Company does not have sufficient funds to put the Prairie Creek Property
      into production from its own financial resources. There is no assurance that
      such financing will be available to the Company, or that it will be available
      on
      acceptable terms.








**5.**
            **SUMMARY
                OF QUARTERLY RESULTS AND FOURTH QUARTER
                2006**





Revenue
                $
            Net
                Earnings (Loss) $
            Net
                Earnings (Loss)
              per
                Common Share $**2006**Fourth
                Quarter
            304,193
            (966,375)
            (0.02)Third
                Quarter
            237,104
            (38,749)
            (0.00)Second
                Quarter
            225,490
            (326,146)
            (0.00)First
                Quarter
            181,361
            (155,146)
            (0.00)**2005**Fourth
                Quarter
            119,509
            (133,163)
            (0.01)Third
                Quarter
            80,686
            (87,923)
            (0.00)Second
                Quarter
            75,812
            (159,896)
            (0.00)First
                Quarter
            53,108
            (1,586,330)
            (0.02)**2004**Fourth
                Quarter
            82,579
            (230,314)
            (0.01)Third
                Quarter
            83,134
            (63,978)
            (0.00)Second
                Quarter
            83,635
            (135,300)
            (0.00)First
                Quarter
            80,728
            (249,535)
            (0.00)





In
      the
      fourth quarter of 2006 the Company recorded a loss of $966,375 ($0.02 per share)
      compared to a loss of $133,163 ($0.01 per share) in the fourth quarter of 2005
      and a loss of $38,749 in the third quarter of 2006. The increased loss in the
      fourth quarter of 2006 arose primarily from a non-cash expense of $831,527
      in
      respect of stock based compensation on the issue during the quarter of stock
      options to directors and employees. Expenditure on the Prairie Creek property
      was $3,235,394 which mainly comprised underground exploration drilling. The
      Company generated gross proceeds of $13,000,000, before expenses, from financing
      activities through the private placement of shares and flow through
      shares.


7





**6.**
            **LIQUIDITY
                AND
                CAPITAL RESOURCES**





**Cash
      Flow**





Canadian
      Zinc does not generate any cash flow and has no income other than interest
      income. The Company relies on equity financings for its working capital
      requirements and to fund its planned exploration, development and permitting
      activities. Interest income in 2006 was $948,148 compared to $329,115 in 2005
      and $330,076 in 2004.





**Source
      of Cash - Financing Activities**





During
      2006 the Company generated $22,037,177 net proceeds from financing activities
      through the issue of 27,843,000 common shares in private placements, the
      exercise of options and the conversion of share purchase warrants.





During
      2005 the Company generated $5,406,368
      net proceeds from financing activities through the issue of a total of
      10,352,270 shares.





During
      2004 the Company generated $2,444,625 from the exercise of share purchase
      warrants and employee stock options on a total of 4,612,010 shares.





**Use
      of Cash - Investing Activities**





In
      2006,
      cash used in operating activities was $261,642 which largely represents
      corporate and operating expenses, whilst cash used in investing activities
      was
      $24,231,047 including payments of $205,000 for the performance of reclamation
      obligations, $15,787,718 for short-term investments and marketable securities
      and $7,871,494 on exploration and development costs.





In
      2005
      cash used in operating activities was $776,334 which largely represents
      corporate and operating expenses, whilst cash used in investing activities
      was
      $1,474,155, including payment of a $30,000 deposit for the performance of
      reclamation obligations and $1,426,212 on exploration and development
      activities. All of the investment in exploration and development was made on
      the
      Prairie Creek Property. Details of the Company’s deferred exploration and
      development costs are given in Note 4 to the financial statements which shows
      the major components of expenditure.





In
      2004
      cash used in operating activities was $679,750 which largely represents
      corporate and operating expenses, whilst cash used in investing activities
      was,
      $2,196,320 including a payment of a $30,000 deposit for the performance of
      reclamation obligations, $45,657 for the purchase of equipment and $2,120,663
      of
      exploration and development costs.





**Liquidity,
      Financial Condition and Capital Resources**





Canadian
      Zinc’s cash, cash equivalent and short term investments at December 31, 2006 was
      $29,087,082 compared to $16,063,876 at December 31, 2005 and $12,907,997 at
      December 31, 2004. The increase in 2006 was attributable to funds raised during
      the year. The Company’s working capital increased to $29,142,161 compared to
      $16,039,646 at December 31, 2005 and $12,757,628 at December 31, 2004. During
      the year the Company raised $22,037,177 net proceeds from the private placement
      of shares and exercise of options and warrants.


