MANAGEMENT’S DISCUSSION AND ANALYSIS - YEAR ENDED DECEMBER 31,
2008





March 16,
2009





TABLE OF
CONTENTS





INTRODUCTION


ADDITIONAL INFORMATION


INFORMATION ABOUT FORWARD-LOOKING
STATEMENTS


CAUTIONARY NOTE TO U.S. INVESTORS


OVERVIEW


STRATEGY AND RISK MANAGEMENT


2008 REVIEW OF ACTIVITIES


SELECTED ANNUAL FINANCIAL INFORMATION


CHANGE IN ACCOUNTING POLICY


REVIEW OF FINANCIAL RESULTS


SUMMARY OF QUARTERLY RESULTS (UNAUDITED) AND FOURTH
QUARTER


LIQUIDITY, FINANCIAL CONDITION AND CAPITAL
RESOURCES


FINANCIAL INSTRUMENTS


NORMAL COURSE ISSUER BID


OUTLOOK


CRITICAL ACCOUNTING ESTIMATES


CHANGES IN ACCOUNTING POLICIES INCLUDING INITIAL ADOPTION, AND
INTERNATIONAL FINANCIAL REPORTING STANDARDS (“IFRS”)


RISKS AND UNCERTAINTIES


OTHER INFORMATION


DISCLOSURE CONTROLS AND PROCEDURES AND INTERNAL CONTROLS OVER
FINANCIAL REPORTING





1


INTRODUCTION





This
Management’s Discussion and Analysis (“MD&A”), dated March 16, 2009, focuses
upon the activities, results of operations, and liquidity, financial condition
and capital resources of Canadian Zinc Corporation (the “Company” or “Canadian
Zinc” or “CZN”) for the year ended December 31, 2008.  In order to
better understand the MD&A, it should be read in conjunction with the
audited financial statements and notes thereto for the year ended December 31,
2008.





The
Company’s financial statements are prepared in accordance with Canadian
generally accepted accounting principles (“GAAP”).  The significant
accounting policies are outlined in Notes 2, 3 and 4 to the Company’s financial
statements for the year ended December 31, 2008.  These principles
conform in all material respects with generally accepted accounting principles
in the United States, except as disclosed in Note 19 to the financial
statements.








ADDITIONAL INFORMATION





Additional
information about the Company, including the Company’s Annual Information Form,
is available under the Company’s profile on SEDAR at www.sedar.com
and on the Company’s website at www.canadianzinc.com.  Information
is also available through the EDGAR system accessible through the United States
Securities and Exchange Commission’s website www.sec.gov.





Readers
should be aware that historical results are not necessarily indicative of future
performance; actual results will vary from estimates and variances may be
significant.





The
Company reports its financial information in Canadian dollars and all monetary
amounts set forth herein are expressed in Canadian dollars unless specifically
stated otherwise.





Alan
Taylor, P. Geo., Chief Operating Officer, Vice President Exploration and
Director of Canadian Zinc Corporation, is the Company’s Qualified Person for the
purposes of National Instrument 43-101 and has approved the technical
disclosures in the MD&A.








2


INFORMATION ABOUT FORWARD-LOOKING STATEMENTS





This
MD&A contains 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.  Such forward-looking statements in this MD&A
include the planned/proposed Prairie Creek Mine operations, anticipated future
operating descriptions included in the Company’s Project Description Report
(filed for permitting requirements), ongoing work to convert the Project
Description Report into a Pre-Feasibility Study, future cost estimates,
expectations around the process for obtaining operating permits, the impact to
the Company of future accounting standards and discussion of risks and
uncertainties around the Company’s business.  Words such as
“believes”, “anticipates”, “expects”, “estimates”, “may”, “could”, “would”,
“will”, or “plan”, or similar expressions, are intended to identify
forward-looking statements.  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, the timing of
exploration, development and mining activities 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 “Liquidity, Financial Condition
and Capital Resources” and “Review of Financial Results.”





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 of 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.  The
Company does not currently hold a permit for the operation of the Prairie Creek
Mine.





This list
is not exhaustive of the factors that may affect any of the Company’s
forward-looking statements.  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.





CAUTIONARY NOTE TO U.S. INVESTORS





The
United States Securities and Exchange Commission (“SEC”) permits U.S. mining
companies, in their filings with the SEC, to disclose only those mineral
deposits that a company can economically and legally extract or
produce.  We use certain terms in this MD&A, such as “measured,”
“indicated,” and “inferred” “resources,” which the SEC guidelines prohibit U.S.
registered companies from including in their filings with the
SEC.  U.S. Investors are urged to consider closely the disclosure in
our Form 20-F which may be secured from us, or from the SEC’s website at
http://www.sec.gov/edgar.shtml.


3


OVERVIEW





Canadian
Zinc Corporation is a development stage company listed on the Toronto Stock
Exchange under the symbol “CZN,” and in the United States on the OTCBB under the
symbol “CZICF,” and is engaged in the business of exploration and development of
natural resource properties.  The Company’s principal focus is to
advance the Prairie Creek Mine (the “Mine” or “Prairie Creek”), a
zinc/lead/silver property located in the Northwest Territories of Canada,
towards production.  The Mine is partially developed with an existing
1,000 tonne per day mill and related infrastructure.





In 2006
and 2007, the Company carried out major exploration and development programs at
Prairie Creek, including driving a new underground decline tunnel approximately
600 metres long, which enabled completion of a significant underground diamond
drilling program.  This led to the preparation, in October 2007, of a
Technical Report (the “Report”) to National Instrument (“NI”) 43-101 standards,
which estimates that the Prairie Creek Property hosts total Measured and
Indicated Resources of 5,840,329 tonnes grading 10.71% zinc, 9.90% lead, 161.12
grams silver per tonne and 0.326% copper.  In addition, the Report
confirms a large Inferred Resource of 5,541,576 tonnes grading 13.53% zinc,
11.43% lead, 215 grams per tonne silver and 0.514% copper and additional
exploration potential.





During
2008, progress was made on many fronts in advancing the Prairie Creek Mine
towards production.  Detailed mine planning, process design and
transportation studies were completed, in conjunction with SNC-Lavalin Inc.,
leading to the preparation of a Project Description Report (“PDR”) which was
filed with regulatory authorities in support of applications for operating
permits for the Prairie Creek Mine.





The
proposed new operation at the Prairie Creek Mine utilizes the existing
infrastructure and facilities that were built in the 1980’s, which will be
upgraded and enhanced to meet current-day environmental standards, and a number
of additional improvements including a new fuel-efficient low–emission power
generation plant and the permanent disposal of mill tailings underground as
paste backfill.





All
mining will be underground, on a year round basis, with production rates
starting at 600 tonnes per day, building to 1,200 tonnes per day.  The
Mill, which will include a new dense media separator, will process 600 to 1,000
tonnes per day and will produce separate lead and zinc sulphide concentrates and
lead oxide concentrates.  The concentrates will be bagged, stored and
trucked offsite on flat bed trucks over the winter access road to the Liard
Highway for onward shipment by rail to smelters in Canada or
Asia.  The current planned mine life is 10 to 14 years and will
generate 220 full time jobs.





In
May 2008, the applications for the main operating permits were submitted to the
Mackenzie Valley Land and Water Board (“MVLWB” or “Water Board”), which
completed its preliminary screening in September 2008.  The
applications have now moved on to the next stage of the regulatory process which
is Environmental Assessment (“EA”) currently being conducted by the Mackenzie
Valley Environmental Impact Review Board (“MVEIRB” or “Review
Board”).  On March 5, 2009, the MVEIRB published its ruling on scope
of development issues and is expected to soon issue draft Terms of Reference
that will identify what issues need to be examined in what level of detail
during the EA.  Given the open-ended nature of the Mackenzie Valley
permitting process, and the Company’s experience to date, it is likely that the
Environmental Assessment process will extend for a considerable
time.





The
Company’s existing 2003 Land Use Permit and Water Licence were renewed, in
September 2008, for two and five years respectively. A Type “B” Water Licence
was issued by the MVLWB in March 2008 to carry out rehabilitation of the access
road to the Prairie Creek Mine and authorization was received from Department of
Fisheries and Oceans Canada in July 2008.  The rehabilitation work
commenced in July 2008 and ran through until the end of October
2008.


4


Memoranda
of Understanding were signed with Parks Canada in July 2008 and with Liidlii Kue
First Nation and Nahanni Butte Dene Band in October 2008.  The Company
believes that these important agreements will lead to co-operative and
beneficial relationships with these parties and will assist in advancing the
Prairie Creek Mine towards production.





At the
Prairie Creek Mine, ongoing site maintenance continued, including rehabilitation
work on the access road, completion of a groundwater well drilling program,
further engineering assessments and the removal and destruction of all the
sodium cyanide which had been stored in drums on the property since
1982.





At
December 31, 2008 the Company had cash, cash equivalents, short term investments
and marketable securities of $22.972 million compared to $28.514 million at
December 31, 2007.  However, in view of the current global financial
uncertainty being experienced in the markets and with commodity prices, as
discussed in this MD&A in the section entitled “Liquidity, Financial
Condition and Capital Resources,” CZN is seeking to minimize non-essential
expenditures in 2009 to the extent possible.  Such action is being
taken to ensure that cash on hand is preserved to the maximum extent possible
which will enable the Company to further progress the ongoing Prairie Creek Mine
permitting activities without the need to seek additional financing in the
short-term.








STRATEGY AND RISK MANAGEMENT





Canadian
Zinc’s long-term aim has been, and continues to be, to bring the Prairie Creek
Mine into production.  CZN is committed to the responsible and
sustainable development of the Prairie Creek Mine.  The Company is
acutely aware of the ecological value and importance of the area to First
Nations, conservationists and the public in general.  CZN intends to
operate the Prairie Creek Mine with best available technology and environmental
protection so that the temporary impact on the environment during operations are
minimal, and long-term effects after closure of the mine will be
negligible.  CZN believes that mineral development and conservation of
ecological resources need not be mutually exclusive.





The
Company’s vision is the development and successful operation of the Prairie
Creek Mine with controlled road access, where the ecology is protected, and
mineral extraction with its related economic benefits successfully co-exist with
traditional aboriginal land uses and the neighboring Nahanni National Park
Reserve.





The
Company has continued to make progress with its strategy to bring the Prairie
Creek Mine into production and, as described in this MD&A, has submitted
applications for operating permits.  However, while the Company
intends to continue to work to obtain operating permits for Prairie Creek, it
has also re-evaluated its planned activities in light of the current global
financial concerns.  Accordingly, CZN has sought to implement
cost-saving measures in the short-term, in order to focus on the currently
required key activities and to preserve cash resources pending future
indications as to the state of the global financial and commodity
markets.  The Company will continue to evaluate the impact of the
current global financial crisis as the development of the Prairie Creek Mine
continues.








5


2008 REVIEW OF ACTIVITIES





Operations
Update





Ongoing
site preparation and care and maintenance work, including environmental
management and water treatment, continued at the Prairie Creek Mine site as the
project moves toward production.





Progress
was made on reopening and rehabilitating part of the road (approximately 30
kilometres) which connects the Prairie Creek Mine to the Liard Highway (a total
distance of approximately 170 kilometres).  A new base for the roadbed
was re-established along the Prairie Creek River, immediately north of the mine
site and to further protect the road bed from any future erosion in proximity to
the Prairie Creek water course.  Work on the road repair project
continued up until the end of October 2008.





In July
2008, in response to local concerns and environmental sensitivities, Canadian
Zinc removed from the Prairie Creek site drums of sodium cyanide that had been
stored on the property since 1982.  The material had been safely
stored and monitored in an engineered and covered storage
facility.  Under the direction of Hazco Environmental Services Ltd.
(“Hazco”), Canadian Zinc undertook a program in 2007 to repack the old sodium
cyanide drums into new overpack drums suitable for transport
off-site.  Following receipt of the necessary regulatory approvals, an
airlift of the repacked sodium cyanide drums and associated repackaging waste
took place utilizing a DHC-5 rear loading Buffalo aircraft, which shuttled the
material from the Prairie Creek Mine site to Fort Simpson.  From Fort
Simpson, Hazco transported the cyanide by truck to Cyanide Destruct Systems in
Barrie, Ontario and the repackaging waste was removed to Earth Tech’s Swan Hills
Treatment Centre in Alberta for destruction and disposal.





During
September 2008, the Company completed a geo-technical drilling program to
install a number of water wells to monitor groundwater conditions beneath the
mine-site.  Data gathered from this monitoring program will assist in
the EA process and also with future mine design.  Drill holes were
also completed in the area of the proposed Water Storage Pond to monitor slope
stability.





