Financial Statements





(A
Development Stage Company)


December
31, 2007, 2006 and 2005








Index





Report of
Independent Auditors


Balance
Sheets


Statements
of Operations, Comprehensive Income and Deficit


Statements
of Cash Flows


Statements
of Shareholders’ Equity


Notes to
Financial Statements





Ernst & Young
      LLP
              Chartered
      Accountants
              Pacific
      Centre
              P.O.
      Box 10101
              700
      West Georgia Street
              Vancouver,
      Canada V7Y 1C7
            Phone:(604)
      891-820
              Fax:(604)
    643-5422








Independent Auditors' Report on Financial
Statements





To the
Shareholders of Canadian Zinc Corporation





We have
audited the balance sheets of Canadian Zinc Corporation (the “Company”) as at
December 31, 2007 and 2006 and the statements of operations, comprehensive
income and deficit, shareholders’ equity and cash flows for each of the years in
the three-year period ended December 31, 2007.  These financial
statements are the responsibility of the Company’s management.  Our
responsibility is to express an opinion on these financial statements based on
our audits.





We
conducted our audits in accordance with Canadian generally accepted auditing
standards and the standards of the Public Company Accounting Oversight Board
(United States).  Those standards require that we plan and perform an
audit to obtain reasonable assurance whether the financial statements are free
of material misstatement.  An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements.  An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation.  We believe
that our audits provide a reasonable basis for our opinion.





In our
opinion, these financial statements present fairly, in all material respects,
the financial position of the Company as at December 31, 2007 and 2006 and the
results of its operations and its cash flows for each of the years in the
three-year period ended December 31, 2007 in conformity with Canadian generally
accepted accounting principles.





As
described in Note 14, the financial statements have been restated.





We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of the Company’s internal
control over financial reporting as of December 31, 2007, based on criteria
established in Internal Control—Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission and our report dated March
25, 2008 expressed an unqualified opinion thereon.







March 25,
2008


Vancouver,
Canada











Ernst & Young
      LLP
              Chartered
      Accountants
              Pacific
      Centre
              P.O.
      Box 10101
              700
      West Georgia Street
              Vancouver,
      Canada V7Y 1C7
            Phone:  (604)
      891-8200
              Fax:(604)
      643-5422








Independent
Auditors' Report on Internal Controls under Standards of the Public Company
Accounting Oversight Board (United States)





To the
Shareholders of Canadian Zinc Corporation





We have
audited Canadian Zinc Corporation’s (the “Company”) internal control over
financial reporting as at December 31, 2007, based on criteria established in
Internal Control – Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the “COSO criteria”).  The
Company’s management is responsible for maintaining effective internal control
over financial reporting, and for its assessment of the effectiveness of
internal control over financial reporting. Our responsibility is to express an
opinion on the effectiveness of the Company’s internal control over financial
reporting based on our audit.





We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness
exists, testing and evaluating the design and operating effectiveness of
internal control, and performing such other procedures as we considered
necessary in the circumstances.  We believe that our audit provides a
reasonable basis for our opinion.





A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles.  A company’s internal
control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records, that in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the Company;
(2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the Company are
being made only in accordance with authorizations of management and directors of
the Company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of the Company’s
assets that could have a material effect on the financial
statements.





Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements.  Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.





In our
opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2007 based on the COSO
criteria.





We also
have audited, in accordance with Canadian generally accepted auditing standards
and the standards of the Public Company Accounting Oversight Board (United
States), the balance sheets as at December 31, 2007 and 2006 and the statements
of operations, comprehensive income and deficit, shareholders’ equity and cash
flows for each of the years in the three-year period ended December 31, 2007 of
the Company and our report dated March 25, 2008 expressed an unqualified opinion
thereon.

















March 25,
2008
 Vancouver,
Canada











CANADIAN
ZINC CORPORATION
 (a
development stage company)
 Balance
Sheets
 (Prepared
in accordance with Canadian generally accepted accounting
principles)





December
      31,
            
            
            December
      31,(in
      thousands of Canadian dollars)
            
            2007
            
            
            2006ASSETSCurrentCash
      and cash equivalents
            
            $
            6,919
            
            
            $
            13,608Short-term
      investments (Note 4)
            
            
            21,495
            
            
            
            15,479Marketable
      securities (Note 5)
            
            
            100
            
            
            
            250Other
      receivables and prepaid expenses
            
            
            172
            
            
            
            270Total
      Current Assets
            
            
            28,686
            
            
            
            29,607Resource interests (Note
      6)
            
            
            37,797
            
            
            
            26,700Plant and equipment
      (Note 7)
            
            
            448
            
            
            
            455Total
      Assets
            
            $
            66,931
            
            
            $
            56,762LIABILITIESCurrentAccounts
      payable
            
            $
            813
            
            
            $
            451Accrued
      liabilities
            
            
            441
            
            
            
            13Total
      Current Liabilities
            
            
            1,254
            
            
            
            464Asset retirement obligation(Note 8)
            
            
            1,228
            
            
            
            1,380Future income tax(Note
      12)
            
            
            3,621
            
            
            
            1,134Total
      Liabilities
            
            
            6,103
            
            
            
            2,978Commitments(Notes 6 and
      15)SHAREHOLDERS'
      EQUITYShare capital(Note
      9)
            
            
            66,593
            
            
            
            59,994Contributed surplus(Note 10)
            
            
            7,844
            
            
            
            6,479Accumulated
      other comprehensive income
            
            
            -
            
            
            
            -Deficit
            
            
            (13,609
            )
            
            
            (12,689
            )Total
      Shareholders’ Equity
            
            
            60,828
            
            
            
            53,784Total
      Liabilities and Shareholders’ Equity
            
            $
            66,931
            
            
            $
            56,762Subsequent events (Note
      16)


Approved
by the Board of Directors:


“John
      F. Kearney”
            
            “Robert
      Gayton”Director
            
            Director


CANADIAN
ZINC CORPORATION
 (a
development stage company)
 Statements
of Operations, Comprehensive Income and Deficit
 (Prepared
in accordance with Canadian generally accepted accounting
principles)










Year
      ended December 31,(in thousands of Canadian
      dollars except share and per share amounts)
            
            2007
            
            
            2006
            
            
            2005Income
              Interest
      Income
            
            $
            1,234
            
            
            $
            948
            
            
            $
            329ExpensesAmortization
      of furniture and equipment
            
            
            13
            
            
            
            4
            
            
            
            3Write-off
      of mining equipment
            
            
            -
            
            
            
            27
            
            
            
            -Listing
      and regulatory fees
            
            
            59
            
            
            
            40
            
            
            
            58Management
      and directors fees
            
            
            347
            
            
            
            318
            
            
            
            203Office
      and general
            
            
            463
            
            
            
            491
            
            
            
            274Professional
      fees
            
            
            396
            
            
            
            256
            
            
            
            215Project
      evaluation
            
            
            39
            
            
            
            31
            
            
            
            73Shareholder
      and investor communications
            
            
            420
            
            
            
            244
            
            
            
            156Stock
      based compensation
            
            
            267
            
            
            
            1,023
            
            
            
            1,314Write
      down on marketable securities (Note 5)
            
            
            150
            
            
            
            -
            
            
            
            -2,154
            
            
            
            2,434
            
            
            
            2,296Net
      loss for the year
            
            
            (920
            )
            
            
            (1,486
            )
            
            
            (1,967
            )Other
      comprehensive income/(loss)
            
            
            -
            
            
            
            -
            
            
            
            -Comprehensive
      loss
            
            $
            (920
            )
            
            $
            (1,486
            )
            
            $
            (1,967
            )Deficit, beginning of
      year
            
            $
            (12,689
            )
            
            $
            (11,203
            )
            
            $
            (9,236
            )Net
      loss
            
            
            (920
            )
            
            
            (1,486
            )
            
            
            (1,967
            )Deficit, end of
      year
            
            $
            (13,609
            )
            
            $
            (12,689
            )
            
            $
            (11,203
            )Loss per share - basic
      and diluted
            
            $
            (0.01
            )
            
            $
            (0.02
            )
            
            $
            (0.03
            )Weighted average number of
      common  shares outstanding – basic and
      diluted
            
            
            113,429,078
            
            
            
            94,734,979
            
            
            
            71,378,444


See
accompanying notes to the financial statements.
 