8


Canadian
      Zinc is debt free. The Company is in its strongest ever financial position
      and
      is well financed to carry out its planned exploration, development and
      permitting activities. At December 31, 2006 the Company had committed to incur
      Canadian Exploration Expenditures of $8.0 million during 2007 in respect of
      which the Company has renounced to certain subscribing shareholders the
      applicable Canadian Exploration Expenditure (CEE) tax deductions.





**Outstanding
      Share Data**





At
      December 31, 2006 the Company had 107,590,212 common shares outstanding, with
      an
      unlimited authorized capital, compared to 79,747,212 at December 31, 2005 and
      69,394,942 common shares at December 31, 2004. During 2004 at a meeting of
      shareholders the Company’s authorized capital was increased from 200,000,000
      common shares of no par value to an unlimited number of common shares of no
      par
      value. At March 30, 2007 the Company had 108,040,212 common shares outstanding.
      All common shares have one vote and rank equally for the payment of dividends or
      distribution of capital.





During
      2006 options on a total of 1,200,000 shares exercisable at a price of $0.90
      per
      share for five years were granted to directors and 300,000 stock options
      exercisable at $0.89 were granted to employees and other service providers
      under
      the Company’s 10% Rolling Stock Option Plan. 30,000 of the options granted to
      employees were cancelled in 2006.





In
      January 2005 options on a total of 3,650,000 shares exercisable at a price
      of
      $0.60 per share for five years were granted to employees, directors and other
      service providers under the Company’s Stock Option Plan. As of December 31,
      2006, 690,000 of these stock options were exercised in 2006 and 100,000 expired
      in 2005.




At
      December 31, 2006 the Company had 4,780,000 stock options exercisable between
      $0.23 to $0.90 with expiring dates between March 18, 2007 and December 13,
      2011
      and 11,995,493 share purchase warrants  outstanding
      exercisable at prices between $0.72 to $1.15 per share and with expiry dates
      of
      January 30, 2008 and November 23, 2008. At March 30, 2007 the Company had
      4,330,000 stock options and 11,995,493 share purchase warrants
      outstanding.




**Off-Balance
      Sheet Arrangements**





Canadian
      Zinc has no off balance sheet arrangements or off-balance financing structures
      in place.





**Contractual
      and Other Obligations**





The
      Company had no material contractual or other financial or lease obligations
      at
      December 31, 2006.








**7.**
            **CRITICAL
                ACCOUNTING POLICIES AND
                ESTIMATES**





Canadian
      Zinc’s accounting policies are described in Note 2 to the financial statements.
      Management considers the following to be the most critical in understanding
      the
      judgments that are involved in preparing the Company’s financial statements and
      the uncertainties that could impact its results of operations, financial
      condition and future cash flows.





**Use
      of Estimates**





The
      preparation of financial statements in conformity with Canadian GAAP requires
      management to make estimates and assumptions that affect the reported amounts
      of
      assets and liabilities at the date of the financial statements. The most
      significant estimates are related to the carrying value of resource interests
      and its


9


recoverability,
      site restoration costs and asset retirement and related obligations. Actual
      results could differ from those estimates.





**Resource
      Interests**





In
      accordance with its accounting policies the Company capitalizes all exploration
      and development costs incurred on its Prairie Creek Property. The amounts shown
      for resource interests represent costs incurred to date and do not necessarily
      reflect present or future values. The carrying value of resource interests
      are
      reviewed at least annually or when events or changes in circumstances suggest
      the carrying value of such assets may not be recoverable or has become impaired.
      If impairment is deemed to exist the asset will be written down to its estimated
      fair value, usually determined using a discounted cash flow analysis. The
      Company includes both measured and indicated resources and some inferred
      resources in its carrying value impairment calculations. These resources have
      not been estimated in accordance with National Instrument 43-101. Management’s
      estimates of the recoverable reserves and resources, operating and capital
      costs
      and future metal prices are all subject to risks and uncertainties which may
      affect the assessment of recoverability of amounts recorded for resource
      interests. Upon commencement of commercial production capitalized costs of
      resource interests will be subject to depreciation and depletion using the
      unit-of-production method based upon the estimated proven and probable reserves.
      The ultimate recoverability of amounts capitalized for resource interests is
      dependent upon, amongst other things, obtaining the necessary financing to
      complete the development of, and obtaining the necessary permits to operate,
      the
      Prairie Creek mine.





**Asset
      Retirement Obligations**





The
      Company follows the policy which requires that the fair value of liabilities
      for
      an asset retirement obligation be recognized in the period in which they are
      incurred. The Company’s exploration and development activities are subject to
      various laws and regulations governing the protection of the environment. These
      laws and regulations are continually changing and, over time, have become and
      are becoming more restrictive. Future changes to environmental laws and
      regulations could increase the liabilities for asset retirement obligations
      and
      the extent of reclamation and remediation work required to be performed by
      the
      Company.