In
December 2008, the Company determined that, in light of the decline in the
financial and commodity markets, it would be prudent to preserve cash by
terminating all activity at the Prairie Creek Mine site for the duration of the
winter period.  Accordingly, the site was “winterized” in mid-December
2008 and it is currently anticipated that a minimal presence will be maintained
at Prairie Creek from approximately April/May 2009.  The Company has
continued to maintain its Environmental and Community Liaison staff and to
manage its operating permit applications.





6


Project
Description Report / Pre-Feasibility Study





A
Technical Report dated October 12, 2007, was prepared by MineFill Services Inc.
(Dr. David Stone and Stephen Godden – Qualified Independent Persons), to
National Instrument 43-101 standards, following the results of part of the 2007
drilling program.  The Report estimates that the Prairie Creek
Property hosts total Measured and Indicated Resources of 5,840,329 tonnes
grading 10.71% zinc, 9.90% lead, 161.12 grams silver per tonne and 0.326%
copper.  In addition, the Report confirms a large Inferred Resource of
5,541,576 tonnes grading 13.53% zinc, 11.43% lead, 215 grams per tonne silver
and 0.514% copper and additional exploration potential.





The
Report has been filed on SEDAR and may be viewed under the Company’s profile at
www.sedar.com,
or on the Company’s website at www.canadianzinc.com.





Utilizing
the Report, the Company has subsequently examined various operating alternatives
including mine planning, processing and tailings disposal
studies.  The work to date, which was undertaken in conjunction with
SNC-Lavalin Inc., has focused on detailed mine planning and scheduling, process
design, including a new dense media separation plant, and underground tailings
disposal.  A new bulk sample and representative water samples were
extracted from underground and transported to SGS Lakefield for laboratory and
metallurgical testing to produce representative tailings and process
water.  Detailed transportation studies were also carried
out.





A
Project Description Report was prepared and filed with regulatory authorities in
May 2008 in support of application for operating permits.  The
PDR  describes in detail the proposed new mining operations at Prairie
Creek and contemplates the construction of new facilities including new
fuel-efficient/low-emission power generating units, a kitchen/accommodation
block, concentrate storage shed, an incinerator, a new engineered waste rock
pile and two new transfer stations along the winter road.





The
Project Description Report, dated May 2008, may be viewed under the Company’s
name on the MVLWB website at http://www.mvlwb.ca/mv/registry.aspx.





The
Company is currently working with SNC-Lavalin Inc. and other consultants to
optimize the proposed mine plan incorporating some of the data from studies that
were carried out in 2008 and will work towards updating and converting the PDR
into a Pre-Feasibility Study to be finalized after the current Environmental
Assessment has been completed by the MVEIRB.





The
additional capital costs for the proposed new facilities and equipment to place
the Prairie Creek Mine into production will be estimated in the Pre-Feasibility
study.  The Company currently anticipates that the capital costs will
be in the range of $80 - 100 million, depending on final project design and
conditions in the operating permits.





7


Applications
for Operating Licence/Permit





On May
28, 2008, the Company applied to the MVLWB for a Type “A” Water Licence and
three Type “A” Land Use Permits (“LUPs”); one for the operation of the Prairie
Creek Mine and the other two for Transfer Facilities along the
road.  A detailed Project Description Report was filed with the MVLWB
as part of the permit applications.





The
proposed new operation at Prairie Creek utilizes the existing infrastructure and
facilities that were built in the 1980’s and which will be upgraded and enhanced
to meet current-day environmental standards.  The improvements
proposed for specific site facilities will further mitigate the potential impact
the Project may have on the environment.  Specifically, the Company
proposes to place waste rock and tailings underground in a cemented backfill
mix, use the existing large pond for temporary water storage, and place
development waste rock in an engineered facility removed from the Prairie Creek
floodplain.





A summary
of the proposed Prairie Creek mine operations as described in the Project
Description Report follows:





The Mine: All mining
will be performed from underground. Underground development and workings (about
5,000 metres) already exist on three levels, including the new 600 metre decline
driven in 2006/07.  Proposed production rates will initially start at
600 tonnes per day and may build to 1,200 tonnes per day.  Mining will
occur on a year round basis by cut-and-fill methods.  Mine voids will
be backfilled with a mix of flotation tailings, waste rock aggregate and
cement.





The Mill: The Mill,
which is already constructed on site but never operated, will process 600-1,000
tonnes per day.  Ore will be crushed to a gravel-size and subjected to
dense media separation (“DMS”).  The lighter, uneconomic “gangue”
minerals will create a waste rock aggregate.  Denser material will be
processed further by grinding and flotation to produce concentrates of lead
sulphide, zinc sulphide and lead oxide.  No hazardous chemicals will
be used in the process.





Concentrates and Road
Haul: The concentrates will be bagged, stored under cover and trucked
off-site on flat-deck trailers over the winter road.  CZN holds a Type
“A” LUP (MV2003F0028) for the use of the winter road from the Prairie Creek Mine
to the Liard Highway.  CZN has also applied for Type “A” LUP’s for two
new transfer facilities to be located approximately mid-point along the winter
road and at the junction of the winter road with the Liard Highway.





Environment:
Extensive environmental data has been collected at the Prairie Creek Mine Site
over recent years to update and add to the baseline information that was
collected previously as far back as the late 1970’s.  Sixteen years of
water flow data have been recorded on the Prairie Creek watercourse adjacent to
the Mine Site.  Canadian Zinc now has an extensive database on water
quality, stream flows, local climatic variables, and wildlife in the
area.





Waste Management: All
flotation tailings will be backfilled into the voids in the underground mine in
a mix with the waste rock aggregate and cement.  The flotation
tailings are expected to be non-acid generating with low sulphide content and
excess buffering capacity.  Waste rock from underground development
along with excess waste rock aggregate from the DMS plant will be placed in an
engineered Waste Rock Pile (“WRP”) in the adjacent Harrison Creek
valley.





8


Water Management: An
existing large pond facility, originally intended in 1980 for tailings disposal,
will be reconfigured, relined and recertified to form a two-celled Water Storage
Pond.  Mine drainage, treated sewage water and WRP runoff will report
to the first cell.  Water for the mill process will be taken from this
first cell.  Excess water from the first cell will overflow into the
second cell.  Used water from the Mill will also report to the second
cell.  The second cell will feed a water treatment
plant.  The treated water will discharge to the existing certified
Polishing Pond and from there into the existing Catchment Pond, before final
discharge to the environment.





Site Infrastructure:
The Site presently contains a near complete mill, three levels of underground
workings, a fuel tank farm, office facilities, accommodation facilities and
workshops.  Existing buildings and structures will be upgraded and
modernized.  New facilities will include fuel-efficient low-emission
power generation units, a kitchen/accommodation block, concentrate shed and an
incinerator.





Socio-Economics and
Manpower: The operation of the Prairie Creek Mine will provide
substantial economic stimulus to the region, and presents a unique opportunity
to enhance the social and economic well-being of the surrounding
communities.  There will be approximately 220 direct full time jobs,
half of this number being on-site at any one time.  Personnel will
generally work a three weeks on, three weeks off schedule (with variations as
required).  Canadian Zinc’s objective is to employ a workforce with a
35% northern content, and a minimum 15% First Nations content.  The
Company anticipates that it will provide assistance through the provision of
training programs.  In addition, there will be many indirect business
and employment opportunities, mostly related to transport, supply of the Mine
Site and environmental monitoring and management.





Mine Closure: At the
end of the Mine’s life, the Site will be reclaimed.  The underground
development will be backfilled.  Bulkheads at strategic points will
help limit the movement of groundwater.  The objective is to create a
complete seal to ensure there is no long term mine drainage.  The WRP
will be covered and sealed with a clay-rich soil.  Site buildings and
infrastructure, if deemed not to have any future use, will be dismantled and the
Site will be returned to its natural setting.





Subsequent
to submitting the applications to the MVLWB, the Company responded to a number
of requests for additional information from the Water Board.  On July
14, 2008, the MVLWB advised the Company that all applications were deemed
complete.  A subsequent letter from MVLWB, dated July 21, 2008,
indicated that the Water Board was moving forward with its preliminary screening
of the application and had requested comments from interested parties by August
8, 2008.





The MVLWB
conducted a review of the submissions, and comments of reviewers, and interested
parties, and of the submissions made by CZN.  After conducting and
completing the preliminary screening the MVLWB determined that the land use
permit and water licence applications might have a significant impact on the
environment and might be the cause of public concern.  The concerns
were around water quality, wildlife, damage to landscape, and long term risk of
contamination.  The MVLWB therefore resolved, on September 17, 2008,
to refer the Land Use Permit applications as well as the Water Licence
application to the Mackenzie Valley Environmental Impact Review Board (“MVEIRB”
or “Review Board”) for environmental assessment.





All MVLWB
comments and documents may be viewed on the MVLWB website at http://www.mvlwb.ca/mv/registry.aspx.





9


Environmental
Assessment





On August
11, 2008, the Company was informed by the Review Board that Indian and Northern
Affairs Canada, under Section 126(2)(a) of the Mackenzie Valley Resource Management
Act, had referred the proposed development of Prairie Creek to
Environmental Assessment both on its own behalf and on request from the Nahanni
Butte Dene Band as per Article 12 of the Settlement Agreement between the Dehcho
First Nations (“DCFN”) and the Government of Canada.





An
Environmental Assessment (“EA”) is the next stage in the regulatory process
following preliminary screening by the MVLWB.  The initial phase of
the EA consisted of community scoping sessions and written hearings, submissions
and rulings to determine the scope of the Terms of Reference for the
EA.





The
Company participated in six public scoping sessions in several Dehcho
communities and in Yellowknife in late September/early October 2008 to enable
discussion and questions to be addressed to assist in determining the overall
scope of the EA.  The Community public sessions demonstrated that
there is considerable local community support for the Prairie Creek project and
there is no significant public concern amongst the communities.  The
MVEIRB was strongly encouraged to undertake a very focused and efficient
EA.  Two clear themes emerged: protection of water quality is
paramount, and, jobs and economic activity are sorely needed in the Dehcho
region.





The
MVEIRB originally proposed a deadline of October 14, 2008, for interested
parties to provide scoping submissions but this was subsequently
extended.  Initially, the MVEIRB indicated that it anticipated
providing further guidance on how the EA would proceed in the last week of
November 2008.





On
November 6, 2008, the MVEIRB received a Request for Ruling from Ecojustice
(formerly known as Sierra Legal Defence Fund) on behalf of DCFN and Canadian
Parks and Wilderness Society (“CPAWS”).  The Request for Ruling
concerned the question whether the winter access road, and its use, should be
included in the EA process.  The MVEIRB subsequently decided to issue
information requests to various parties to ensure that all potentially relevant
materials to assist their decision on the Request would be available to all
interested parties.  The information request was published by the
MVEIRB on November 26, 2008, and noted two questions:





(1)
            Whether
      the winter road should be part of the scope of development and subject to
      direct impact assessment during the EA;
and


(2)
            Whether
      existing mine site infrastructure should be part of the scope of
      development and subject to direct impact assessment during the
      EA.





The
MVEIRB proceeded to set deadlines for submissions and
responses.  These timelines were further extended following a MVEIRB
pre-hearing conference on December 17, 2008.  The MVEIRB considered
submissions and responses from interested parties, including Canadian Zinc which
submitted that the winter road and existing mine site infrastructure should not
be part of the assessment and that the EA should focus on the new developments
and the new transfer stations on the winter road.





On March
5, 2009, the MVEIRB published its Ruling on the Scope of Development, finding
that “all physical works and activities associated with the winter access
road.....and all physical works and activities associated with the mine site.....are
part of the scope of development for the Prairie Creek Mine environmental
assessment.”





The
MVEIRB also provided some comments with regard to the scope of assessment,
noting that “In its forthcoming Draft Terms of Reference, the
Review Board will provide its preliminary determination of the scope of
assessment – what issues need to be examined in what level of detail during the
environmental assessment – for review and comment.  The Review Board
reminds all interested parties


10


that
while the scope of development defines all the physical works and activities
required to undertake the development, that does not mean that all physical
works and activities are subject to the same level of
assessment.  Depending on their potential for impacts and subject to
Review Board discretion, parts of the scope of development may be considered
very closely, other very little or not at all.





“The
Review Board will give full consideration to historic studies, impact assessment
and operational information about all aspects of the Prairie Creek Mine before
determining whether additional studies are required....The Review Board assures
all interested parties it has no intention of ignoring the wealth of relevant
existing evidence collected on how the existing infrastructure will likely
interact with the environment.





“The
Review Board also notes that the Prairie Creek Mine includes a variety of
existing structures, including the winter access road and much of the mine site
infrastructure.  The Review Board accepts the argument made by
Canadian Zinc and others that conducting an impact assessment on the
construction of facilities, including the road, which have been present on the
land for over 25 years is not likely to generate any useful information even if
it is possible.  The Review Board will not be assessing construction
impacts of already built structures.  The Board has decided that
assessment of these facilities will be restricted to the effects of their
ongoing operation in combination with the effects of other construction and
operations necessary for the operation of the mine.”