 CANADIAN
ZINC CORPORATION
 (a
development stage company)
 Statements
of Cash Flows
 (Prepared
in accordance with Canadian generally accepted accounting
principles)


Year
      ended December 31,(in
      thousands of Canadian dollars)
            
            2007
            
            
            2006
            
            
            2005Operating
      ActivitiesNet
      loss for the year
            
            $
            (920
            )
            
            $
            (1,486
            )
            
            $
            (1,967
            )Reclamation
      expenditures (Note 8)
            
            
            (246
            )
            
            
            -
            
            
            
            -Adjustment
      for items not involving cash:-
      Amortization of furniture and equipment
            
            
            13
            
            
            
            4
            
            
            
            3-
      write-off of mining equipment
            
            
            -
            
            
            
            27
            
            
            
            --
      write down on marketable securities
            
            
            150
            
            
            
            -
            
            
            
            --
      Stock based compensation
            
            
            267
            
            
            
            1,023
            
            
            
            1,314Change
      in non-cash working capital items:-
      other receivables and prepaid expenses
            
            
            98
            
            
            
            (246
            )
            
            
            1-
      accounts payable and accrued liabilities
            
            
            69
            
            
            
            416
            
            
            
            (127
            )(569
            )
            
            
            (262
            )
            
            
            (776
            )Financing
      ActivitiesCapital
      stock issued and subscribed, net of issuance costs
            
            
            10,184
            
            
            
            22,037
            
            
            
            5,406Investing
      ActivitiesPurchase
      of equipment,
            
            
            (149
            )
            
            
            (426
            )
            
            
            (18
            )Resource
      interest and plant and equipment obligations
            
            
            721
            
            
            
            -
            
            
            
            -Short-term
      investments
            
            
            (6,016
            )
            
            
            (15,479
            )
            
            
            -Marketable
      securities
            
            
            -
            
            
            
            (250
            )
            
            
            -Reclamation
      security deposits
            
            
            (30
            )
            
            
            (205
            )
            
            
            (30
            )Deferred
      exploration and development costs, excluding amortization and
      accretion
            
            
            (10,830
            )
            
            
            (7,871
            )
            
            
            (1,426
            )(16,304
            )
            
            
            (24,231
            )
            
            
            (1,474
            )(Decrease)
      increase in cash and cash equivalents
            
            
            (6,689
            )
            
            
            (2,456
            )
            
            
            3,156Cash and cash equivalents,beginning of year
            
            
            13,608
            
            
            
            16,064
            
            
            
            12,908Cash and cash
      equivalents, end of year
            
            $
            6,919
            
            
            $
            13,608
            
            
            $
            16,064Supplemental
      Information:Interest
      paid
            
            $
            -
            
            
            $
            -
            
            
            $
            -Income
      taxes paid
            
            $
            -
            
            
            $
            -
            
            
            $
            -





See
accompanying notes to the financial statements.
 
 CANADIAN
ZINC CORPORATION
 (a
development stage company)
 Statements
of Shareholders’ Equity
 (Prepared
in accordance with Canadian generally accepted accounting
principles)


(in thousands
      of Canadian dollars except for share amounts)
            Common
      shares
            
            ContributedShares
            Amount
            
            Surplus
            
            Deficit
            
            TotalBalance, December 31,
      2004
            69,394,942
            $
            37,790
            $
            36
            $
            (9,236)
            $
            28,590Exercise of warrants at $0.60 per share
            388,813
            
            233
            
            -
            
            -
            
            233Issue
      of flow-through shares at $0.55 per share
            9,090,909
            
            5,000
            
            -
            
            -
            
            5,000Issuance costs
            -
            
            (445)
            
            -
            
            -
            
            (445)Broker
      warrants issued at $0.60 per share
            -
            
            (109)
            
            109
            
            -
            
            -Issue
      of flow-through shares at $0.75 & $0.85 per
    share
            872,548
            
            675
            
            -
            
            -
            
            675Issuance
      costs
            
            
            (57)
            
            -
            
            -
            
            (57)Broker
      warrants issued at $0.85 per share
            -
            
            (20)
            
            20
            
            -
            
            -Stock-based
      compensation
            -
            
            -
            
            1,314
            
            -
            
            1,314Net loss
      for the year
            -
            
            -
            
            -
            
            (1,967)
            
            (1,967)Balance, December 31,
      2005
            79,747,212
            $
            43,067
            $
            1,479
            $
            (11,203)
            $
            33,343Issue
      of shares at $0.72 per share
            13,333,333
            
            9,600
            
            -
            
            -
            
            9,600Issuance
      costs
            -
            
            (498)
            
            -
            
            -
            
            (498)Share
      purchase warrants
            -
            
            (2,264)
            
            2,264
            
            -
            
            -Broker
      warrants issued at $0.72 per share
            -
            
            (773)
            
            773
            
            -
            
            -Broker
      warrants issued at $1.00 per share
            -
            
            (320)
            
            320
            
            -
            
            -Exercise
      of warrants between $0.55 - $0.85 per share
            1,307,590
            
            1,215
            
            (394)
            
            -
            
            821Exercise
      of options at $0.60 per share
            690,000
            
            670
            
            (255)
            
            -
            
            415Issue
      of flow-through shares at $1.15 per share
            6,956,522
            
            8,000
            
            -
            
            -
            
            8,000Issuance
      costs
            -
            
            (671)
            
            -
            
            -
            
            (671)Issue
      of shares at $0.90 per unit
            5,555,555
            
            5,000
            
            -
            
            -
            
            5,000Share
      purchase warrants
            -
            
            (845)
            
            845
            
            -
            
            -Broker
      warrants issued at $0.93 per share
            -
            
            (167)
            
            167
            
            -
            
            -Broker
      warrants issued at $1.15 per share
            -
            
            (257)
            
            257
            
            -
            
            -Future
      income tax effect of flow-through shares
            -
            
            (1,763)
            
            -
            
            -
            
            (1,763)Stock-based
      compensation
            -
            
            -
            
            1,023
            
            -
            
            1,023Net
      loss for the year
            -
            
            -
            
            -
            
            (1,486)
            
            (1,486)Balance, December 31,
      2006
            107,590,212
            $
            59,994
            $
            6,479
            $
            (12,689)
            $
            53,784Exercise
      of options at $0.23 per share
            450,000
            
            131
            
            (27)
            
            -
            
            104Future
      income tax effect of flow through shares
            -
            
            (2,487)
            
            -
            
            -
            
            (2,487)Exercise
      of options at $0.89 per share
            100,000
            
            153
            
            (64)
            
            -
            
            89Exercise
      of warrants between $0.72 - $0.93 per share
            302,738
            
            394
            
            (174)
            
            -
            
            220Issue
      of shares at $0.85 per unit
            11,765,000
            
            9,766
            
            -
            
            -
            
            9,766Share
      purchase warrants
            -
            
            (1,366)
            
            1,366
            
            -
            
            -Exercise
      of warrants at $0.72 per share
            6,012
            
            8
            
            (3)
            
            -
            
            5Stock-based
      compensation
            -
            
            -
            
            267
            
            -
            
            267Net
      loss for the year
            -
            
            -
            
            -
            
            (920)
            
            (920)Balance, December 31,
      2007
            120,213,962
            $
            66,593
            $
            7,844
            $
            (13,609)
            $
            60,828 388,813
 37,790
 37,790


See
accompanying notes to the financial statements.
 
 CANADIAN
ZINC CORPORATION
 (a
development stage company)
 Notes to
the Financial Statements
 December
31, 2007
 (Tabular
amounts are in thousands of Canadian dollars, except for shares, price per share
and per share amounts)







1.
            Nature
      of Operations





The
Company is engaged in the exploration and development of its Prairie Creek
property and related activities.  The Company is considered to be in
the exploration and development stage given that its Prairie Creek property is
not yet in production and, to date, has not earned any significant
revenues.  The recoverability of amounts shown for resource interests
is dependent on the existence of economically recoverable reserves, obtaining
the necessary permits to operate a mine, obtaining the financing to complete
development and future profitable production (see Note 6).





2.
            Significant
      Accounting Policies





These
financial statements have been prepared in accordance with Canadian generally
accepted accounting principles (“Canadian GAAP”). These accounting principles
conform in all material respects to the accounting principles generally accepted
in the United States of America (“U.S. GAAP”), except as disclosed in Note
14.





(a)
            Measurement
      Uncertainty





The
preparation of financial statements in accordance with Canadian GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period.  Actual results could differ
from those estimates. Significant accounts that require estimates as the basis
for determining the stated amounts include resource interests, plant and
equipment, asset retirement obligation and future income taxes.