**Stock
      Based Compensation**





The
      Company follows the fair value accounting based method for stock options. The
      fair value of stock options is determined by the widely used Black-Scholes
      option pricing model which was developed for use in estimating the fair value
      of
      freely traded options which are fully transferable and have no  vesting
      restrictions. The Company’s options have characteristics that are significantly
      different from those of traded options and changes in any of the assumptions
      used can materially affect fair value estimates.





**Metal
      Prices and Exchange Rates**





The
      Company estimates the future prices of the metals it expects to produce based
      on
      historical trends and published forecasts. The long-term metal prices used
      by
      the Company in the Scoping Study of the Prairie Creek Project completed in
      2001
      were: Zinc - US$0.50; Lead - US$0.25; and Copper - US$0.90 respectively, per
      pound; and US$5.50 per ounce of silver, and an exchange rate of US$0.66 to
      CDN$1.00. The Scoping Study has not been updated.


10





**8.**
            **DISCLOSURE
                CONTROLS AND PROCEDURES**





Disclosure
      controls and procedures are designed to provide reasonable assurance that
      material information is gathered and reported to senior management, including
      the Chief Executive Officer and Chief Financial Officer, as appropriate to
      permit timely decisions regarding public disclosure.





Management,
      including the Chief Executive Officer and Chief Financial Officer, have
      evaluated the effectiveness of the Company’s disclosure controls and procedures
      as of December 31, 2006. Based on this evaluation, the Chief Executive Officer
      and Chief Financial Officer have concluded that as of the end of the period
      covered by this Management’s Discussion and Analysis the Company’s disclosure
      controls and procedures, as defined in Multilateral Instrument 52-109 -
      Certification of Disclosure in Issuer’s Annual and Interim Filings, were
      effective to provide reasonable assurance that material information required
      to
      be disclosed in reports filed or submitted by the Company is recorded,
      processed, summarized and reported within the appropriate time
      periods.





It
      should
      be noted that while the Company's Chief Executive Officer and Chief Financial
      Officer believe that the Company’s disclosure controls and procedures provide a
      reasonable level of assurance and that they are effective, they do not expect
      that the disclosure controls and procedures can prevent all errors or mistakes.
      A control system, no matter how well conceived or operated, can provide only
      reasonable, not absolute, assurance that the objectives of the control system
      are met.








**9.**
            **INTERNAL
                CONTROLS OVER FINANCIAL
                REPORTING**







The
      Chief
      Executive Officer and Chief Financial Officer are responsible for designing
      internal controls over financial reporting, or causing them to be designed
      under
      their supervision, in order 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.





During
      fiscal 2006, the Company made changes to its systems of internal controls over
      financial reporting that did not materially affect internal controls over
      financial reporting. During this process, management identified certain
      potential deficiencies or weaknesses in internal controls over financial
      reporting. The design of a control system must reflect that there are staffing
      and financial resource constraints, and that the benefits of controls must
      be
      considered relative to their costs to the Company. Due to the limited number
      of
      staff at Canadian Zinc, it is not feasible or cost effective to achieve complete
      segregation of incompatible duties. These matters and their related risks are
      not uncommon in a company of Canadian Zinc’s size. These risks are not
      considered to be significant. The Company’s management has taken such action as
      it considered appropriate to minimize any potential risks from these
      deficiencies or weaknesses.





The
      Company’s management, including the Chief Executive Officer and Chief Financial
      Officer, believe that any internal controls over financial reporting, including
      those systems determined to be effective and no matter how well conceived and
      operated, has inherent limitations and can provide only reasonable, not
      absolute, assurance that the objectives of the control system are met with
      respect to financial statement preparation and presentation. Because of the
      inherent limitations in all control systems, they cannot provide absolute
      assurance that all control issues and instances of fraud, if any, within the
      Company have been prevented or detected. These inherent limitations include
      the
      realities that judgments in decision-making can be faulty, and that breakdowns
      can occur because of simple error or mistake. Additionally, controls can be
      circumvented by the individual acts of some persons, by collusion of two or
      more
      people, or by unauthorized override of the control. The design of any system
      of
      controls is also based in part upon certain assumptions about the likelihood
      of
      future events, and there can be no assurance that any design will succeed in
      achieving its stated goals under all potential future conditions. Accordingly,
      because of the inherent limitations in a cost effective control system,
      misstatements due to error or fraud may occur and not be
      detected.


11





**10.**  **OUTLOOK**





Canadian
      Zinc is currently in an exploration and development phase. At December 31,
      2006
      the Company held cash equivalents and short term investments of $29.6 million
      placing the Company in a strong financial position to carry out its planned
      exploration, development and permitting activities.