The
Review Board is expected to issue Draft Terms of Referencein
the coming weeks that identify the scope of development in more detail, and
allow public comment before finalizing the scope of development to be assessed
in the EA.





All
comments and documents can be viewed on the MVEIRB website at http://www.mveirb.nt.ca/registry/index.php.





Following
the EA will be a further regulatory stage, managed by the MVLWB (with input from
territorial and federal agencies), before permits are issued.  These
permits will include conditions to ensure CZN meets appropriate environmental
guidelines.





Since
2001 the Company has successfully obtained seven permits for the exploration and
development of the Prairie Creek property from the MVLWB, including two Type “B”
Water Licences, four land Use permits for exploration activities and underground
development and a winter road permit.  Various aspects of the Prairie
Creek Project have been the subject of five previous EAs carried out by MVEIRB,
all of which resulted in recommendations that the relevant project be allowed to
proceed.  The applications for operating permits filed in 2008 are now
undergoing Environmental Assessment.  Although the Company has
experienced long delays in obtaining permits, and expects a continued lengthy
process with its permitting activities, the Company has, to date, successfully
carried out extensive programs at Prairie Creek, in accordance with all
regulatory requirements and in compliance with all permits and
licences.  Given the open-ended nature of the Mackenzie Valley
permitting process, and the Company’s experience to date, it is likely that the
Environmental Assessment process will extend for a considerable
time.





11


Other
Permits/Licences





In April
2007, a Land Use Permit for use of the winter road, which connects the Prairie
Creek Mine with the Liard Highway, was obtained from the MVLWB.  The
Company applied for a Type “B” Water Licence in June 2007 in order to complete
part of the road rehabilitation work along the Prairie Creek stream-bed and this
Water Licence was issued on March 20, 2008.  Authorization for this
rehabilitation work was received from Department of Fisheries and Oceans on July
15, 2008.





In
September 2008, the MVLWB granted the Company an extension to Land Use Permit
MV2001C0023 for two years (to September 9, 2010) and renewal of the Water
Licence MV2001L2-0003 for five years (to September 9, 2013).  This
Land Use Permit and Water Licence relate to underground development activities
and metallurgical pilot plant operations.





Nahanni
National Park Reserve / Parks Canada Agency Memorandum of
Understanding





The
Prairie Creek project is located in the Mackenzie Mountains of the Northwest
Territories, within the watershed of the South Nahanni River and in proximity
to, but outside of, the Nahanni National Park Reserve (“NNPR”).  In
August 2007, the Prime Minister of Canada visited Fort Simpson to announce the
proposed expansion of NNPR.  The Prime Minister announced that the
Government of Canada had approved an Order in Council (PC-2007-1202 July 31,
2007), withdrawing certain lands for the proposed park expansion.  The
surface lands surrounding the Prairie Creek mine, containing approximately 367
square kilometres, are specifically excluded and exempted from the interim land
withdrawal.  Canadian Zinc has been assured by the Government of
Canada and by Parks Canada Agency (“Parks Canada”) that the final boundaries of
the expanded park will not include the site of or the access road to the Prairie
Creek mine and that in the proposed expansion of the NNPR the existing mining
and access rights of Canadian Zinc to the Prairie Creek mine will be respected
and protected.





On July
29, 2008, Parks Canada and Canadian Zinc entered into a Memorandum of
Understanding (“MOU”) with regard to the expansion of the Nahanni National Park
Reserve and the development of the Prairie Creek Mine, whereby:





·
            Parks
      Canada and Canadian Zinc agree to work collaboratively, within their
      respective areas of responsibility, authority and jurisdiction, to achieve
      their respective goals of an expanded NNPR and an operating Prairie Creek
      Mine.





·
            Parks
      Canada recognizes and respects the right of Canadian Zinc to develop the
      Prairie Creek Mine and will manage the expansion of NNPR so that the
      expansion does not in its own right negatively affect development of, or
      reasonable access to and from, the Prairie Creek
  Mine.





·
            Canadian
      Zinc accepts and supports the proposed expansion of the NNPR and will
      manage the development of the Prairie Creek Mine so the mine does not, in
      its own right, negatively affect the expansion of the Nahanni
      Park.





Parks
Canada and Canadian Zinc (the “Parties”) have agreed to make every reasonable
effort to address issues of common interest and build a strong working
relationship, including convening a Technical Team, including representatives of
the Dehcho First Nations, which will better identify, define and consider issues
of common interest, including, among other things, access to and from the
Prairie Creek Mine through the proposed expanded Park and the park boundaries
around the Prairie Creek Mine properties.  The Parties have also
agreed to share with one another and the Technical Team any existing technical
and scientific information relevant to a discussion and analysis of issues of
common interest to the Parties.


12





The MOU,
which is valid for three years is intended to cover the period up to the
development of the Prairie Creek Mine (Phase I) and may be amended or renewed as
agreed by the Parties and may be terminated by either Parks Canada or Canadian
Zinc on not less than three months written notice.  It is contemplated
that the Phase I MOU will be replaced by a further MOU (Phase II) which will
address the operation of the mine and the expanded Nahanni Park.





The MOU
is an expression of the mutual intentions of the parties and is not legally
binding or enforceable.  The MOU does not create any  new
powers or duties or alter or affect any rights, powers or duties established by
law, including by the Parks
Canada Agency Act  and the Canada National Parks Act, or
result in the Parties relinquishing any right, jurisdiction, power, privilege,
prerogative or immunity.





To the
extent that the Prairie Creek Mine is subject to regulatory or government
processes, including hearings, Parks Canada reserves the right, while
recognizing the intent of the MOU, to participate in any such process and take
such positions as it sees fit and the MOU does not constrain Parks Canada from
doing so, subject only to the understanding that Parks Canada has agreed not to
object to or oppose, in principle, the development of the Prairie Creek
Mine.





The
exclusion of the Prairie Creek mine from the proposed Nahanni National Park
expansion area has brought clarity to the land use policy objectives for the
region.  Canadian Zinc believes that the Prairie Creek mine and the
expanded NNPR can co-exist and that, properly planned and managed, the expanded
Park will not interfere with the operation of the Prairie Creek mine and
similarly that the operation of the mine will not adversely impact upon the Park
or its ecological integrity.





Memorandum
of Understanding with Liidlii Kue First Nation





On
October 16, 2008, CZN and Liidlii Kue First Nation (“LKFN”) of Fort Simpson,
Northwest Territories, entered into a MOU to formally establish a mutually
beneficial, co-operative and productive relationship with regard to the
exploration and development of the Prairie Creek Mine and to demonstrate that
LKFN and Canadian Zinc intend to work together, as responsible corporate
citizens of the region, in a spirit of co-operation for mutual benefit as well
as social, ecological, cultural and economic well-being.





The
Liidlii Kue First Nation of Fort Simpson, Northwest Territories, is a member of
the Dehcho First Nations.  Fort Simpson, located approximately 500
kilometres east of the Prairie Creek Mine, is the administrative centre and main
service centre of the Dehcho region.  Fort Simpson has a population of
approximately 1,200 and the LKFN Band, which is the largest in the Dehcho has
1,175 Members.





The
purpose of the MOU is:





·
            to
      provide a process through which Canadian Zinc, in pursuing its exploration
      and development activities at the Prairie Creek Mine, can consult with and
      accommodate the interests of LKFN with a view to amicably reconciling any
      issues that might arise;





·
            to
      establish a relationship through which LKFN can identify opportunities for
      its businesses and members to participate in Canadian Zinc’s exploration
      and development activities; and





·
            to
      set out the objectives, process and topics for the negotiation of an
      Impact Benefits Agreement (“IBA”) between LKFN and Canadian Zinc, which is
      specifically intended to cover the future operations of the Prairie Creek
      Mine project.





The MOU
provides for implementation of a more formalized structure for communication and
information exchange through, among other things, the appointment of a Community
Information Representative, establishing a Communications Committee and hiring
an Environmental Monitor.


13





In the
MOU, Canadian Zinc has agreed to make its best efforts to employ LKFN members
and to assist LKFN and its community to benefit from business opportunities
associated with the exploration and development of the Prairie Creek
Project.  Canadian Zinc and LKFN have agreed to use their best efforts
to negotiate an IBA but nothing in the MOU is intended to define, create or
extinguish any rights of LKFN or CZN and the MOU is not legally binding on the
parties.





Memorandum
of Understanding with Nahanni Butte Dene Band





Effective
October 28, 2008, CZN and Nahanni Butte Dene Band (“NBDB”) of Nahanni Butte,
Northwest Territories, entered into a MOU, similar to that with LKFN, to
establish a mutually beneficial, co-operative and productive
relationship.





The
Nahanni Butte Dene Band of Nahanni Butte, Northwest Territories, is a member of
the Dehcho First Nations.  Nahanni Butte is the closest community to
the Prairie Creek mine and is located approximately 90 kilometres southeast of
the mine site.  Nahanni Butte has a population of approximately 90
people.





In the
MOU, NBDB agrees to maintain close communication links with CZN, participate in
good faith in current and pending environmental assessment and regulatory
processes, and not to oppose, “in principle,” mining operations at Prairie
Creek.  CZN has agreed to apply best efforts to employ NBDB members
and to assist NBDB and its community to benefit from business opportunities
associated with the exploration and development of the Prairie Creek
Project.  The MOU also provides for the subsequent negotiation of an
IBA regarding mining operations.  Nothing within the MOU is intended
to define, create or extinguish any rights of NBDB or CZN and the MOU is not
legally binding on the parties.








SELECTED ANNUAL FINANCIAL INFORMATION





The
following summary financial information has been derived from the financial
statements of the Company, which have been prepared in accordance with Canadian
GAAP.





(thousands
      of Canadian dollars
            
            Year
      ended December 31,except
      per share amounts)
            
            2008
            
            
            
            2007
            *
            
            
            2006
            *Statement
      of operationsNet
      (loss)
            
            $
            (4,228
            )
            
            $
            (9,483
            )
            
            $
            (7,723
            )Basic
      and diluted (loss) per share
            
            $
            (0.04
            )
            
            $
            (0.08
            )
            
            $
            (0.08
            )Balance
      sheetCash,
      cash equivalents and short-term investments
            
            $
            20,948
            
            
            $
            28,414
            
            
            $
            29,087Marketable
      securities
            
            $
            2,024
            
            
            $
            100
            
            
            $
            250Total
      assets
            
            $
            29,521
            
            
            $
            34,391
            
            
            $
            35,272Total
      liabilities
            
            $
            1,673
            
            
            $
            2,482
            
            
            $
            1,844Shareholders’
      equity
            
            $
            27,848
            
            
            $
            31,909
            
            
            $
            33,428


* See section below re restatement
arising on accounting policy change.





The
Company is at the exploration and development stage and does not generate
revenue or cash flows from operations.  The loss for each of the years
2006 to 2008 represents administrative expenses and expenditures incurred on the
Prairie Creek property.





14


CHANGE IN ACCOUNTING POLICY





During
2008, the Company commenced its review of the impact of International Financial
Reporting Standards (“IFRS”) on its current accounting policies, which included
an examination of the Company’s current accounting policies under Canadian
GAAP.  In light of this review, the Company determined that it was
appropriate to change its accounting policy for resource interests whereby its
exploration and development costs are to be expensed until such time as either
reserves are proven or permits to operate a mineral resource property are
received and financing to complete development has been
obtained.  Previously, the Company capitalized its exploration and
development expenditures as incurred, which is permitted under Canadian
GAAP.