Depreciation
and depletion of resource interests and plant and equipment assets are dependent
upon estimates of useful lives and reserves estimates, both of which are
determined with the exercise of judgment. The assessment of any impairment of
resource interests and plant and equipment is dependent upon estimates of fair
value that take into account factors such as reserves, economic and market
conditions and the useful lives of assets. Asset retirement obligations are
recognized in the period in which they arise and are stated at the fair value of
estimated future costs. These estimates require extensive judgment about the
nature, cost and timing of the work to be completed, and may change with future
changes to costs, environmental laws and regulations and remediation
practices.





(b)
            Cash and Cash
      Equivalents





Cash and
cash equivalents consist of cash and liquid investments which are readily
convertible into cash with maturities of three months or less when
purchased.





(c)
            Short-term
      investments





Short-term
investments, which consist primarily of investments in Bankers Acceptances and
Guaranteed Investment Contracts (“GIC’s”) are investments with maturities of
more than three months and less than one year when purchased.


CANADIAN
ZINC CORPORATION
 (a
development stage company)
 Notes to
the Financial Statements
 December
31, 2007
 (Tabular
amounts are in thousands of Canadian dollars, except for shares, price per share
and per share amounts)


2.           Significant
Accounting Policies (continued)




(d)
            Marketable
      Securities





Marketable
securities are valued at the lesser of cost and quoted market
value.  As at December 31, 2007 and 2006, marketable securities
consisted of equity securities listed on the Canadian Trading and Quotation
System Inc. (“CNQ”).





(e)
            Plant and
      Equipment





Plant and
equipment is recorded at cost, net of accumulated
amortization.  Amortization is provided on a declining-balance basis
at the following annual rates:





Mining
      equipment and pilot plant
            30%Office
      furniture and equipment
            20%Computer
      equipment
            30%





Amortization
is provided at half the annual rate in the year of acquisition.





Leasehold
improvements are recorded at cost, net of accumulated amortization. Amortization
on leasehold improvements is provided on a straight-line basis over the life of
the lease.





(f)
            Resource
      Interests





The
Company follows the policy of capitalizing all acquisition (including plant and
equipment acquired with the property), exploration and development costs
relating to the resource interests. The amounts shown for resource interests
represent costs incurred to date, less recoveries, and do not necessarily
reflect present or future values. These costs will be amortized against revenue
from future production or written off if the interest is abandoned or
sold.





Depletion
of costs capitalized on projects put into commercial production will be recorded
using the unit-of-production method based upon estimated proven and probable
reserves.





The
carrying values of resource interests, on a property-by-property basis, are
reviewed by management at least annually to determine if they have become
impaired. If impairment is determined to exist, the resource interest will be
written down to its net recoverable value.





Ownership
in resource interests involves certain inherent risks, including geological,
metal prices, operating costs, and permitting risks.  Many of these
risks are outside the Company’s control.





The
ultimate recoverability of the amounts capitalized for the resource interests is
dependent upon the delineation of economically recoverable ore reserves,
obtaining the necessary financing to complete their development, obtaining the
necessary permits to operate a mine, and realizing profitable production or
proceeds from the disposition thereof. Management estimates of recoverability of
the Company’s investment in Prairie Creek have been based on current
conditions.  However, it is reasonably possible that changes could
occur which could adversely affect management’s estimates and may result in
future write downs of capitalized property carrying values.


CANADIAN
ZINC CORPORATION
 (a
development stage company)
 Notes to
the Financial Statements
 December
31, 2007
 (Tabular
amounts are in thousands of Canadian dollars, except for shares, price per share
and per share amounts)


2.           Significant
Accounting Policies (continued)




(g)
            Property Option
      Agreements





Property
Option payments are recorded as resource property costs or recoveries when the
payments are made or received, respectively.





(h)
            Asset Retirement
      Obligations





Future
obligations to retire an asset, including dismantling, remediation and ongoing
treatment and monitoring of the site, are recognized and recorded as a liability
at fair value as at the time in which they are incurred or the event occurs
giving rise to such an obligation. The liability is increased (accreted) over
time through periodic charges to earnings. The corresponding asset retirement
cost is capitalized as part of the asset’s carrying value, and is amortized over
the asset’s estimated useful life.  The amount of the liability will
be subject to re-measurement at each reporting period.





The
Company, where possible, has estimated asset retirement obligations based on
current best practice.  These estimates, made by Management, are
subject to change as a result of changes in regulations, the extent of
environmental remediation required, the means of reclamation, or cost estimates.
Changes in estimates are accounted for prospectively from the period the
estimate is revised.





(i)
            Asset
      Impairment





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
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.





(j)
            Earnings (Loss) Per
      Common Share





Basic
earnings (loss) per share calculations are based on the net income (loss)
attributable to common shareholders for the period divided by the weighted
average number of common shares issued and outstanding during the
year.





Diluted
earnings (loss) per share is calculated based on the weighted average number of
common shares outstanding during the year, plus the effects of dilutive common
share equivalents. This method requires that the dilutive effect of outstanding
options and warrants issued should be calculated using the treasury stock
method. This method assumes that all common share equivalents have been
exercised at the beginning of the period (or at the time of issuance, if later),
and that the funds obtained thereby were used to purchase common shares of the
Company at the average trading price of common shares during the
period.





As the
Company incurred net losses in fiscal 2007, 2006 and 2005, the stock options and
share purchase warrants as disclosed in Note 10 were not included in the
computation of loss per share as such inclusion would be
anti-dilutive.











CANADIAN
ZINC CORPORATION
 (a
development stage company)
 Notes to
the Financial Statements
 December
31, 2007
 (Tabular
amounts are in thousands of Canadian dollars, except for shares, price per share
and per share amounts)


2.           Significant
Accounting Policies (continued)




(k)
            Income
      Taxes





The
Company follows the asset and liability method of accounting for income
taxes.  Under this method, current income taxes are recognized for the
estimated income taxes payable for the period. Future income tax assets and
liabilities are recognized in the period for temporary differences between the
tax and accounting bases of assets and liabilities as well as for the potential
benefit of income tax losses and other deductions carried forward to future
years.





Future
income tax assets and liabilities are measured using substantively enacted tax
rates and laws expected to apply in the years in which temporary differences are
expected to be recovered or settled. The effect of a change in tax rates on
future income tax assets and liabilities is recognized in operations in the
period that includes the substantive enactment date. The value of future income
tax assets is reviewed annually and adjusted, if necessary, by use of a
valuation allowance to reflect the estimated realizable amount.





(l)
            Stock-based
      Compensation





The
Company follows the fair value method of accounting for the stock options awards
granted to employees and directors, as recommended by the Canadian Institute of
Chartered Accountants (“CICA”) Handbook Section 3870, “Stock-based Compensation
and Other Stock-based Payments”.  The fair value of stock options is
determined by the widely used Black-Scholes Option Pricing Model with
assumptions for risk-free interest rates, dividend yields, volatility of the
expected market price of the Company’s common shares and an expected life of the
options. The fair value of direct awards of stock is determined by the quoted
market price of the Company’s stock.  Stock based compensation is
amortized to earnings over the vesting period of the related
option.





Option-pricing
models require the use of highly subjective estimates and assumptions including
the expected stock price volatility.  Changes in the underlying
assumptions can materially affect the fair value estimates and, therefore,
existing models do not necessarily provide reliable measurement of the fair
value of the Company’s stock options.





(m)
            Flow-through
      shares





Canadian
tax legislation permits a company to issue flow-through shares whereby the
deduction for income tax purposes for qualified resource expenditures can be
renounced and claimed by the investors.





The
Company follows the guidance in CICA Emerging Issues Committee Abstract 146,
“Flow-Through Shares” (“EIC 146”) in respect of flow-through
shares.  Under EIC 146, a future income tax liability must be
recognized, and shareholders’ equity reduced, on the date that the Company
renounces the tax credits associated with flow-through expenditures, provided
that there is reasonable assurance that the expenditures will be
made.





(n)
            Revenue
      Recognition





Interest
income on cash and cash equivalents and short-term investments is recognized as
it is earned.





CANADIAN
ZINC CORPORATION
 (a
development stage company)
 Notes to
the Financial Statements
 December
31, 2007
 (Tabular
amounts are in thousands of Canadian dollars, except for shares, price per share
and per share amounts)


3.           Accounting
Changes





On
January 1, 2007, the Company adopted the recommendations included in the
following Sections of the CICA Handbook: Section 1530, “Comprehensive Income,”
Section 3251, “Equity,” Section 3855, “Financial Instruments – Recognition and
Measurement,” Section 3861, “Financial Instruments – Disclosure and
Presentation” and Section 3865, “Hedges.” These new accounting standards provide
the requirements for the recognition, measurement, disclosure and presentation
of financial instruments, the use of hedge accounting and also establish
standards for reporting and presenting comprehensive income. The standards were
adopted retroactively without restating prior periods. The Company also adopted,
effective January 1, 2007, Section 1506, “Accounting Changes.”