Demand
      for zinc, lead and silver, the principal minerals at Prairie Creek is expected
      to remain strong in 2007 with global growth led by China. The zinc price
      declined in the first quarter of 2007 from a high of US$1.96 per pound at the
      start of the year to about US$1.45 per pound, equal to the average for 2006,
      at
      the date of this MD&A. The price of silver increased in the first quarter of
      2007 from US$12.90 per ounce at the start of the year, reaching a high of
      US$14.58 per ounce at the end of February and was trading at approximately
      US$13.37 per ounce at the date hereof. The price of lead improved to US$0.867
      per pound at the date hereof from US$0.80 per pound at the start of the year.
      Business conditions for Canadian Zinc are expected to be positive as demand
      for
      primary metals, allied to a continuing shortage in supply, will help to sustain
      metal prices, which in turn should encourage investor interest in mining and
      exploration companies.





Plans
      for
      2007 include continuing the Company’s ongoing underground exploration and infill
      drilling program, as well as a large exploration program on the Prairie Creek
      property outside the immediate currently known resource area. At the same time
      ongoing technical and metallurgical studies will continue to advance the project
      towards commercial production. The Company will also continue with its
      permitting activities. The application for the Land Use Permits and Water
      Licence for the commercial operation of the Prairie Creek Mine will be filed
      during the year. It is estimated that the remaining permitting work will take
      approximately two years and will cost $3.0 to $5.0 million, depending on the
      level of environmental and assessment work required. A budget of $ 9.0 million
      has been approved for the Prairie Creek project for 2007.





The
      Company has also undertaken the review of a number of other new mining
      investment opportunities during 2006 and this activity will continue in
      2007.








**11.**  **CAUTIONARY
      NOTE - FORWARD LOOKING INFORMATION**





Some
      of
      the statements contained in this document are forward-looking statements, such
      as estimates and statements that describe the Company’s future plans, objectives
      or goals, including words to the effect that the Company or management expects
      a
      stated condition or result to occur. Forward-looking statements may be
      identified by such terms as “believes”, “anticipates”, “expects”, “estimates”,
“may”, “could”, “would”, “will”, or “plan”). Such forward-looking statements are
      made pursuant to the safe harbour provisions of the United States Private
      Securities Litigation Reform Act of 1995. Since forward-looking statements
      are
      based on assumptions and address future events and conditions, by their very
      nature they involve inherent risks and uncertainties. Actual results relating
      to, among other things, mineral reserves, mineral resources, results of
      exploration, reclamation and other post-closure costs, capital costs, mine
      production costs and the Company’s financial condition and prospects, could
      differ materially from those currently anticipated in such statements by reason
      of factors such as changes in general economic conditions and conditions in
      the
      financial markets, changes in demand and prices for the minerals the Company
      expects to produce delays in obtaining permits, litigation, legislative,
      environmental and other judicial, regulatory, political and competitive
      developments in areas in which the Company operates, technological and
      operational difficulties encountered in connection with the Company’s
      activities, labour relations matters, costs and changing foreign exchange rates
      and other matters discussed under “Management’s Discussion and Analysis of
      Financial Condition and Results of Operations”. Other delays in factors that may
      cause actual results to vary materially include, but are not limited to, the
      receipt of permits or approvals, changes in commodity and power prices, changes
      in interest and currency exchange rates, geological and metallurgical
      assumptions (including with respect to the size, grade and recoverability of
      mineral resources) unanticipated operational difficulties (including failure
      with plant, equipment or processes to operate in accordance with specifications
      or expectations) cost escalation, unavailability of materials and equipment,
      industrial disturbances or other job action, and unanticipated events related
      to
      health, safety and environmental matters, political risk, social unrest, and
      changes in general economic conditions or conditions in the financial markets.
      Mineral resources that are not mineral reserves do not have demonstrated
      economic viability. Inferred mineral resources are considered too speculative
      geologically to have economic considerations applied to them that would enable
      them to be categorized as mineral reserves. There is no certainty that mineral
      resources will be converted into mineral reserves. This list is not exhaustive
      of the factors that may affect any of the Company’s forward-looking statements.
      The Company does not currently hold a permit for the operation of the Prairie
      Creek Mine. These and other factors should be considered carefully and readers
      should not place undue reliance on the Company’s forward-looking statements.
      Further information regarding these and other factors which may cause results
      to
      differ materially from those projected in forward-looking statements are
      included in the filings by the Company with securities regulatory authorities.
      The Company does not undertake to update any forward-looking statements that
      may
      be made from time to time by the Company or on its behalf, except in accordance
      with applicable securities laws.