Management
believes that this revised accounting policy provides a more relevant and
reliable basis of accounting.  Among other benefits, the revised
accounting policy aligns the accounting treatment of these resource interest
expenditures with standards used by producing mining companies in the resource
sector and with global accounting standards (including U.S.
GAAP).  The change in accounting policy has been applied
retrospectively, and the comparative financial statements for 2007 and 2006 have
been restated. The effect of the change was to increase the Company’s
accumulated deficit at January 1, 2006 by $13.490 million and at January 1, 2007
by $19.727 million.  Further impacts of the restatement are noted in
the table below:





As
      Previously Reported
            
            
            Adjustment
            
            
            RestatedBalance
      Sheet as at December 31, 2007:Resource
      interests
            
            $
            37,797
            
            
            $
            (32,965
            )
            
            $
            4,832Other
      long-term assets
            
            
            -
            
            
            
            425
            
            
            
            425Future
      income tax liability
            
            
            (3,621
            )
            
            
            3,621
            
            
            
            -Share
      capital
            
            
            66,593
            
            
            
            (629
            )
            
            
            65,964Deficit
            
            
            (13,609
            )
            
            
            (28,290
            )
            
            
            (41,899
            )Statement
      of Operations, Comprehensive Income and Deficit for the year ended
      December 31, 2007:Mineral
      exploration and development costs
            
            
            -
            
            
            
            (11,050
            )
            
            
            (11,050
            )Future
      income taxes income
            
            
            -
            
            
            
            2,487
            
            
            
            2,487Net
      loss / Comprehensive loss for year
            
            
            (920
            )
            
            
            (8,563
            )
            
            
            (9,483
            )Loss
      per share – basic and diluted
            
            
            (0.01
            )
            
            
            (0.07
            )
            
            
            (0.08
            )Statement
      of Cash Flows for the year ended December 31, 2007:Operating
      activities
            
            
            (569
            )
            
            
            (10,109
            )
            
            
            (10,678
            )Investing
      activities
            
            $
            (16,304
            )
            
            $
            10,109
            
            
            $
            (6,195
            )


15





As
      Previously Reported
            
            
            Adjustment
            
            
            RestatedBalance
      Sheet as at December 31, 2006:Resource
      interests
            
            $
            26,700
            
            
            $
            (21,885
            )
            
            $
            4,815Other
      long-term assets
            
            
            -
            
            
            
            395
            
            
            
            395Future
      income tax liability
            
            
            (1,134
            )
            
            
            1,134
            
            
            
            -Share
      capital
            
            
            59,994
            
            
            
            (629
            )
            
            
            59,365Deficit
            
            
            (12,689
            )
            
            
            (19,727
            )
            
            
            (32,416
            )Statement
      of Operations, Comprehensive Income and Deficit for the year ended
      December 31, 2006:Mineral
      exploration and development costs
            
            
            -
            
            
            
            (8,027
            )
            
            
            (8,027
            )Write-off
      of mining equipment
            
            
            (27
            )
            
            
            27
            
            
            
            -Future
      income taxes income
            
            
            -
            
            
            
            1,763
            
            
            
            1,763Net
      loss / Comprehensive loss for year
            
            
            (1,486
            )
            
            
            (6,237
            )
            
            
            (7,723
            )Loss
      per share – basic and diluted
            
            
            (0.02
            )
            
            
            (0.06
            )
            
            
            (0.08
            )Statement
      of Cash Flows for the year ended December 31, 2006:Operating
      activities
            
            
            (262
            )
            
            
            (7,871
            )
            
            
            (8,133
            )Investing
      activities
            
            $
            (24,231
            )
            
            $
            7,871
            
            
            $
            (16,360
            )





REVIEW OF FINANCIAL RESULTS





This
review of the results of operations should be read in conjunction with the
audited financial statements of the Company for the year ended December 31, 2008
and other public disclosure documents of the Company.  All items in
this section discuss the financial results of the Company following the change
in accounting policy for resource interests as discussed above.





For the
year ended December 31, 2008, the Company reported a net loss of $4.228 million
compared to a loss of $9.483 million for the year ended December 31,
2007.  The reduced loss in 2008 was primarily attributable to the
completion in 2007 of the Company’s extensive underground decline development
and drilling exploration program at Prairie Creek.





Mineral
Exploration and Development Costs





For the
year ended December 31, 2008, the Company expensed $3.426 million on its mineral
exploration and development programs at Prairie Creek compared to $11.050
million for the year ended December 31, 2007.  Excluding accretion and
depreciation charges relating to the asset retirement obligation and mining
plant and equipment of $248,000 in the year ended December 31, 2008 (2007 -
$220,000), the exploration and development expenditures for Prairie Creek
amounted to $3.178 million in 2008 compared to $10.830 million in
2007.  Details of the mineral exploration and development costs are
shown in Note 10 to the audited financial statements for the year ended December
31, 2008.





The
overall decrease in expenditures relates to the lower level of activities at the
Prairie Creek Mine following completion, in late 2007, of the underground
decline development and exploration


16


programs
which commenced in 2006.  For the year ended December 31, 2008, the
Company incurred drilling and underground exploration costs of $170,000 compared
to $6.076 million in the year ended December 31, 2007.  In addition,
in April 2008, a cost recovery of $942,000 was received following a final
reconciliation of the 2006/2007 underground contract (see Note 10 to the audited
financial statements as at December 31, 2008).





During 2008, the Company incurred
$862,000 (2007 - $694,000) relating to permitting and environmental matters.
These expenditures included costs related to filing the applications for
operating permits at Prairie Creek, as well as liaising with local communities
and Parks Canada, among others.  As described in this MD&A in the
section above entitled “2008 Review of Activities,” the Company considers that
it has made continued progress in this area.  However, the process for
obtaining operating permits in the Mackenzie Valley in general, and relating to
the Prairie Creek Mine in particular, has been marked by long delays and this
extended process is expected to continue.  The Company intends to
continue to work through the process for obtaining operating permits in 2009 and
expects that there will be significant costs associated with the
process.  Given the open-ended nature of the permitting process, the
Company is not able to provide, with any reasonable assurance, an estimate as to
the total costs for obtaining operating permits.





Revenue
and Investment Income





The
Company is in the development stage and does not generate any cash flows from
operations.  To date the Company has not earned any significant
revenues other than interest and related investment
income.  Investment income for the year ended December 31, 2008 was
$899,000 compared to $1.234 million for 2007.  The decrease is
attributable to the overall decrease in amounts available for investment during
the year ended December 31, 2008 compared to the prior year.  There
has also been a significant decline in interest rates during the second half of
the 2008 fiscal year as a result of the current global recession which has seen
central banks cut rates to historically low levels.





Administrative
Expenses





Administrative
expenses (excluding stock based compensation and depreciation) for the year
ended December 31, 2008 were $1.445 million compared to $1.724 million in the
year ended December 31, 2007.  The decrease was largely attributable
to lower office and general costs (2008 - $360,000; 2007 - $463,000) due to tax
charges relating to the Company’s flow-through share program in 2007 which were
not incurred in 2008 and the Company’s decision in 2008 to cut-back its
expenditures on investor relations items (2008 - $230,000; 2007 -
$420,000).  The Company’s professional fees costs reduced from
$396,000 in 2007 to $220,000 in 2008 while management and directors fees
increased from $347,000 in 2007 to $566,000 in 2008.  The increase in
management and director fees and decrease in professional fees arose as a result
of staffing increases within CZN that reduced the need to use professional
advisors.





Other
Expenses





In 2008,
the Company recorded an expense for stock-based compensation of $205,000
relating to the vesting of stock options granted in prior periods to directors,
officers, employees and contractors.  The amount charged in 2007
relating to stock-based compensation was $267,000.  The stock-based
compensation expense for 2007 and 2008 relates to the same grant of stock
options in October 2007 for which the expense was recognized over the vesting
period for the options granted.  The stock-based compensation expense
value was calculated using the Black-Scholes valuation method and assumptions as
described in the ”Critical Accounting Estimates” section to this
MD&A.  The assumptions used in the calculation are described in
Note 14(a) to the audited financial statements at December 31,
2008.


17


The
Company expensed depreciation costs relating to mining plant and equipment of
$168,000 (2007 - $143,000).  The increase in depreciation relating to
plant and equipment arose as a result of equipment purchases in January 2008
that have been amortized during fiscal 2008.





The
Company recorded an unrealized loss on its marketable securities of $38,000 in
the year ended December 31, 2008 (2007 - $150,000).  All the Company’s
marketable securities were designated as held for trading assets by the Company
upon the adoption, on January 1, 2007, of new accounting standards relating to
financial instruments as described in more detail in the “Critical Accounting
Estimates” section to this MD&A.  The unrealized loss on the
marketable securities is based upon the market value of the shares at December
31, 2008.  Further details relating to the Company’s marketable
securities are included in Note 6 to the audited financial statements for the
year ended December 31, 2008.





Related
Party Transactions





The
Company’s related party transactions during the year ended December 31, 2008
consisted of rent for office space paid or payable to corporations with a common
director of the Company in the amount of $19,000 compared to $13,000 in
2007.  The increase was attributable to increased rent following
relocation of the Toronto office.  Particulars relating to related
party transactions are shown in Note 16 to the audited financial statements for
the year ended December 31, 2008.





Income
Taxes





The
Company is currently not profitable and has recorded a valuation allowance
against its future income tax assets.  Following renouncement of
flow-through share expenditures, the Company recorded future income tax income
as per the reconciliation of income taxes for each of the past three years
below:





2008
            
            2007
            
            2006Statutory
      tax rate
            
            31.00%
            
            34.12%
            
            35.01%Recovery
      of income taxes computed at statutory rates
            $
            1,311
            $
            4,084
            $
            3,321Permanent
      differences
            
            (64)
            
            (93)
            
            (361)Expired
      losses
            
            (192)
            
            (162)
            
            (55)Other
            
            (118)
            
            281
            
            479Income
      tax rate changes
            
            (403)
            
            (1,612)
            
            (810)Change
      in valuation allowance
            
            (534)
            
            (11)
            
            (811)$
            -
            $
            2,487
            $
            1,763





The
Company follows the guidance prescribed by the Canadian Institute of Chartered
Accountants (“CICA”) Emerging Issues Committee Recommendation 146, “Flow-through
Shares,” such that future income tax income is recognized, and shareholders’
equity reduced, on the day the Company files the tax documents to renounce
expenditures with the tax authorities.  In 2007, $8 million of such
expenditures were renounced and the documents filed in the quarter ended March
31, 2007.  This resulted in the recovery of future income tax income
in respect of the renounced expenditures of $2.487 million and a corresponding
reduction in shareholder equity.  In 2006, the renounced expenditures
resulted in future income tax income of $1.763 million.





18


Reclamation
Expenditures





In 2008,
the Company incurred $366,000 removing drums of sodium cyanide from Prairie
Creek for destruction as described in the “2008 Review of Activities –
Operations Update” section above.  In 2007, the Company spent $246,000
on a work program to repackage these hazardous materials stored at the Prairie
Creek site in order to facilitate their removal and destruction. These
expenditures were applied against the asset retirement obligation as disclosed
in Note 12 to the audited financial statements as at December 31,
2008.








SUMMARY OF QUARTERLY RESULTS (UNAUDITED) AND FOURTH
QUARTER





(thousands of dollars except per share
amounts)


Quarter
      ended
            Investment
      income $
            Net
      (Loss) Income  $
            Net
      (Loss) Income per Common Share  $December
      31, 2008
            201
            (1,075)
            (0.010)September
      30, 2008*
            184
            (1,671)
            (0.015)June
      30, 2008*
            218
            (1,131)
            (0.010)March
      31, 2008*
            296
            (351)
            (0.005)December
      31, 2007*
            208
            (2,658)
            (0.02)September
      30, 2007*
            375
            (4,922)
            (0.040)June
      30, 2007*
            331
            (2,510)
            (0.025)March
      31, 2007*
            320
            607
            0.005


* The
quarterly results for 2007 and up to September 30, 2008 have been presented
after restatement for the Company’s change in accounting policy as described in
this MD&A.  Please refer to the section titled “Change in
Accounting Policy.”





The
Company’s investment income has generally decreased as a result of lower cash,
cash equivalents and short-term investment balances over the past eight quarters
as the Company has funded its activities.  There have been no private
placements since July 2007.  In addition, there has been a significant
decline in the rate of return for such investments as the current global
economic crisis has unfolded.





The
Company’s net loss and expenditures in 2007 were significantly higher than in
2008 as a result of the underground development and exploration work that was
ongoing at Prairie Creek until the end of 2007.  The majority of this
work was completed in the summer months to take advantage of the milder weather
at that time of year.  The income reported in the quarter ended March
31, 2007, relates to the future income tax income arising on renouncement of
flow-through expenditures.





During
the fourth quarter of 2008, the Company was primarily focused on its permitting
activities related to its applications for operating
permits.  Activities at Prairie Creek continued until mid-December
2008 at which time the Mine Site was closed for the winter.  The
Company pursued a number of key studies on operations at the Prairie Creek site
which will be important to the permitting process and the proposed operations
such as a locked cycle metallurgical test, water treatment studies and analysis
of waste tailings product.  The Company also completed its road
rehabilitation work along the Prairie Creek riverbed during the fourth quarter
of 2008.








19


LIQUIDITY, FINANCIAL CONDITION AND CAPITAL RESOURCES





As at
December 31, 2008, the Company had cash and cash equivalents of $9.225 million,
short term investments of $11.723 and marketable securities of $2.024 million
(for a total of $22.972 million).  The Company also had a positive
working capital balance of $22.557 million.  As at December 31, 2007,
the Company had cash and cash equivalents of $6.919 million, short term
investments of $21.495 million, marketable securities of $100,000 and a positive
working capital balance of $27.432 million.  The Company’s short term
investments consist primarily of Bankers’ Acceptances and Guaranteed Investment
Certificates; the Company does not hold, and has never held, any asset-backed
commercial paper.  The Company’s accounts payable and accrued
liabilities at December 31, 2008 were $511,000 compared to $1.254 million as at
December 31, 2007.  This decrease follows the termination of the
exploration program (in late 2007) and a reduced level of activity at the
Prairie Creek Mine Site during the final quarter of the year ended December 31,
2008.