(a)
            Section 1530,
      “Comprehensive Income” and Section 3251,
  “Equity”





Section
1530, “Comprehensive Income” requires the presentation of comprehensive income
and its components in a new financial statement. Comprehensive income is the
change in the net assets of a company arising from transactions, events and
circumstances not related to shareholders. Section 3251, “Equity,” establishes
standards for the presentation of equity and changes in equity during the
reporting period.





The
Company had no other comprehensive income or loss transactions for the year
ended December 31, 2007 and no opening balance of accumulated other
comprehensive income or loss as at January 1, 2007.





(b)
            Section 3855,
      “Financial Instruments – Recognition and
    Measurement”





Section
3855 establishes standards for recognizing and measuring financial assets,
financial liabilities and non-financial derivatives. All financial instruments
are required to be measured at fair value on initial recognition, except for
certain related party transactions. Measurement in subsequent periods depends on
whether the financial instrument has been classified as loans and receivables,
held for trading, held-to-maturity, available-for-sale or other liabilities. The
classification depends on the purpose for which the financial instruments were
acquired, their characteristics and/or management’s intent. Management
determines the classification of financial assets and financial liabilities at
initial recognition and, except in very limited circumstances, the
classification is not changed subsequent to such initial
recognition.





Loans
and receivables





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 classification of the Company’s other
receivables as loans and receivables did not have any impact on the financial
statements.





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 along with gains and losses
arising from changes in fair value. The Section also permits a company to
designate any financial instrument irrevocably on initial recognition as held
for trading.





Short
term investments and cash equivalents totaling approximately $29.1 million were
classified as held for trading on January 1, 2007. The classification did not
have a material impact on the financial statements.


CANADIAN
ZINC CORPORATION
 (a
development stage company)
 Notes to
the Financial Statements
 December
31, 2007
 (Tabular
amounts are in thousands of Canadian dollars, except for shares, price per share
and per share amounts)


3.           Accounting
Changes (continued)




(b)
            Section 3855,
      “Financial Instruments – Recognition and Measurement”
      (continued)





On
January 1, 2007, the Company also designated its marketable securities (see Note
5) as held for trading in the amount of $250,000. The classification did not
have a material impact on the financial statements at that time.





Held-to-maturity





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 did not classify any financial assets as held-to-maturity on
January 1, 2007.





Available-for-sale





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 on January 1,
2007.





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 in the period when the liability is
derecognized. The classification of the Company’s accounts payable and accrued
liabilities as other liabilities had no material impact on the financial
statements.





(c)
            Section 3861,
      “Financial Instruments – Disclosure and
    Presentation”





Section
3861 establishes standards for the disclosure and presentation of financial
instruments as determined in accordance with Section 3855 above. The new
disclosure requirements are extensive and include methods and significant
assumptions used to determine fair value and disclosure by fair value source
such as quoted market prices, valuation techniques with observable inputs and
valuation techniques with certain inputs that are not observable.





(d)
            Section 3865,
      “Hedges”





Section
3865 sets out standards that are applicable for a company that chooses to
designate a hedging relationship for accounting purposes. This Section specifies
how hedge accounting is applied and what disclosures are required if it is
applied. The recommendations of this Section are optional and are only required
if applying hedge accounting. The adoption of this Section has no impact to the
Company’s financial statements as no hedge accounting has been
applied.


CANADIAN
ZINC CORPORATION
 (a
development stage company)
 Notes to
the Financial Statements
 December
31, 2007
 (Tabular
amounts are in thousands of Canadian dollars, except for shares, price per share
and per share amounts)


3.           Accounting
Changes (continued)




(e)
            Section 1506,
      “Accounting Changes”





Section
1506 establishes criteria for changing accounting policies together with the
accounting treatment and disclosure of changes in accounting policies and
estimates, and correction of errors. Under the new standard, accounting changes
should be applied retrospectively unless otherwise permitted or required by the
transitional provisions of a primary source of GAAP or where impracticable to
determine. In addition, voluntary changes in accounting policy are made only
when the change results in more relevant and reliable information. The Company
has not made any voluntary changes in accounting policies since the adoption of
the revised standard.





(f)
            New Canadian
      Accounting Standards





In
February 2008, the CICA Accounting Standards Board (“AcSB”) confirmed that the
use of International Financial Reporting Standards (“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 of the
implementation of IFRS.





The CICA
has issued several new standards which may affect the financial disclosures and
results of operations of the Company for interim and annual periods beginning
January 1, 2008. The Company will adopt the requirements commencing in the
interim period ended March 31, 2008.





Section
1535 – “Capital Disclosures”





This
Section establishes standards for disclosing information about a company’s
capital and how it is managed. Under this standard the Company will be required
to disclose the following, based on the information provided internally to the
Company’s key management personnel:





(i)
            qualitative
      information about its objectives, policies and processes for managing
      capital;


(ii)
            summary
      quantitative data about what it manages as
  capital;


(iii)
            whether
      during the period it complied with any externally imposed capital
      requirements to which the Company is subject;
  and


(iv)
            when
      the Company has not complied with such externally imposed capital
      requirements (if any), the consequences of such
      non-compliance.





The
Company does not believe that Section 1535 will have a significant impact on its
financial statements.





Section
3031 – “Inventories”





This
Section prescribes the accounting treatment for inventories and provides
guidance on the determination of costs and its subsequent recognition as an
expense, including any write-down to net realizable value. It also provides
guidance on the cost formulas that are used to assign costs to inventories. The
Company does not believe that Section 3031 will have a significant impact on its
financial statements.





CANADIAN
ZINC CORPORATION
 (a
development stage company)
 Notes to
the Financial Statements
 December
31, 2007
 (Tabular
amounts are in thousands of Canadian dollars, except for shares, price per share
and per share amounts)


3.           Accounting
Changes (continued)




Section
3862 – “Financial Instruments – Disclosures”





The new
disclosure standard requires companies to provide disclosure of quantitative and
qualitative information in their financial statements that enable users to
evaluate (a) the significance of financial instruments for the company’s
financial position and performance; and (b) the nature and extent of risks
arising from financial instruments to which the entity is exposed during the
period and at the balance sheet date, and management’s objectives, policies and
procedures for managing such risks. Companies will be required to disclose the
measurement basis or bases used, and the criteria used to determine
classification for different types of instruments.





The
Section requires specific disclosures to be made, including the criteria
for:


(i)
            designating
      financial assets and liabilities as held for
  trading;


(ii)
            designating
      financial assets as available-for-sale;
and


(iii)
            determining
      when impairment is recorded against the related financial asset or when an
      allowance account is used.





The
Company does not believe that Section 3862 will have a significant impact on its
financial statements.





4.           Short-term
Investments





Short-term
investments, which consist primarily of investments in Bankers Acceptances and
Guaranteed Investment Certificates, are investments with maturities of three
months or more when purchased.  As at December 31, 2007, short-term
investments were valued at $21.5 million, earning income at rates ranging from
3.4% to 5.75% (December 31, 2006 - $15.5 million, earning income at rates
ranging from 3.25% to 6.8%). The Company has designated its short-term
investments as held for trading assets. Interest income and changes in market
value on short-term investments are recorded in interest income in the Statement
of Operations; accrued interest earned but not yet received is included in other
receivables on the balance sheet. The market value of these assets is based upon
quoted market values and the recorded amounts at December 31, 2007 approximate
fair value for these investments.





5.           Marketable
Securities





On
December 21, 2006, the Company participated in a private placement and
subscribed to 5,000,000 Units of Ste. Genevieve Resources Ltd. at a price of
$0.05 per Unit for a total cost of $250,000.  Each Unit consists of
one common share and one common share purchase warrant entitling the holder to
acquire an additional common share at a price exercisable at $0.06 on or before
December 29, 2008.  The market value as at December 31, 2007, based
upon quoted market values, was $100,000 (December 31, 2006 - $300,000). The loss
in market value has been recorded in the Statement of Operations in accordance
with the Company’s designation of the marketable securities as held for trading
assets.





CANADIAN
ZINC CORPORATION
 (a
development stage company)
 Notes to
the Financial Statements
 December
31, 2007
 (Tabular
amounts are in thousands of Canadian dollars, except for shares, price per share
and per share amounts)


6.
            Resource
      Interests




The
Company’s resource interests comprise the Prairie Creek Mine
Property:





December
      31,
              2007
            
            
            December
      31, 2006Acquisition
      costs:-
      mining lands
            
            $
            3,158
            
            
            $
            3,158-
      plant and mill
            
            
            500
            
            
            
            5003,658
            
            
            
            3,658Reclamation
      security deposits
            
            
            425
            
            
            
            395Increase
      from asset retirement obligations
            
            
            635
            
            
            
            746Exploration
      and development costs (see table below)
            
            
            33,079
            
            
            
            21,901$
            37,797
            
            
            $
            26,700





Exploration
and development costs incurred in 2007 and 2006 are detailed below:





2007
            
            
            2006Exploration
      and development costsAssaying
      and metallurgical studies
            
            $
            307
            
            
            $
            275Camp
      operation and project development
            
            
            2,804
            
            
            
            1,964Drilling
      and underground exploration
            
            
            6,076
            
            
            
            4,226Insurance,
      lease rental
            
            
            102
            
            
            
            73Permitting
      and environmental
            
            
            694
            
            
            
            579Transportation
      and travel
            
            
            847
            
            
            
            75410,830
            
            
            
            7,871Amortization
      – asset retirement obligations
            
            
            128
            
            
            
            129Amortization
      – mining plant and equipment
            
            
            143
            
            
            
            51Asset
      retirement accretion
            
            
            77
            
            
            
            78348
            
            
            
            258Total exploration and
      development costs for the year
            
            
            11,178
            
            
            
            8,129Exploration and development
      costs, beginning of year
            
            
            21,901
            
            
            
            13,772Exploration and development
      costs, end of year
            
            $
            33,079
            
            
            $
            21,901


CANADIAN
ZINC CORPORATION
 (a
development stage company)
 Notes to
the Financial Statements
 December
31, 2007
 (Tabular
amounts are in thousands of Canadian dollars, except for shares, price per share
and per share amounts)


6.           Resource
Interests (continued)




Prairie Creek
Mine





The
Company holds a 100% interest in the Prairie Creek Mine property and plant and
equipment located in the Northwest Territories, Canada.





In 1996,
the Company concluded a Co-operation Agreement (the “Agreement”) with the
Nahanni Butte Dene Band (“Nahanni”), part of the Dehcho First
Nations.  In return for co-operation and assistance undertakings given
by Nahanni towards the development of the Prairie Creek Project, the Company
granted the following net profit interest and purchase option to
Nahanni:





(i)
            A
      5% annual net profits, before taxation, interest in the Prairie Creek
      Project, payable following the generation of profits after taxation
      equivalent to the aggregate cost of bringing the Prairie Creek Project
      into production and establishing the access road;
  and





(ii)
            An
      option to purchase either a 10% or a 15% interest in the Prairie Creek
      Project at any time prior to the expiry of three months following
      permitting for the Project, for the cash payment of either $6 million or
      $9 million, subject to price adjustment for exploration expenditure and
      inflation, respectively.





In
October 2003 Nahanni informed the Company that Nahanni considers the Agreement
terminated.  Such termination is not in accordance with the provisions
of the Agreement.  The Company is currently re-negotiating the
Agreement with Nahanni.





During
2003 the Company renewed two surface leases granted by the Federal Government
relating to the operation and care and maintenance of the Prairie Creek Mine
Property for a period of ten years terminating September 30,
2012.  The Company paid $100,000 upon execution of the lease and is
obligated to pay $30,000 per year for five years to a maximum of $250,000 (the
final amount of which was paid in the quarter ended March 31, 2007), as a
security deposit for the performance of abandonment and reclamation obligations
under the leases.





On
September 10, 2003, the Company was granted a Type A Land Use Permit and a Type
B Water License (reissued February 2006) by the Mackenzie Valley Land and Water
Board for a period of five years commencing September 10, 2003 for underground
development and exploration and for metallurgical testing.





On June
12, 2006, under the terms of the Land Use Permit (MV2001C0023 Part 3C, Section
38) and Water License (MV2001L2-0003, Part B, Section 2) the Company contributed
$30,000 and $70,000, respectively, as security deposits for reclamation
obligations.





On May
11, 2006 the Mackenzie Valley Land and Water Board issued a Land Use Permit for
the Phase 3 Exploration Drilling Program.  The Land Use Permit
(MV2004C0030) is valid for five years and allows surface exploration and diamond
drilling at up to 60 sites.  Under the terms of the Permit (Part C,
Section 56), a security deposit for $75,000 was made on June 12,
2006.





On April
10, 2007, the Mackenzie Valley Land and Water Board issued a Land Use Permit for
use of the road which connects the Prairie Creek Mine with the Liard Highway.
The Land Use Permit (MV2003F0028) is valid for five years to April 10,
2012.  Under the terms of the Permit (Condition #38; 26 (1)(I)) a
security deposit in the amount of $100,000 is payable prior to the first use of
the road.


CANADIAN
ZINC CORPORATION
 (a
development stage company)
 Notes to
the Financial Statements
 December
31, 2007
 (Tabular
amounts are in thousands of Canadian dollars, except for shares, price per share
and per share amounts)


6.           Resource
Interests (continued)




On June
7, 2007, the Company applied to the Mackenzie Valley Land and Water Board for a
Class B water license (MV2007L8-0026) needed to rehabilitate a portion of the
road in the proximity of the mine site and sought authorization from the
Department of Fisheries and Oceans to carry out the work. On June 29, 2007, the
Company applied to Indian and Northern Affairs Canada for a quarrying permit to
obtain rock to be used in the road rehabilitation. The issuance of these permits
was delayed as they were referred to consultation between the Crown and the
Nahanni Band. The Company received the quarry permit on February 29, 2008 and
the water license on March 20, 2008.





During
the year ended December 31, 2007, the Company engaged in an active exploration
program at the Prairie Creek Mine Property in order to gain further knowledge
about the property and to facilitate the completion of a Technical Report to NI
43-101 standards.





7.
            Plant
      and Equipment





December
      31, 2007Cost
            
            
            Accumulated
              Amortization
            
            
            Net
      Book
              ValueMining
      equipment
            
            $
            693
            
            
            $
            349
            
            
            $
            344Pilot
      plant
            
            
            108
            
            
            
            82
            
            
            
            26Furniture,
      fixtures & equipment
            
            
            107
            
            
            
            81
            
            
            
            26Leasehold
      improvements
            
            
            60
            
            
            
            8
            
            
            
            52$
            968
            
            
            $
            520
            
            
            $
            448





December
      31, 2006Cost
            
            
            Accumulated
              Amortization
            
            
            Net
      Book
              ValueMining
      equipment
            
            $
            619
            
            
            $
            218
            
            
            $
            401Pilot
      plant
            
            
            108
            
            
            
            71
            
            
            
            37Furniture,
      fixtures & equipment
            
            
            92
            
            
            
            75
            
            
            
            17$
            819
            
            
            $
            364
            
            
            $
            455





8.
            Asset
      Retirement Obligation





Although
the ultimate amount of the asset retirement obligation is uncertain, the fair
value of these obligations is based on information currently available,
including the Company’s obligations to undertake site reclamation and
remediation in connection with its Prairie Creek Mine Site infrastructure and
development and applicable regulations.





The total
undiscounted amount of the estimated cash flows required to settle the Company’s
reclamation and remediation obligations, as at December 31, 2007, is estimated
to be $2.5 million


(2006 -
$1.9 million).  While it is anticipated that some expenditures will be
incurred during the life of the operation to which they relate (should mining
activity commence), a significant component of this expenditure will only be
incurred at the end of the mine life.





The fair
value of the estimated cash flows has been estimated at $1.2 million as at
December 31, 2007 (2006 - $1.4 million).  In determining the fair
value of the asset retirement obligation, the Company has assumed a long-term
inflation rate of 2.5%, a credit-adjusted risk-free discount rate of 6.5% and a
weighted average useful life of production facilities and equipment of ten
years.  Elements of uncertainty


CANADIAN
ZINC CORPORATION
 (a
development stage company)
 Notes to
the Financial Statements
 December
31, 2007
 (Tabular
amounts are in thousands of Canadian dollars, except for shares, price per share
and per share amounts)


8.           Asset
Retirement Obligation (continued)




in
estimating this amount include changes in the projected mine life, reclamation
expenditures incurred during ongoing operations and reclamation and remediation
requirements and alternatives.