Canadian
Zinc does not generate any cash flows from operations and has no income other
than investment income.  The Company relies on equity financings to
fund its working capital requirements and planned exploration, development and
permitting activities.





In light
of the current global financial market turmoil and uncertainty, towards the end
of 2008, the Company performed a review of planned programs and activities for
2009 with a view to preserving cash used in operations as much as possible while
still working towards obtaining permits to operate the Prairie Creek
Mine.  Accordingly, the Company has implemented a number of cost
saving measures and continues to review other avenues whereby additional costs
can be saved.  Some of the steps implemented by the Company included
reducing the workforce at the Prairie Creek Mine and ceasing active development
operations at the Mine site to focus on the permitting process and limiting
other expenditures presently deemed non-essential such as a portion of the
investor relations program.





The
Company has reviewed its planned expenditures for 2009 and is confident that it
has capital resources that are adequate to support its current operations and
short to medium-term plans.  The Company anticipates that total
expenditures will be reduced for 2009 compared to 2008 such that, given current
capital resources on hand, the Company can continue to operate for several years
in its current form.  However, the Company’s expenditures could
increase significantly in the short-term due to factors beyond the Company’s
control, such as regulatory matters associated to the permitting process, and in
particular, the possibility that external consultants’ time may be
required.  CZN cannot predict all costs that may be required as a
result of external conditions imposed upon it and these expenditures could cause
the Company’s cash and cash equivalents resources to be depleted at a faster
rate than currently anticipated.





Additional
capital will be required in order to bring the Prairie Creek Mine into
production in the future.  The ability to raise additional finance may
be impaired, or such financing may not be available on favorable terms, due to
conditions beyond the control of the Company, such as continued uncertainty in
the capital markets and depressed commodity prices, or the conditions imposed
upon the Company in its operating permits.  This is discussed in more
detail in the “Risks and Uncertainties” section in this MD&A.  The
Company currently anticipates that, depending on final design and operating
permit conditions, the additional capital required to install the planned new
facilities and to bring the Prairie Creek Mine into production will be in the
area of $80 – 100 million.





20


In
October 2008, the Company reviewed its current investment portfolio and
strategy.  During this review, it was noted that the rates of return
for Bankers’ Acceptances and Guaranteed Investment Certificates had declined
significantly during the course of 2008.  The Company determined that
it was appropriate to allocate a portion of its investments to equities in order
to seek a better return on its capital resources.  A total of
approximately $2 million was invested in the equity stock of a number of major
mining companies during late 2008.  The Company considers that these
marketable securities, while acquired as part of a medium-term investing
strategy, are highly liquid assets in view of the average trading volumes of
such companies’ shares.  However, CZN’s ability to realize these
investments (and make a gain) is dependent on the performance of the companies’
shares that have been acquired, which is not certain.





The
following table reflects the Company’s aggregate financial commitments as of
December 31, 2008:





($’000s)
            Payment
      due by periodContractual
      Obligations
            Total
      (CDN$)
            Less
      than 1 year
            1-3
      years
            3-5
      years
            More
      than 5 yearsOperating
      Lease Obligation (1)
            497
            149
            270
            78
            -Asset
      Retirement Obligation (2)
            2,383
            -
            -
            -
            2,383Total
            2,880
            149
            270
            78
            2,383





(1)
            Represents
      rent obligations under operating leases for office space and
      equipment.


(2)
            The
      asset retirement obligation represents the undiscounted value of total
      payments of $2.383 million which are anticipated to be predominantly
      incurred at the end of the life of the Prairie Creek
  Mine.





The table
above does not include the annual fees related to the Company’s mining leases,
surface leases and mineral claims which total approximately $45,000 per annum
and property taxes of approximately $30,000 per annum.








FINANCIAL INSTRUMENTS





The
Company classifies its financial assets as either held for trading,
available-for-sale, or loans and receivables.  Financial liabilities
are classified as either held for trading, or loans and
receivables.  The Company’s accounting policy for each category of
financial instrument is summarized below:





Loans and
receivables are initially recognized at fair value including direct and
incremental transaction costs and are subsequently measured at amortized cost,
using the effective interest method.  The Company has classified its
other receivables as loans and receivables.





Held for
trading: Financial assets and liabilities that are purchased and incurred with
the intention of generating income in the near term are classified as held for
trading.  Financial instruments included in this category are
initially recognized at fair value and transaction costs are taken directly to
net income (loss) along with gains and losses arising from changes in fair
value.  Regular-way purchases and sales of financial assets are
accounted for on the trade date.  The Company has designated its cash
and cash equivalents, short-term investments, marketable securities and
restricted cash as held for trading.





Held-to-maturity
investments are financial assets with fixed or determinable payments that the
Company has the intention and ability to hold to maturity.  These are
initially recognized at fair value including direct and incremental transaction
costs and are subsequently valued at amortized cost using the effective interest
rate method.  The Company has no financial assets classified as
held-to-maturity.


21


Available-for-sale
assets are financial assets that are designated as available-for-sale and are
not categorized into any other categories as described above.  These
assets are initially recognized at fair value including direct and incremental
transaction costs and are subsequently held at fair value with gains and losses
arising from changes in fair value included in other comprehensive income until
ultimate sale when the cumulative gain or loss is transferred to net
income.  The Company had no financial assets designated as
available-for-sale.





Other
liabilities: If not classified as held for trading, financial liabilities are
classified as other liabilities.  After initial measurement at fair
value, other liabilities are measured at amortized cost using the effective
interest rate method.  Gains or losses are recognized in net income
(loss) in the period when the liability is derecognized. The Company has
classified its accounts payable and accrued liabilities as other
liabilities.





The fair
values of the Company’s held for trading (current) assets, such as cash and cash
equivalents, short-term investments and marketable securities, approximate their
carrying values of $22.972 million at December 31, 2008 (December 31, 2007 -
$28.514 million) as these items are carried (on the balance sheet) at fair
values with gains and losses recorded in the statement of
operations.  The nature of the Company’s held for trading assets are
such that they are valued based upon quoted market prices as at the reporting
date








NORMAL COURSE ISSUER BID





The
Company is of the view that the recent market prices of the common shares of the
Company do not properly reflect the underlying value of the Company's
assets.  The Company obtained TSX approval to conduct a normal course
issuer bid (the “Bid”) pursuant to which the Company may purchase up to a
maximum of 5,000,000 common shares in the capital of the Company, representing
approximately 4.1% of the issued and outstanding common shares of the Company of
120,685,063 as at May 1, 2008.





During
the year ended December 31, 2008, the Company acquired 1,716,000 common shares
under the Bid for a total cost of $378,000.  Subsequent to December
31, 2008, the Company has acquired an additional 13,500 common shares at a cost
of $2,735.  All shares purchased under the Company’s normal course
issuer bid are cancelled and returned to treasury as soon as practical after the
purchase date.





The Bid
may be carried out from May 13, 2008 for a period of up to one
year.  Pursuant to TSX policies, daily purchases made by the Company
under the Bid may not exceed 44,876 common shares, which is 25% of the average
daily trading volume of 179,505 common shares on the TSX over the six months
prior to the commencement of the Bid, subject to certain prescribed
exceptions.  For the period from November 3, 2008 until March 31,
2009, the TSX amended the allowed amount of daily purchases to 50% of the
average daily trading volume (which for Canadian Zinc equates to 89,752
shares).  Purchases pursuant to the Bid will be made from time to time
through the facilities of the TSX.  Common shares purchased will be
paid for with cash available from the Company's working capital.  No
insiders of the Company intend to participate in the Bid.








22


OUTLOOK





For 2009,
Canadian Zinc’s primary focus will be to move forward in the permitting process
for the operating permits for the Prairie Creek Mine that were applied for in
2008.  This is likely to be a lengthy process, as illustrated in this
MD&A in the section “2008 Review of Activities – Environmental
Assessment.”  This is a key step as the Company moves the Prairie
Creek project towards commercial production.  In light of the likely
extended timeframe that the permitting process will require, the Company has
determined that it will limit expenditures at Prairie Creek for the immediate
future, with the exception of continuing to carry out projects and studies that
will be of assistance for the EA process and also in determining and refining
future anticipated mine plans.  Given the open-ended nature of the
Mackenzie Valley permitting process, the Company cannot, with any reasonable
assurance at this point in time, provide a detailed estimate as to the likely
costs of permitting activities in 2009.





When the
Company receives its operating permits, which is not a certain event, additional
finance will be required to bring the mine into commercial
production.  This will be very dependent on future market conditions,
especially with regard to commodity prices, which may impact the Company’s
ability to complete development of Prairie Creek.  The Company is
currently evaluating the cost of the future development required at Prairie
Creek and currently estimates that an additional $80 - 100 million will be
required.  This number, however, is highly uncertain and could
materially change based on final project design, permitting conditions and
economic circumstances at that time.





The
Company also plans to seek to maintain, to the extent possible, its treasury
such that it is able to take advantage of any investment opportunities that may
present themselves in the current economic climate.








CRITICAL ACCOUNTING ESTIMATES





The
Company’s financial statements are prepared in accordance with Canadian GAAP and
require management to make estimates and assumptions that affect the reported
amounts of assets, liabilities, revenues and expenses, and the related
disclosure of contingent assets and liabilities (if any).  The
Company’s management makes assumptions that are believed to be reasonable under
the circumstances and that are based upon historical experience, current
conditions and expert advice.  These estimates are reviewed on an
ongoing basis for updated information and facts.  The use of different
assumptions would result in different estimates, and actual results may differ
from results based on these estimates.





A summary
of the Company’s significant accounting policies is included in Notes 2, 3 and 4
to the financial statements for the year ended December 31, 2008.  The
following is a discussion of the accounting estimates that are considered by
management to be significant in determining the Company’s financial results and
position:





Resource
Interests





As
described in this MD&A in the section entitled “Change in Accounting Policy”
and in Note 2 to the audited financial statements for the year ended December
31, 2008, during 2008, the Company changed its accounting policy relating to
resource interests expenditures whereby exploration and development costs are to
be expensed until such time as either reserves are proven or permits to operate
a mineral resource property are received and necessary financing to complete
development obtained.





23


Impairment
of long-lived assets





The
carrying value of resource interests at December 31, 2008 was $5.053 million
(December 31, 2007 - $4.832 million) and for plant and equipment was $661,000
(December 31, 2007 - $448,000).  Long-lived assets are tested for
impairment whenever events or changes in circumstances indicate the related
carrying amounts may not be recoverable.  Impairment is considered to
exist if total estimated future cash flows or probability-weighted cash flows on
an undiscounted basis are less than the carrying amount of the assets, including
resource interests and plant and equipment.  An impairment loss, if
any, is measured and recorded based on discounted estimated future cash flows or
the application of an expected present value technique to estimate fair value in
the absence of a market price.





At
December 31, 2008, management carried out an impairment review and determined
that, notwithstanding the Company’s history of losses, and based upon best
estimates available, no impairment of the carrying value of resource interests
was indicated.





In
assessing the future estimated cash flows management uses various estimates
including, but not limited to, future operating and capital costs as well as
future commodity prices and estimates based upon indicated and inferred
resources.   By their very nature, there can be no assurance that
these estimates will actually be reflected in the future construction or
operation of the Prairie Creek Mine.  The ultimate recoverability of
amounts deferred 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 obligation (environmental estimates)





Asset
retirement obligations are recognized in the period in which they are incurred
if a reasonable estimate of fair value can be determined.  The fair
value of the estimated asset retirement cost is capitalized as part of the
carrying amount of the long-lived asset when incurred or revised, and amortized
over the asset’s estimated useful life.  Increases in the asset
retirement obligation resulting from the passage of time are recorded as
accretion expenses.  Actual expenditures incurred are charged against
the accumulated obligation.  Various assumptions are used in
determining the liability including current mine plans, future retirement costs
and estimates of resources.  The estimates used require extensive
judgment as to the nature, cost and timing of the work to be completed and may
change with future changes to cost structures, environmental laws and
requirements and remediation practices employed.  Management evaluates
the asset retirement obligation estimates at the end of each reporting period to
determine whether the estimates continue to be appropriate.





As at
December 31, 2008, the Company estimates that the total undiscounted cash flows
required to settle the reclamation and remediation obligations at the Prairie
Creek Property are $2.383 million (2007 - $2.528 million), mostly to be incurred
at the end of the life of the mine.  These cash flows have been
determined to have a present value of $1.162 million (2007 - $1.228 million)
based upon the following assumptions: long-term inflation rate of 2.5%; a
credit-adjusted risk-free discount rate of 6.5%; and a weighted average useful
life production facilities and equipment of ten years.