A summary
of the Company’s provision for asset retirement obligation and reclamation is
presented below:





2007
            
            
            2006Balance
      – beginning of year
            
            $
            1,380
            
            
            $
            1,302Reclamation
      expenditures
            
            
            (246
            )
            
            
            -Accretion
            
            
            77
            
            
            
            78Change
      in estimates
            
            
            17
            
            
            
            -Balance
      – end of year
            
            $
            1,228
            
            
            $
            1,380





During
      the year ended December 31, 2007, the Company incurred expenditures of
      $246,000 on reclamation activities at the Prairie Creek Mine site (2006 -
      $Nil).





9.
            Share
      Capital





Authorized:
Unlimited common shares with no par value (2006 – unlimited).





Issued
and outstanding:





(a)
            During
      the year ended December 31, 2007:





i.
              450,000
      stock options were exercised at $0.23 per common share for proceeds of
      $103,500.
  ii.
                100,000
      stock options were exercised at $0.89 per common share for proceeds of
      $89,000.


iii.
            308,750
      broker warrants were exercised at $0.72 to $0.93 per common share for
      proceeds of $225,500.





iv.
            On
      July 23, 2007 the Company completed a private placement of 11,765,000
      Units at a price of $0.85 per Unit for total proceeds of
      $10,000,250.  Each Unit consists of one common share and
      one-half of one common share purchase warrant. Each whole Warrant entitles
      the holder to purchase one common share at a price of $1.20 per Warrant
      Share, until July 23, 2009.  A value of $1,365,667 was assigned
      to the warrants issued and added to contributed surplus. The fair
      value of the warrants was calculated at $0.23 each (see Note 10(b)). Share
      issue costs relating to the transaction amounted to
    $233,918.





v.
            Flow-through
      share expenditures in the amount of $8 million were renounced to
      shareholders during the year ended December 31, 2006 (see Note 9(b)(ii)
      below for a description of the related shares issued in 2006). As
      described in Note 12, the income tax effect of the renouncement, in the
      amount of $2.5 million, was recorded in the 2007 fiscal
      period.





(b)
            During
      the year ended December 31, 2006:





i.
            In
      January 2006, the Company completed an underwritten private placement for
      total proceeds of $9.6 million, through the issuance of 13,333,333 units,
      priced at $0.72 per unit. Each unit consisted of one common share and
      one-half share purchase warrant (6,666,666
  warrants)


CANADIAN
ZINC CORPORATION
 (a
development stage company)
 Notes to
the Financial Statements
 December
31, 2007
 (Tabular
amounts are in thousands of Canadian dollars, except for shares, price per share
and per share amounts)


9.
            Share
      Capital (continued)




exercisable to purchase one common
share at a price of $1.00 per share for a period of two years.  A
value of $2,263,858 was assigned to the warrants issued and added to contributed
surplus.  The fair value of the warrants was $0.34
each.  Share issue costs related to the transaction amounted to
$768,141.





Commission
related to the private placement was 7% in cash and underwriter’s warrants
(1,333,333 warrants) exercisable for units in the amount of 10% of the number of
units sold at $0.72 per unit for a period of two years.  A value of
$773,333 was assigned to the warrants issued and added to contributed
surplus.




On June
14, 2006, at the Company’s Annual Meeting, shareholders approved the issuance to
Northern Securities Inc. of underwriters options on 1,333,333 units, exercisable
for a period of two years from January 30, 2006 at $0.72 per unit, with each
unit consisting of one common share and one half share purchase warrant (666,666
warrants) exercisable at $1.00 per share for a period of two years, pursuant to
the underwritten financing of the Company completed in January
2006.  A value of $319,999 was assigned to the broker warrants issued
and added to contributed surplus.





ii.
            In
      November 2006, the Company completed an underwritten private placement for
      total proceeds of $13 million consisting of 5,555,555 units at $0.90 per
      unit and 6,956,522 shares at $1.15 per Flow-Through Share. Each unit
      consisted of one common share and one-half share purchase warrant
      (2,777,778 warrants). Each full warrant is exercisable to purchase one
      common share at a price of $1.15 per share until November 23, 2008. A
      value of $845,077 was assigned to the warrants issued and added to
      contributed surplus. Share issue costs related to the transaction amounted
      to $1,029,783.





A
commission of 7% in cash was paid and broker warrants equal to 7% of the
5,555,555 units sold in the offering were issued (388,889 warrants). Each broker
warrant is exercisable at $0.93 into one broker unit consisting of one common
share and one-half warrant (194,444 warrants), with each whole warrant
exercisable at $1.15 until November 23, 2008. Values of $166,549 and $73,362
were assigned to the broker warrants and half warrants
respectively.





In
addition, a commission of broker warrants of 7% of the Flow-Through Shares were
issued (486,957 warrants). Each broker flow through warrant is exercisable into
one common share at $1.15 until November 23, 2008. A value of $183,723 was
assigned to the broker warrants issued.





iii.
            1,307,590
      broker warrants were exercised between $0.55 to $0.85 per common share
      for  total proceeds of
$821,101.




iv.
              690,000
      stock options were exercised at $0.60 per common share for proceeds of
      $414,000.




(c)
            During
      the year ended December 31, 2005:





i.
            In
      October 2005, the Company completed a private placement for total proceeds
      of $5 million consisting of 9,090,909 flow-through shares at $0.55 per
      share. Share issue costs related to the transaction amounted to $444,685.
      Broker warrants were issued to purchase 727,273 shares at $0.55 per share
      for a period of two years expiring October 27,
  2007.





ii.
            In
      December 2005, the Company completed a private placement for total
      proceeds of $675,000 consisting of 872,548 flow-through shares at $0.75
      and $0.85 per share. Share issue costs related to the transaction amounted
      to $57,235.


CANADIAN
ZINC CORPORATION
 (a
development stage company)
 Notes to
the Financial Statements
 December
31, 2007
 (Tabular
amounts are in thousands of Canadian dollars, except for shares, price per share
and per share amounts)


9.
            Share
      Capital (continued)




On
December 30, 2005, share purchase warrants were issued to purchase 46,666 shares
at $0.75 per share for one year and 14,411 share purchase warrants were issued
to purchase shares at $0.85 per share for one year.


iii.
              388,813
      warrants were exercised at $0.60 per common share for proceeds of
      $233,288


10.           Stock
Options and Warrants





(a)           Stock
Options





The
Company has an incentive stock option plan in place under which it is authorized
to grant stock options to directors, executive officers, employees and
consultants. At December 31, 2007, the Company was allowed to grant up to 10% of
the issued share capital of the Company as stock options. Stock options are
exercisable once they have vested under the terms of the grant.  A
summary of the Company’s options at December 31, 2007, 2006 and 2005 and the
changes for the years then ended is presented below:





2007
            
            2006
            
            2005Number
      of Options
            
            Weighted
      Average
              Exercise
      Price
            
            Number
      of Options
            
            Weighted
      Average
              Exercise
      Price
            
            Number
      of Options
            
            Weighted
      Average
              Exercise
      PriceOutstanding,
      beginning of year
            4,780,000
            $
            0.66
            
            4,000,000
            $
            0.56
            
            450,000
            $
            0.23Granted
            695,000
            
            0.94
            
            1,500,000
            
            0.90
            
            3,650,000
            
            0.60Exercised
            (550,000)
            
            0.35
            
            (690,000)
            
            0.60
            
            -
            
            -Cancelled
            (60,000)
            
            0.89
            
            (30,000)
            
            0.89
            
            (100,000)
            
            0.60Outstanding,
      end of year
            4,865,000
            $
            0.73
            
            4,780,000
            $
            0.66
            
            4,000,000
            $
            0.56





As at
December 31, 2007, the Company has outstanding stock options to purchase an
aggregate 4,865,000 common shares as follows:





Options
      Outstanding
            
            Options
      ExercisableNumber
            
            Weighted
      Average Exercise Price
            Expiry
      Date
            
            Number
            
            Weighted
      Average Exercise Price2,860,000
            $
            0.60
            January
      14, 2010
            
            2,860,000
            $
            0.60110,000
            
            0.89
            June
      27, 2011
            
            110,000
            
            0.891,200,000
            
            0.90
            December
      13, 2011
            
            1,200,000
            
            0.90695,000
            
            0.94
            October
      15, 2012
            
            -
            
            -4,865,000
            $
            0.73
            
            
            4,170,000
            $
            0.69





CANADIAN
ZINC CORPORATION
 (a
development stage company)
 Notes to
the Financial Statements
 December
31, 2007
 (Tabular
amounts are in thousands of Canadian dollars, except for shares, price per share
and per share amounts)


10.           Stock
Options and Warrants (continued)




(a)           Stock Options
(continued)





For the
year ended December 31, 2007, using the fair value method for stock-based
compensation, the Company recorded a charge of $267,000 (2006 – $1,023,000; 2005
– $1,314,000) for stock options granted to Directors, Officers, Employees and
Contractors. This amount was determined using the Black-Scholes option pricing
model, based on the following terms and assumptions:





2007
            2006
            2005Dividend
      Yield
            0%
            0%
            0%Risk
      free interest rate
            4.07%
            4.02%
            3.5%Expected
      life
            5
      years
            5  years
            5
      yearsExpected
      volatility
            89%
            101%
            91%





(b)           Warrants





A summary
of the Company’s warrants issued and outstanding as at December 31, 2007, 2006
and 2005 and the changes for the years then ended is presented
below:





2007
            
            2006
            
            2005Number
      of Warrants
            
            Weighted
      Average
              Exercise
      Price
            
            Number
      of Warrants
            
            Weighted
      Average
              Exercise
      Price
            
            Number
      of Warrants
            
            Weighted
      Average
              Exercise
      PriceOutstanding,
      beginning of year
            11,995,493
            $
            1.02
            
            788,350
            $
            0.57
            
            7,284,065
            $
            0.89Granted
            5,882,500
            
            1.20
            
            12,514,733
            
            1.01
            
            788,350
            
            0.57Exercised
            (308,750)
            
            0.73
            
            (1,307,590)
            
            0.63
            
            (388,813)
            
            0.60Cancelled
            -
            
            -
            
            -
            
            -
            
            (6,895,252)
            
            0.91Outstanding,
              end
      of year
            17,569,243
            $
            1.09
            
            11,995,493
            $
            1.02
            
            788,350
            $
            0.57





As at
December 31, 2007, the Company has outstanding warrants to purchase an aggregate
17,569,243 common shares as follows





Balance
      of Warrants Outstanding at December 31, 2007
            Exercise
      Price per Warrant
            Expiry
      Date6,666,666
            $1.00
            January
      30, 2008520,899
            $0.72
            January
      30, 2008666,666
            $1.00
            January
      30, 20082,777,778
            $1.15
            November
      23, 2008194,444
            $1.15
            November
      23, 2008486,957
            $1.15
            November
      23, 2008373,333
            $0.93
            November
      23, 20085,882,500
            $1.20
            July
      23, 200917,569,243


10.           Stock
Options and Warrants (continued)




(b)           Warrants
(continued)





The fair
value of the warrants issued during the years ended December 31, 2007, 2006 and
2005 was determined using the Black-Scholes option pricing model based upon the
following terms and assumptions:





2007
            2006
            2005Dividend
      Yield
            0%
            0%
            0%Risk
      free interest rate
            3.96%
            3.26%
            3.5%Expected
      life
            2
      years
            2  years
            1 –
      2 yearsExpected
      volatility
            67%
            71%
            68
      – 91%





The fair
value of the 2007 warrants was allocated by bifurcating the warrant value and
the closing share price from the amount per unit in the private placement
offering (see Note 9(a)(iv)).





(c)           Contributed
Surplus





A summary of the contributed surplus
account is presented below:





Options
            
            
            Warrants
            
            
            Unexercised
      Options and Warrants
            
            
            TotalBalance,
      December 31, 2004
            
            $
            36
            
            
            $
            -
            
            
            $
            -
            
            
            $
            36Stock
      options issued
            
            
            1,314
            
            
            
            -
            
            
            
            -
            
            
            
            1,314Warrants
      issued
            
            
            -
            
            
            
            129
            
            
            
            -
            
            
            
            129Balance,
      December 31, 2005
            
            $
            1,350
            
            
            $
            129
            
            
            $
            -
            
            
            $
            1,479Stock
      options issued
            
            
            1,023
            
            
            
            -
            
            
            
            -
            
            
            
            1,023Stock
      options exercised
            
            
            (255
            )
            
            
            -
            
            
            
            -
            
            
            
            (255
            )Stock
      options cancelled
            
            
            (114
            )
            
            
            -
            
            
            
            114
            
            
            
            -Warrants
      issued
            
            
            -
            
            
            
            4,626
            
            
            
            -
            
            
            
            4,626Warrants
      exercised
            
            
            -
            
            
            
            (394
            )
            
            
            -
            
            
            
            (394
            )Balance,
      December 31, 2006
            
            $
            2,004
            
            
            $
            4,361
            
            
            $
            114
            
            
            $
            6,479Stock
      options issued
            
            
            267
            
            
            
            -
            
            
            
            -
            
            
            
            267Stock
      options exercised
            
            
            (91
            )
            
            
            -
            
            
            
            -
            
            
            
            (91
            )Stock
      options cancelled
            
            
            (38
            )
            
            
            -
            
            
            
            38
            
            
            
            -Warrants
      issued
            
            
            -
            
            
            
            1,366
            
            
            
            -
            
            
            
            1,366Warrants
      exercised
            
            
            -
            
            
            
            (177
            )
            
            
            -
            
            
            
            (177
            )Balance,
      December 31, 2007
            
            $
            2,142
            
            
            $
            5,550
            
            
            $
            152
            
            
            $
            7,844





CANADIAN
ZINC CORPORATION
 (a
development stage company)
 Notes to
the Financial Statements
 December
31, 2007
 (Tabular
amounts are in thousands of Canadian dollars, except for shares, price per share
and per share amounts)


11.           Related
Party Transactions




The
Company incurred the following expenses to directors and corporations controlled
by directors of the Company:





2007
            
            
            2006
            
            
            2005Executive
      and director compensation
            
            $
            485
            
            
            $
            568
            
            
            $
            343Rent
            
            
            13
            
            
            
            12
            
            
            
            13$
            498
            
            
            $
            580
            
            
            $
            356





All
transactions with related parties were within the normal course of business.
These transactions have been recorded at amounts agreed to by the transacting
parties. At December 31, 2007, $114,100 relating to amounts owing to related
parties was included in accounts payable and accrued liabilities (2006 -
$21,000).





12.
            Income
      Taxes





The
Company’s income tax expense for each of the years 2007, 2006 and 2005 is
$Nil.  A reconciliation of the statutory tax rate to the effective
rate for the Company is as follows:





2007
            
            
            2006
            
            
            2005Statutory
      tax rate
            
            
            34.12
            %
            
            
            35.01
            %
            
            
            34.87
            %Recovery
      of income taxes computed at statutory rates
            
            $
            314
            
            
            $
            520
            
            
            $
            686Permanent
      differences
            
            
            (93
            )
            
            
            (401
            )
            
            
            (519
            )Expired
      losses
            
            
            147
            
            
            
            (739
            )
            
            
            (68
            )Other
            
            
            (242
            )
            
            
            637
            
            
            
            (10
            )Income
      tax rate changes
            
            
            177
            
            
            
            (155
            )
            
            
            (2
            )Change
      in valuation allowance
            
            
            (303
            )
            
            
            138
            
            
            
            (87
            )$
            -
            
            
            $
            -
            
            
            $
            -





CANADIAN
ZINC CORPORATION
 (a
development stage company)
 Notes to
the Financial Statements
 December
31, 2007
 (Tabular
amounts are in thousands of Canadian dollars, except for shares, price per share
and per share amounts)


12.           Income
Taxes (continued)




The
approximate tax effect of each type of temporary difference that gives rise to
the Company’s future income tax assets and liabilities are as
follows:





2007
            
            
            2006
            
            
            2005Future
      income tax assetsNon-capital
      loss carry forwards
            
            $
            2,136
            
            
            $
            1,672
            
            
            $
            1,537Plant
      and equipment
            
            
            183
            
            
            
            287
            
            
            
            287Other
            
            
            758
            
            
            
            1,050
            
            
            
            7613,077
            
            
            
            3,009
            
            
            
            2,585Valuation
      allowance
            
            
            (1,108
            )
            
            
            (805
            )
            
            
            (811
            )Net
      future tax assets
            
            
            1,969
            
            
            
            2,204
            
            
            
            1,774Future
      income tax liability
            
            
            (5,590
            )
            
            
            (3,338
            )
            
            
            (1,774
            )Future
      income tax liability (net)
            
            $
            (3,621
            )
            
            $
            (1,134
            )
            
            $
            -





At
December 31, 2007, the Company has approximately $7.9 million (2006 - $5.4
million) of non-capital losses for tax purposes available at various dates until
2027, to be carried forward and applied against future income tax for tax
purposes and approximately $16.7 million (2006 - $15.6 million) of unused
cumulative Canadian exploration and development expenses for tax purposes
available to be carried forward indefinitely and applied against future income
for tax purposes.  The non-capital losses expire as
follows:





Year2008
            $
            6192009
            
            5972010
            
            1,0332014
            
            9262015
            
            9362026
            
            1,0462027
            
            2,755$
            7,912





Future
income tax benefits which may arise as a result of these losses have been
recognized in these financial statements to the extent necessary to reduce
future income tax liabilities that have arisen on issuance of flow through
shares.