24


Stock-based
compensation





The
Company applies the fair-value method of accounting for stock-based compensation
in accordance with the recommendations of CICA 3870, “Stock-based Compensation
and Other Stock-based Payments.” Stock-based compensation expense is calculated
using the Black-Scholes option pricing model
(“Black-Scholes”).  Black-Scholes requires management to make various
estimates and assumptions that impact the value assigned to the option expense
including the predicted future volatility of the stock price, the risk free
interest rate, dividend yield and the expected life of the options. Management
has used the following assumptions for its Black-Scholes
calculations:





Years
      ended December 31,2008*
            2007
            2006Dividend
      yield
            N/a
            0%
            0%Risk
      free interest rate
            N/a
            4.07%
            4.02%Expected
      life
            N/a
            5
      years
            5
      yearsExpected
      volatility
            N/a
            89%
            101%


* No
stock options were granted in 2008. Stock-based compensation expense during 2008
was related to options granted in 2007.





Any
change in the assumptions used could have a material impact on the fair value of
the stock-based compensation value.  In addition, the Black-Scholes
option pricing model was developed for options that have characteristics that
are materially different to the Company’s stock options, and for purposes other
than to determine the fair value to be assigned to stock
options.  Accordingly, the use of a Black-Scholes valuation model may
not always result in the determination of a compensation value that appears
appropriate or reasonable in the circumstances, for example, the model may
determine that a stock option grant at $0.30 per share is of higher value than a
grant at $0.15 per share (where the grant price is assumed to equal market value
and all other factors remain unchanged).





Financial
Instruments





As
disclosed in Note 3 to the audited financial statements for the year ended
December 31, 2008, the Company elected to classify its marketable securities,
short term investments and cash and cash equivalents as held for trading assets,
which requires that gains or losses from changes in fair value are taken
directly to net income, as this was considered the most appropriate
classification.  Should a different classification have been
determined, it is possible that such gains or losses would have been included in
other comprehensive income instead of net income.





The
Company has also included note disclosure concerning some of the risk factors
relating to its financial instruments – see Note 18 to the audited financial
statements for the year ended December 31, 2008.








25


CHANGES IN ACCOUNTING POLICIES INCLUDING INITIAL ADOPTION, AND
INTERNATIONAL FINANCIAL REPORTING STANDARDS (“IFRS”)





As noted
in this MD&A in the section “Change in Accounting Policy,” during the year
ended December 31, 2008, the Company retrospectively changed its accounting
policy for its exploration and development expenditures to align itself with
industry practice, U.S. GAAP and the anticipated future direction of
IFRS.





In
addition, the Company adopted various new accounting standards, as described
below, during the year ended December 31, 2008.





On
January 1, 2008, the Company adopted the recommendations included in the
following Sections of the CICA Handbook: Section 1400, “General Standards of
Financial Statement Presentation,” Section 1535, “Capital Disclosures,” Section
3862, “Financial Instruments – Disclosure” and Section 3863, “Financial
Instruments – Presentation.”  Additional information on the adoption
of these accounting standards can be found in Note 4 to the audited financial
statements for the year ended December 31, 2008.





In
February 2008, the CICA Accounting Standards Board confirmed that the use
of  IFRS will be required in 2011 for public companies in Canada
(i.e., IFRS will replace Canadian GAAP for public companies).  The
official changeover date will apply for interim and annual financial statements
relating to fiscal years beginning on or after January 1, 2011.  The
Company is currently assessing the impact implementation of IFRS will have on
its financial statements through, among other items, initial review of IFRS
standards currently in place and a “diagnostic” of the impact on the Company’s
current accounting policies.  However, the financial reporting impact
of the transition cannot be reasonably estimated at this time.  The
Company is also ensuring that certain key individuals involved in its financial
reporting processes, and moving forward, the implementation of IFRS, receive
adequate training in IFRS, primarily through use of available
courses.





Additional
information on the adoption of these accounting standards, and on proposed
future standards, can be found in Note 4(d) to the audited financial statements
as at December 31, 2008.








26


RISKS AND UNCERTAINTIES





In
conducting its business, Canadian Zinc faces a number of risks and
uncertainties, many of which are beyond its ability to control or
predict.  Because of these risks and uncertainties, actual results may
differ materially from those expressed or implied by forward-looking statements,
and investors are cautioned not to place undue reliance on such statements,
which speak only as of the date hereof.





Investors
are urged to review the discussion of risk factors associated with the Company’s
business below and as set out in the Company’s Annual Information Form dated
March 16, 2009, which has been filed with the Canadian Securities Regulators on
SEDAR (www.sedar.com).





The risks
below, and as described in the Company’s Annual Information Form and other
Canadian and U.S. filings, are not the only risks facing the
Company.  Additional risks and uncertainties not currently known to,
or that are currently deemed to be immaterial, also may materially affect the
Company’s business, financial condition and/or operating results.





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 Dehcho First Nations as
their traditional territory.  The Dehcho have not settled their land
claim with the Federal Government of Canada.  The Dehcho and the
Federal Government both claim legal title to this territory and legal title to
the land remains in dispute.  The Company’s operations are potentially
subject to a number of political, legislative and other
risks.  Canadian Zinc is not able to determine the impact of
political, legislative or other risks on its business or its future financial
position.





Canadian
Zinc’s operations are exposed to various levels of political, legislative and
other risks and uncertainties.  These risks and uncertainties include,
but are not limited to, cancellation, renegotiation or nullification of existing
leases, claims, permits and contracts; expropriation or nationalization of
property; changes in laws or regulations; changes in taxation laws or policies;
royalty and tax increases or claims by governmental, Aboriginal or other
entities; retroactive tax or royalty claims and changing political conditions;
government mandated social expenditures; governmental regulations or policies
that favour or require the awarding of contracts to local or Aboriginal
contractors or require contractors to employ residents of, or purchase supplies
from, a particular jurisdiction or area; or that require that an operating
project have a local joint venture partner, which may require to be subsidized;
and other risks arising out of sovereignty or land claims over the area in which
Canadian Zinc’s operations are conducted.





The
mining, processing, development and mineral exploration activities of Canadian
Zinc are subject to extensive federal, territorial and local laws and
regulations, including various laws governing prospecting, development,
production, taxes, labour standards and occupational health, mine safety, toxic
substances, land use, water use and other matters.  Such laws and
regulations are subject to change and can become more stringent and costly over
time.  No assurance can be given that new rules and regulations will
not be enacted or that existing rules and regulations will not be applied in a
manner which could limit or curtail exploration, production or
development.  Amendments to current laws and regulations governing
operations and activities of exploration and mining, or more stringent
implementation thereof, could have a substantial adverse impact on Canadian
Zinc.





In 1998 -
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/or its financial
condition.


27


In
relation to the Northwest Territories specifically, a number of policy and
social issues exist which increase Canadian Zinc’s political and legislative
risk.  The Government of Canada is facing legal and political issues,
such as land claims and social issues, all of which may impact future
operations.  This political climate increases the risk of the
Government making changes in the future to its position on issues such as mining
rights and land tenure, which in turn may adversely affect Canadian Zinc’s
operations.  Future government actions cannot be predicted, but may
impact the operation and regulation of the Prairie Creek
mine.  Changes, if any, in Government policies, or shifts in local
political attitude in the Northwest Territories may adversely affect Canadian
Zinc’s operations or business.





In August
2007, the Prime Minister announced that the Government of Canada had approved an
Order in Council (PC-2007-1202 July 31, 2007), withdrawing certain lands for the
proposed park expansion of Nahanni National Park Reserve.  While
Canadian Zinc has been assured that its current rights will be respected, there
is a risk that the Park expansion will detrimentally impact the existing mining
and access rights of Canadian Zinc.





Canadian
Zinc’s exploration, development and production activities may be substantially
affected by factors beyond Canadian Zinc’s control, any of which could
materially adversely affect Canadian Zinc’s financial position or results of
operations.  The occurrence of these various factors and uncertainties
cannot be accurately predicted.  The Company is not able to determine
the impact of these risks on its business.





Permitting,
Environmental and Other Regulatory Requirements





The
operations of Canadian Zinc require licences and permits from various
governmental and regulatory authorities.  Canadian Zinc believes that
it is presently complying in all material respects with the terms of its current
licences and permits.  However, such licences and permits are subject
to change in various circumstances.  Canadian Zinc does not hold all
necessary licences and permits under applicable laws and regulations for the
operation of the Prairie Creek mine.  There can be no guarantee
Canadian Zinc will be able to obtain or maintain all necessary licences and
permits as are required to explore and develop its properties, commence
construction or operation of mining facilities or properties under exploration
or development, or to obtain them within a reasonable time.





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 current boundaries of Nahanni National Park
Reserve.  The Government of Canada has announced plans to expand the
area of Nahanni National Park and the proposed new boundaries will surround, but
exclude, the Prairie Creek Mine.  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.





Canadian
Zinc’s activities are subject to extensive federal, provincial, territorial and
local laws and regulations governing environmental protection and employee
health and safety.  Canadian Zinc is required to obtain governmental
permits and provide bonding requirements under federal and territorial water and
mine regulations.  All phases of Canadian Zinc’s operations are
subject to environmental regulation.  These regulations mandate, among
other things, the maintenance of water and air quality standards and land
reclamation.  They also set forth limitations on the generation,
transportation, storage and disposal of solid and hazardous
waste.  Environmental legislation is evolving in a manner which will
require stricter standards and enforcement, increased fines and penalties for
non-compliance, and more stringent environmental assessments of proposed
projects.  There is no assurance that future changes in environmental
regulation, if any, will not adversely affect Canadian Zinc’s
operations.





Environmental
laws and regulations are complex and have tended to become more stringent
over


28


time.  These
laws are continuously evolving.  Any changes in such laws, or in the
environmental conditions at Prairie Creek, could have a material adverse effect
on Canadian Zinc’s financial condition, liquidity or results of
operations.  Canadian Zinc is not able to determine the impact of any
future changes in environmental laws and regulations on its future financial
position due to the uncertainty surrounding the ultimate form such changes may
take.  The Company does not currently consider that its expenditures
required to maintain ongoing environmental monitoring obligations at the Prairie
Creek mine are material to the results and financial condition of the
Company.  However, these costs could become material in the future and
would be reported in the Company’s public filings at that time.





Although
Canadian Zinc makes provision for reclamation costs, it cannot be assured that
such provision is adequate to discharge its obligations for these
costs.  As environmental protection laws and administrative policies
change, Canadian Zinc will revise the estimate of its total obligations and may
be obliged to make further provisions or provide further security for mine
reclamation costs.  The ultimate amount of reclamation to be incurred
for existing and past mining interests is uncertain.  Additional
discussion on the impact of reclamation costs is included in this MD&A in
the section “Critical Accounting Estimates - Asset retirement obligation
(environmental estimates).”





Existing
and possible future environmental legislation, regulations and actions could
cause additional expense, capital expenditures, restrictions and delays in the
activities of the Company, the extent of which cannot be
predicted.  Before production can commence on the Prairie Creek
Property the Company must obtain regulatory approval, permits and licences and
there is no assurance that such approvals will be obtained.  No
assurance can be given that new rules and regulations will not be enacted or
made, or that existing rules and regulations will not be applied, in a manner
which could limit or curtail production or development.





Regulatory
approvals and permits are currently, and will in the future be, required in
connection with Canadian Zinc’s operations.  To the extent such
approvals are required and not obtained, Canadian Zinc may be curtailed or
prohibited from proceeding with planned exploration or development of its
mineral properties or from continuing its mining operations.





Failure
to comply with applicable laws, regulations and permitting requirements may
result in enforcement actions thereunder, including orders issued by regulatory
or judicial authorities causing operations to cease or be curtailed, and may
include corrective measures requiring capital expenditures, installation of
additional equipment, or remedial actions.  The Company may have civil
or criminal fines or penalties imposed for violations of applicable laws or
regulations.





Failure
to comply with applicable environmental and health and safety laws can result in
injunctions, damages, suspension or revocation of permits and imposition of
penalties.  There can be no assurance that Canadian Zinc has been or
will be at all times in complete compliance with all such laws, regulations and
permits, or that the costs of complying with current and future environmental
and health and safety laws and permits will not materially adversely affect
Canadian Zinc’s business, results of operations or financial
condition.  Environmental hazards may exist on the properties on which
Canadian Zinc holds interests which are unknown to Canadian Zinc at present and
which have been caused by previous owners or operators of the
properties.





Amendments
to current laws, regulations and permits governing operations and activities of
mining and exploration companies, or more stringent implementation thereof,
could have a material adverse impact on Canadian Zinc Corporation and cause
increases in exploration expenses, capital expenditures or production costs or
require abandonment or delays in the development of mining
properties.





The
Prairie Creek project has, on numerous occasions, experienced significant delays
in obtaining permits and licences necessary for the conduct of its
operations.  If at any time in the future


29


permits
essential to operations are not obtained, or not obtained in a timely manner, or
exemptions not granted, there is a risk that the Prairie Creek mine may not be
able to operate.





Metal
Prices and Market Sentiment





The
market price of metals and minerals is volatile and cannot be
controlled.  Metal prices have fluctuated widely, particularly in
recent years.  If the price of metals and minerals should drop
significantly, as has recently occurred, the economic prospects for the Prairie
Creek Project could be significantly reduced or rendered
uneconomic.  There is no assurance that, even if commercial quantities
of ore are delineated, a profitable market may exist for the sale of products,
including concentrates from that ore.  Factors beyond the control of
the Company may affect the marketability of any minerals discovered or
concentrates produced.  The marketability of minerals is affected by
numerous other factors beyond the control of the Company, including quality
issues, impurities, government regulations, royalties, allowable production and
importing and exporting of minerals, the effect of which cannot be accurately
predicted. Factors tending to affect the price of metals include:





•
            The
      relative strength of the U.S. dollar against other
    currencies;


•
            Government
      monetary and fiscal policies;


•
            Expectations
      of the future rate of global monetary inflation and interest
      rates;


•
            General
      economic conditions and the perception of risk in capital
      markets;


•
            Political
      conditions including the threat of terrorism or
  war;


•
            Speculative
      trading;


•
            Investment
      and industrial demand; and


•
            Global
      production and inventory stocks.





The
effects of these factors, individually or in aggregate, on the prices of zinc,
lead and/or silver is impossible to predict with
accuracy.  Fluctuations in metal prices may adversely affect Canadian
Zinc’s financial performance and results of operations.  Further, if
the market price of zinc, lead and/or silver falls or remains depressed,
Canadian Zinc may experience losses or asset write-downs and may curtail or
suspend some or all of its exploration, development and mining
activities.





Furthermore,
sustained low metal prices can halt or delay the development of new projects;
reduce funds available for mineral exploration and may result in the recording
of a write-down of mining interests due to the determination that future cash
flows would not be expected to recover the carrying value.





Metal
prices fluctuate widely and are affected by numerous factors beyond Canadian
Zinc’s control such as the sale or purchase of such commodities by various
central banks and financial institutions, interest rates, exchange rates,
inflation or deflation, fluctuation in the value of the United States dollar and
foreign currencies, global and regional supply and demand, and the political and
economic conditions of major mineral and metal producing countries throughout
the world.  Future production from Canadian Zinc’s mining properties
is dependent on mineral prices that are adequate to make these properties
economic.  The prices of metals have fluctuated widely in recent
years, and future or continued serious price declines could cause continued
development of and commercial production from Canadian Zinc’s properties to be
impracticable.  Depending on the price of metal, cash flow from mining
operations may not be sufficient and Canadian Zinc could be forced to
discontinue production and may lose its interest in, or may be forced to sell,
its properties.





In
addition to adversely affecting Canadian Zinc’s reserve or resource estimates
and its financial condition, declining commodity prices can impact operations by
requiring a reassessment of the feasibility of a particular
project.  The need to conduct such a reassessment may cause
substantial delays or may interrupt operations until the reassessment can be
completed.


30


Currency
fluctuations may affect the costs that Canadian Zinc incurs at its
operations.  Zinc, lead and silver are sold throughout the world based
principally on the U.S. dollar price, but operating expenses are incurred in
currencies other than the U.S. dollar.  Appreciation of the Canadian
dollar against the U.S. dollar increases the cost of production in U.S. dollar
terms at mines located in Canada.





The
development of the Company’s properties will depend upon the Company’s ability
to obtain financing through private placement financing, public financing, the
joint venturing of projects, bank financing or other means.  There is
no assurance that the Company will be successful in obtaining the required
financing.





Securities
of junior and small-cap companies have experienced substantial volatility in the
past, often based on factors unrelated to the financial performance or prospects
of the companies involved.  These factors include macroeconomic
developments in North America and global and market perceptions of the
attractiveness of particular industries.  The share price of Canadian
Zinc is likely to be significantly affected by short-term changes in metal
prices.  Other factors unrelated to Canadian Zinc’s performance that
may have an effect on the price of its shares include the following: the extent
of analytical coverage available to investors concerning Canadian Zinc’s
business may be limited if investment banks with research capabilities do not
follow the Company’s securities; lessening in trading volume and general market
interest in the Company’s securities may affect an investor’s ability to trade
significant numbers of common shares; the size of Company’s public float may
limit the ability of some institutions to invest in the Company’s securities;
and a substantial decline in the price of the common shares that persists for a
significant period of time could cause the Company’s securities to be delisted
from an exchange, further reducing market liquidity.





As a
result of any of these factors, the market price of the Company’s shares at any
given point in time may not accurately reflect Canadian Zinc’s long-term
value.  Securities class action litigation often has been brought
against companies following periods of volatility in the market price of their
securities.  Canadian Zinc may in the future be the target of similar
litigation.  Securities litigation could result in substantial costs
and damages and divert management’s attention and resources.





The
development and exploration of Canadian Zinc’s properties will require
substantial additional financing.  Failure to obtain sufficient
financing will result in delaying or indefinite postponement of exploration,
development or production on Canadian Zinc’s properties or even a loss of
property interest.  There can be no assurance that additional capital
or other types of financing will be available when needed or that, if available,
the terms of such financing will be favourable to Canadian Zinc.





Exploration
and Development





The
business of exploring for minerals and mining involves a high degree of
risk.  There is no assurance the Company’s mineral exploration
activities will be successful.  Few properties that are explored are
ultimately developed into producing mines.  In exploring and
developing its mineral deposits the Company is subjected to an array of complex
economic factors and technical considerations.  Unusual or unexpected
formations, formation pressures, power outages, labour disruptions, flooding,
explosions, cave-ins, landslides, environmental hazards, and the inability to
obtain suitable or adequate machinery, equipment or labour are other risks
involved in the conduct of exploration and development programs.  Such
risks could materially adversely affect the business or the financial
performance of the Company.





There is
no certainty that the expenditures made by Canadian Zinc towards the search and
evaluation of mineral deposits will result in discoveries of commercial
quantities of ore.  The exploration for and development of mineral
deposits involves significant risks which even a combination of careful
evaluation, experience and knowledge may not eliminate.  Major
expenses may be required to locate and establish mineral reserves, to develop
metallurgical processes and to construct mining and


31


processing
facilities at a particular site.  It is impossible to ensure that the
exploration or development programs planned by Canadian Zinc will result in a
profitable commercial mining operation.  Whether a mineral deposit
will be commercially viable depends on a number of factors, some of which are:
the particular attributes of the deposit, such as size, grade and proximity to
infrastructure; metal prices which are highly cyclical; and government
regulations, including regulations relating to prices, taxes, royalties, land
tenure, land use, importing and exporting of minerals and environmental
protection.  The exact effect of these factors cannot be accurately
predicted, but the combination of these factors may result in Canadian Zinc not
receiving an adequate return on invested capital.





A
specific risk associated with the Prairie Creek Property is its remote
location.  Mining, processing, development and exploration activities
depend, to one degree or another, on adequate
infrastructure.  Reliable roads, bridges, power sources and water
supply are important factors, which affect capital and operating
costs.  Unusual or infrequent weather phenomena, government or other
interference in the maintenance or provision of such infrastructure could
adversely affect Canadian Zinc’s operations, financial condition and results of
operations.





The
development plan for the Prairie Creek Project is based upon a Project
Description Report prepared internally by the Company, with the assistance of
outside consultants, in 2008.  The Project Description Report is not a
Feasibility Study.  The Project Description Report 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 in the 2007 NI 43-101 Technical Report.  The
resource estimation in the Technical Report 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 over twenty-five years old and, although it
has been held under care and maintenance, it has lain idle for more than
twenty-five years and was never operated.  There is significant risk
attaching to the proposed operation of aged equipment.  The Company is
working towards converting the Project Description Report into a Pre-Feasibility
study utilizing the updated Technical Report as described in the “2008 Review of
Activities” section to this MD&A.





Mining
operations generally involve a high degree of risk.  Canadian Zinc’s
mining operations will be subject to all the hazards and risks normally
encountered in the development and production of minerals, including unusual and
unexpected geologic formations, seismic activity, rock bursts, cave-ins,
flooding and other conditions involved in the drilling and removal of material,
any of which could result in damage to, or destruction of, mines and other
producing facilities, damage to life or property, environmental damage and
possible legal liability.  Mining and milling operations are subject
to hazards such as equipment failure or failure of retaining dams around
tailings disposal areas, which may result in environmental pollution and
consequent liability.





32


Uncertainty
in the Estimation of Mineral Resources





The
figures for Mineral Resources contained in this document are estimates only and
no assurance can be given that the anticipated tonnages and grades will be
achieved, that the indicated level of recovery will be realized or that Mineral
Resources can be mined or processed profitably.  There are numerous
uncertainties inherent in estimating Mineral Resources, including many factors
beyond Canadian Zinc’s control.  Such estimation is a subjective
process, and the accuracy of any resource estimate is a function of the quantity
and quality of available data and of the assumptions made and judgments used in
engineering and geological interpretation.  In addition, there can be
no assurance that mineral or metal recoveries in small scale laboratory tests
will be duplicated in larger scale tests under on-site conditions or during
production.





Inferred
mineral resources do not have demonstrated economic viability.  Due to
the uncertainty which may attach to inferred mineral resources, there is no
assurance that inferred mineral resources will be upgraded to measured and
indicated mineral resources as a result of continued exploration.





Fluctuation
in metal prices, results of drilling, metallurgical testing and production and
the evaluation of mine plans subsequent to the date of any estimate may require
revision of any such resource or reserve estimate.  The volume and
grade of resources mined and processed and recovery rates may not be the same as
currently anticipated.  Any material reductions in estimates of
Mineral Resources, or of Canadian Zinc’s ability to extract these Mineral
Resources, could have a material adverse effect on Canadian Zinc’s results of
operations and financial condition.





Mineral
reserve and mineral resource estimates are imprecise and depend partly on
statistical inferences drawn from drilling and other data which may prove to be
unreliable.  Future production could differ dramatically from mineral
resource estimates for many reasons including the following:





•
Mineralization or formations could be different from those predicted by
drilling, sampling and similar examinations;


•
Declines in the market price of metals may render the mining of some or all of
Canadian Zinc’s mineral resources uneconomic;


•
Increases in operating mining costs and processing costs could adversely affect
mineral reserves or resources; and


• The
grade of mineral reserves or resources may vary significantly from time to time
and there can be no assurance that any particular level of metal may be
recovered from the mineral reserves or resources.





Any of
these factors may require Canadian Zinc to reduce its mineral reserve or mineral
resources estimates.





Insurance
and Uninsured Risks





Canadian
Zinc’s business is subject to a number of risks and hazards generally, including
adverse environmental conditions, industrial accidents, labour disputes, unusual
or unexpected geological conditions, ground or slope failures, cave-ins, changes
in the regulatory environment and natural phenomena such as inclement weather
conditions, floods and earthquakes.  Such occurrences could result in
damage to mineral properties or production facilities, personal injury or death,
environmental damage to Canadian Zinc’s properties or the properties of others,
delays in mining, monetary losses and possible legal liability.





Although
Canadian Zinc maintains insurance to protect against certain risks in such
amounts as it considers reasonable, its insurance will not cover all the
potential risks associated with the Company’s mining
operations.  Canadian Zinc may also be unable to maintain insurance to
cover these risks at


33


economically
feasible premiums.  Insurance coverage may not continue to be
available or may not be adequate to cover any resulting
liability.  Moreover, insurance against risks such as environmental
pollution or other hazards as a result of exploration and production is not
generally available to Canadian Zinc or to other companies in the mining
industry on acceptable terms.  In particular, the Company is not
insured for environmental liability or earthquake damage.





Canadian
Zinc might also become subject to liability for pollution or other hazards which
may not be insured against, or which Canadian Zinc may elect not to insure
against, because of premium costs or other reasons.  Losses from these
events may cause Canadian Zinc to incur significant costs that could have a
material adverse effect upon its financial performance and results of
operations.





Executives
and Conflicts of Interest





Canadian
Zinc is dependent on the services of key executives, including the President and
Chief Executive Officer and the Vice President of Exploration and Chief
Operating Officer of the Company, and a small number of other skilled and
experienced executives and personnel.  Due to the relatively small
size of the Company, the loss of these persons or Canadian Zinc’s inability to
attract and retain additional highly skilled or experienced employees may
adversely affect its business and future operations.





Certain
of the directors and officers of the Company also serve as directors and/or
officers of, or have significant shareholdings in, other companies involved in
natural resource exploration and development and consequently there exists the
possibility for such directors and officers to be in a position of
conflict.  Any decision made by any of such directors and officers
involving Canadian Zinc will be made in accordance with their duties and
obligations to deal fairly and in good faith with a view to the best interests
of the Company and its shareholders.  In addition, each of the
directors is required to declare and refrain from voting on any matter in which
such directors may have a conflict of interest in accordance with the procedures
set forth in the Business
Corporations Act (British Columbia) and other applicable
laws.





To the
extent that such other companies may participate in ventures in which Canadian
Zinc may participate, the directors of Canadian Zinc may have a conflict of
interest in negotiating and concluding terms respecting the extent of such
participation.  In the event that such a conflict of interest arises
at a meeting of the Company’s directors, a director who has such a conflict will
abstain from voting for the approval of such participation or such
terms.





From time
to time several companies may collectively participate in the acquisition,
exploration and development of natural resource properties thereby allowing for
their participation in larger programs, permitting involvement in a greater
number of programs and reducing financial exposure in respect of any one
program.  It may also occur that a particular company will assign all
or a portion of its interest in a particular program to another of these
companies due to the financial position of the company making the
assignment.  Under the laws of the Province of British Columbia, the
directors of the Company are required to act honestly, in good faith and in the
best interests of the Company.  In determining whether or not Canadian
Zinc will participate in a particular program and the interest therein to be
acquired by it, the directors will primarily consider the degree of risk to
which the Company may be exposed and its financial position at that
time.





Title
Matters





Mining
leases and surface leases issued to the Company by the Federal Government have
been surveyed but other parties may dispute the Company’s title to its mining
properties.  The mining claims in which the Company has an interest
have not been surveyed and, accordingly, the precise location of the boundaries
of the claims and ownership of mineral rights on specific tracts of land
comprising the claims


34


may be in
doubt.  These claims have not been converted to lease, and are,
accordingly, subject to regular compliance with assessment work
requirements.





Failure
to comply strictly with applicable laws, regulations and local practices
relating to mineral right applications and tenure, could result in loss,
reduction or expropriation of entitlements.





While the
Company has investigated its title to all its mining leases, surface leases and
mining claims and, to the best of its knowledge, title to all properties is in
good standing, this should not be construed as a guarantee of title and title
may be affected by undetected defects.  The validity and ownership of
mining property holdings can be uncertain and may be contested.  There
are currently a number of pending Aboriginal or Native title or Treaty or
traditional land ownership claims relating to Northwest
Territories.  The Company’s properties at Prairie Creek are subject to
Aboriginal or Native land claims.  Title insurance generally is not
available, and Canadian Zinc’s ability to ensure that it has obtained secure
title to individual mineral properties or mining concessions may be severely
constrained.  Canadian Zinc’s mineral properties may be subject to
prior unregistered liens, agreements, transfers or claims, including Native land
claims, and title may be affected by, among other things, undetected
defects.  No assurances can be given that there are no title defects
affecting such properties.





Competition





The
mining industry is competitive in all of its phases.  There is
aggressive competition within the mining industry for the discovery and
acquisition of properties considered to have commercial
potential.  Canadian Zinc faces strong competition from other mining
companies in connection with the acquisition of properties, mineral claims,
leases and other mineral interests as well as for the recruitment and retention
of qualified employees and other personnel.  Many of these companies
have greater financial resources, operational experience and technical
capabilities than Canadian Zinc.  As a result of this competition,
Canadian Zinc may be unable to maintain or acquire attractive mining properties
on terms it considers acceptable or at all.  Consequently, Canadian
Zinc’s operations and financial condition could be materially adversely
affected.





Acquisitions





From time
to time Canadian Zinc undertakes evaluations of opportunities to acquire
additional mining assets and businesses.  Any resultant acquisitions
may be significant in size, may change the scale of Canadian Zinc’s business,
and may expose Canadian Zinc to new geographic, political, operating financial
and geological risks.  Canadian Zinc’s success in its acquisition
activities depends on its ability to identify suitable acquisition candidates,
to acquire them on acceptable terms, and integrate their operations successfully
with those of Canadian Zinc.  Any acquisition would be accompanied by
risks, such as a significant decline in metal prices; the ore body proving to be
below expectations; the difficulty of assimilating the operation and personnel;
the potential disruption of Canadian Zinc’s ongoing business; the inability of
management to maximize the financial and strategic position of Canadian Zinc
through the successful integration of acquired assets and businesses; the
maintenance of uniform standards, control, procedures and policies; the
impairment of relationships with employees, customers and contractors as a
result of any integration of new management personnel; and the potential unknown
liabilities associated with acquired assets and business.  In addition
Canadian Zinc may need additional capital to finance an
acquisition.  Debt financing related to any acquisition will expose
Canadian Zinc to the risk of leverage, while equity financing may cause existing
shareholders to suffer dilution.  There can be no assurance that
Canadian Zinc would be successful in overcoming these risks or any other
problems encountered in connection with such acquisitions.





35


Requirements
of the Sarbanes-Oxley Act and Similar Canadian Regulations





Since
2007, the Company has documented and tested its internal control procedures in
order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act of
2002 (“SOX”).  As of December 31, 2008, SOX requires an annual
assessment by management of the effectiveness of the Company’s internal control
over financial reporting and an attestation by the Company’s independent
auditors addressing internal controls over financial reporting.





Due to
its size, its limited staff resources and financial constraints, the Company is
exposed to certain potential deficiencies in its internal controls over
financial reporting.  If the Company is unable to maintain the
adequacy of its internal control over financial reporting, as such standards are
modified, supplemented, or amended from time to time, the Company may not be
able to ensure that it can conclude on an ongoing basis that it has effective
internal controls over financial reporting in accordance with Section 404 of
SOX.  The Company’s inability to satisfy the requirements of Section
404 of SOX on an ongoing, timely basis could result in the loss of investor
confidence in the reliability of its financial statements, which in turn could
harm the Company’s business and negatively impact the trading price of its
common shares.  In addition, any inability to implement required new
or improved controls, or difficulties encountered in their implementation, could
impact the Company’s operating results or cause it to be unable to meet its
reporting obligations.  Future acquisitions (if any) may provide the
Company with challenges in implementing the required processes, procedures and
controls in the acquired operations.  Acquired companies may not have
disclosure controls and procedures or internal control over financial reporting
that are as thorough or effective as those required by securities laws currently
applicable to the Company.





No
evaluation can provide complete assurance that the Company’s internal control
over financial reporting will detect or uncover all failures of persons within
the Company to disclose material information otherwise required to be
reported.  The effectiveness of the Company’s controls and procedures
could also be limited by simple errors or faulty judgments.  In
addition, as the Company continues to develop, the challenges involved in
implementing appropriate internal controls over financial reporting will
increase and will require that the Company continue to enhance its internal
controls over financial reporting.  Although the Company will be
required to devote substantial time and will incur substantial costs, as
necessary, in an effort to ensure ongoing compliance, the Company cannot be
certain that it will be successful in continuing to comply with Section 404 of
SOX.





History
of Losses and No Assurance of Profitable Operations





The
Company has incurred losses since inception of $46.127 million through December
31, 2008.  There can be no assurance that the Company will be able to
operate profitably during future periods.  If the Company is unable to
operate profitably during future periods, and is not successful in obtaining
additional financing, the Company could be forced to cease its exploration and
development plans as a result of lacking sufficient cash resources.





Shareholder
Dilution





As of
December 31, 2008 there were 118,969,063 common shares
outstanding.  As of the date hereof, the Company had share purchase
options outstanding allowing the holders of these options to purchase 4,035,000
common shares and share purchase warrants outstanding allowing the holders to
purchase 5,882,500 common shares.  Directors and officers of the
Company hold 3,700,000 of these share purchase options and 335,000 share
purchase options are held by contractors and employees of the
Company.  None of the share purchase warrants are held by directors
and officers.  The exercise of all of the existing share purchase
options and warrants would result in percentage ownership dilution to the
existing shareholders.





36


Potential
Future Equity Financings





The
Company has used equity financing in order to meet its needs for capital and may
engage in equity financings during future periods.  Subsequent
issuances of equity securities or securities convertible into or exchangeable or
exercisable for equity securities would result in further percentage ownership
dilution to existing shareholders and could depress the price of the Company’s
shares.





Dividend
Policy





No
dividends have been paid by the Company to date.  The Company
anticipates that it will retain all future earnings and other cash resources for
the future operation and development of its business and the Company does not
intend to declare or pay any cash dividends in the foreseeable
future.  Payment of any future dividends will be at the discretion of
the Company’s board of directors after taking into account many factors,
including the Company’s operating results, financial condition and current and
anticipated cash needs.








OTHER INFORMATION





The
Company has not entered into any off-balance sheet arrangements.





As at
March 16, 2009, the Company had the following securities issued and
outstanding:





Common
      shares
            118,955,563Common
      share purchase options
            4,035,000
            exercisable
      between $0.60 - $0.94 per shareCommon
      share purchase warrants
            5,882,500
            exercisable at
      $1.20 per share








DISCLOSURECONTROLS AND PROCEDURES AND INTERNAL CONTROLS OVER
FINANCIAL REPORTING





Disclosure
controls and procedures





The
Company’s disclosure controls and procedures are designed to provide reasonable
assurance that material items requiring disclosure by the Company are identified
and reported in a timely manner.





Based on
current securities legislation in Canada and the United States, the Chief
Executive Officer (“CEO”) and the Chief Financial Officer (“CFO”) of the Company
have evaluated the design and effectiveness of the Company’s disclosure controls
and procedures as of December 31, 2008, and have concluded that such disclosure
controls and procedures were operating effectively at that date.





There
were no significant changes to the Company’s disclosure controls process during
the year ended December 31, 2008.





It should
be noted that, while the Company’s CEO and CFO 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.





37


Internal
controls over financial reporting





Management
is responsible for designing, establishing and maintaining a system of internal
controls over financial reporting to provide reasonable assurance that the
financial information prepared by the Company for external purposes is reliable
and has been recorded, processed and reported in an accurate and timely manner
in accordance with GAAP.





The Board
of Directors is responsible for ensuring that management fulfills its
responsibilities.  The Audit Committee fulfills its role of ensuring
the integrity of the reported information through its review of the interim and
annual financial statements.





There are
inherent limitations in the effectiveness of internal controls over financial
reporting, including the possibility that misstatements may not be prevented or
detected.  Accordingly, even effective internal controls over
financial reporting can provide only reasonable assurance with respect to
financial statement preparation.  Furthermore, the effectiveness of
internal controls can change with circumstances.  The Company has paid
particular attention to segregation of duties matters surrounding its internal
controls over financial reporting as the Company has only limited staff
resources at the present time such that “ideal” segregation of duties is not
feasible.  This risk is mitigated by management and Board review where
appropriate.  At the present time, the Company does not anticipate
hiring additional accounting or administrative staff as this is not considered
necessary or practical and accordingly, will continue to rely on review
procedures to detect potential misstatements in reporting of material to the
public.





The CEO
and the CFO have evaluated the design and effectiveness of internal controls
over financial reporting based on the framework in Internal Control – Integrated
Frameworkissued by the Committee of Sponsoring Organizations of the
Treadway Commission (“COSO”).  Based on this evaluation, as at
December 31, 2008, the Company believes that its internal controls over
financial reporting were designed and operating effectively to provide
reasonable, but not absolute, assurance that the objectives of the control
system are met.





The
Company’s management, including the CEO and CFO, believe that any internal
controls over financial reporting, including those systems determined to be
effective and no matter how well conceived and operated, have 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.





Ernst
& Young LLP, an independent registered public accounting firm, has audited
the financial statements for the year ended December 31, 2008, and expressed an
unqualified opinion thereon.  Ernst & Young LLP has also expressed
an unqualified opinion on the effective operation of the Company’s internal
control over financial reporting as of December 31, 2008.





38


Changes
in internal controls over financial reporting





The
Company continues to review and assess its internal controls over financial
reporting. There were no significant changes made to internal controls over
financial reporting during the year ended December 31, 2008.





The
Company made certain changes to its systems of internal controls over financial
reporting in 2008 that did not materially affect, and are not reasonably likely
to materially affect, internal control over financial
reporting.  During this process, management identified certain
potential deficiencies in internal control over financial reporting, but none
which were individually or cumulatively considered to be material
weaknesses.  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 risks are not considered to be
significant.  The Company’s management has taken such action as it
considers appropriate to minimize any potential risks from these deficiencies,
including using outside consultants and advisors when deemed
appropriate.





-End-


39