During
the year ended December 31, 2005, the Company renounced, to subscribers of
9,963,457 flow-through shares Canadian Exploration Expenditures (“CEE”) of $5.7
million.  The Company applied the accounting treatment recommended by
EIC 146 requiring the transaction to be reported in the 2006 fiscal
period.  The net effect of the recommendations of EIC 146 resulted in
the recognition of the estimated tax benefits renounced by the Company to the
investors in respect to flow-through shares.  As a result, a future
income tax liability of $1.1 million and a corresponding reduction in
shareholders’ equity was recorded in fiscal 2006.


CANADIAN
ZINC CORPORATION
 (a
development stage company)
 Notes to
the Financial Statements
 December
31, 2007
 (Tabular
amounts are in thousands of Canadian dollars, except for shares, price per share
and per share amounts)


12.           Income
Taxes (continued)




During
the year ended December 31, 2006, the Company renounced, to subscribers of
6,956,522 flow-through shares CEE of $8 million.  The Company applied
the accounting treatment in EIC 146 requiring the transaction to be reported in
the 2007 fiscal period. As a result, a future income tax liability of $2.5
million and a corresponding reduction in shareholders’ equity was recorded in
fiscal 2007.





Flow-through
shares entitle a company that incurs certain resource expenditures in Canada to
renounce such exploration expenditure to the subscribers allowing the
expenditures to be deducted for income tax purposes by the investors who
purchased the shares.  A future income tax liability arises from the
renunciation of mineral exploration costs to investors of flow-through
shares.





Funds
raised through the issuance of flow-through shares are required to be expended
on qualified Canadian mineral exploration expenditures, as defined pursuant to
Canadian income tax legislation.  The flow-through gross proceeds less
the qualified expenditures made to date represent the funds received from
flow-through shares issuances which have not been spent and which are held by
the Company.  As at December 31, 2007, all of the flow-through
proceeds have been expended.





13.           Financial
Instruments





(a)
            Fair
      Values





The
recorded amounts for other receivables and prepaid expenses, accounts payable
and accrued liabilities approximate their fair value due to their short-term
nature.





(b)
            Interest rate
      risk





The
Company does not have any debt obligations which expose it to interest rate
risk. The Company places its cash and cash equivalents and short-term
investments with high credit quality financial institutions which have invested
the funds in AAA debt instruments.  The Company is not exposed to
significant interest rate, market or currency risks arising from these financial
instruments.





(c)
            Credit
      risk





The
Company does not currently generate any revenues from sales to customers nor
does it hold derivative type instruments that would require a counterparty to
fulfil a contractual obligation. The Company has never held any asset-backed
paper instruments. Accordingly, the Company has no credit risks identified at
the current time.





(d)
            Liquidity
      risk





Liquidity
risk encompasses the risk that the Company cannot meet its financial
obligations. As at December 31, 2007, the Company had positive working capital
of $27.4 million. Accordingly, the Company is able to meet its current
obligations and has minimal liquidity risk. However, it is likely that the
Company will require additional funding in the future in order to complete the
development of the Prairie Creek Mine site and bring the mine into production.
Accordingly, there is a risk that the Company may not be able to secure adequate
funding on reasonable terms at that future date.


CANADIAN
ZINC CORPORATION
 (a
development stage company)
 Notes to
the Financial Statements
 December
31, 2007
 (Tabular
amounts are in thousands of Canadian dollars, except for shares, price per share
and per share amounts)


14.           Reconciliation
of Canadian and United States Generally Accepted Accounting
Principles




For the
purposes of U.S. GAAP the Company is considered to be an Exploration Stage
Enterprise. These financial statements have been prepared in accordance with
Canadian GAAP which differs in certain material respects from U.S. GAAP. The
material differences between Canadian and U.S. GAAP, in respect of these
financial statements, are summarized as follows:





Balance
Sheets





2007
            
            
            2006
              (Restated)Total
      assets (Canadian GAAP)
            
            $
            66,931
            
            
            $
            56,762Decrease
      in resource interest due to write-off of exploration and development costs
      (a)
            
            
            (33,079
            )
            
            
            (21,901
            )Total
      assets (U.S. GAAP)
            
            $
            33,852
            
            
            $
            34,861Total
      liabilities (Canadian GAAP)
            
            $
            6,103
            
            
            $
            2,978Decrease
      in future income tax liability due to write-off of exploration and
      development costs (a)
            
            
            (3,621
            )
            
            
            (1,134
            )Increase
      due to flow through share premium paid in excess of market value
      (c)
            
            
            -
            
            
            
            1,531Total
      liabilities (U.S. GAAP)
            
            $
            2,482
            
            
            $
            3,375Total
      Shareholders’ Equity (Canadian GAAP)
            
            $
            60,828
            
            
            $
            53,784Increase
      due to future income tax liability reduction due to write-off of
      exploration and development costs (a)
            
            
            3,621
            
            
            
            1,134Decrease
      re write-off of exploration and development costs (a)
            
            
            (33,079
            )
            
            
            (21,901
            )Decrease
      re flow through share premium paid in excess of market value
      (c)
            
            
            -
            
            
            
            (1,531
            )Total
      Shareholders’ Equity (U.S. GAAP)
            
            $
            31,370
            
            
            $
            31,486








Statements of
Operations





2007
            
            
            2006
            
            
            2005Net
      loss and comprehensive loss (Canadian GAAP)
            
            $
            (920
            )
            
            $
            (1,486
            )
            
            $
            (1,967
            )Flow
      through share premium reversal (c)
            
            
            1,531
            
            
            
            -
            
            
            
            -Exploration
      and Development costs written-off (a)
            
            
            (11,178
            )
            
            
            (8,129
            )
            
            
            (1,666
            )Net
      loss and comprehensive loss (U.S. GAAP)
            
            $
            (10,567
            )
            
            $
            (9,615
            )
            
            $
            (3,633
            )Loss
      per share
              -
      basic and diluted (U.S. GAAP)
            
            $
            (0.09
            )
            
            $
            (0.10
            )
            
            $
            (0.05
            )Weighted
      average number of common shares outstanding
              -
      basic and diluted (U.S. GAAP)
            
            
            113,429,078
            
            
            
            94,734,979
            
            
            
            71,378,444


CANADIAN
ZINC CORPORATION
 (a
development stage company)
 Notes to
the Financial Statements
 December
31, 2007
 (Tabular
amounts are in thousands of Canadian dollars, except for shares, price per share
and per share amounts)


14.
            Reconciliation
      of Canadian and United States Generally Accepted Accounting Principles
      (continued)




Statements of Cash
Flows





2007
            
            
            2006
            
            
            2005Operating
      activities (Canadian GAAP)
            
            $
            (569
            )
            
            $
            (262
            )
            
            $
            (776
            )Deferred
      exploration and development costs (a)
            
            
            (10,830
            )
            
            
            (7,871
            )
            
            
            (1,426
            )Lease
      and property abandonment deposit (a)
            
            
            (30
            )
            
            
            (205
            )
            
            
            (30
            )Operating
      activities (U.S. GAAP)
            
            $
            (11,429
            )
            
            $
            (8,338
            )
            
            $
            (2,232
            )Investing
      activities (Canadian GAAP)
            
            $
            (16,304
            )
            
            $
            (24,231
            )
            
            $
            (1,474
            )Deferred
      exploration costs (a)
            
            
            10,830
            
            
            
            7,871
            
            
            
            1,426Lease
      and property abandonment deposit (a)
            
            
            30
            
            
            
            205
            
            
            
            30Investing
      activities (U.S. GAAP)
            
            $
            (5,444
            )
            
            $
            (16,155
            )
            
            $
            (18
            )





Restatement





The
Company concluded that the reconciliation to U.S. GAAP in the financial
statements at December 31, 2006, should be restated to record a reversal of a
future income tax liability required under Canadian GAAP but not under U.S.
GAAP.  This adjustment is reflected in the 2006 Canadian to U.S. GAAP
reconciled balance sheet above.  The decision to restate the 2006
balance sheet for U.S. GAAP purposes was based upon the results of the
procedures performed as part of the December 31, 2007 year end financial
reporting process which identified that the Company has no future income tax
liabilities under U.S. GAAP (compared to Canadian GAAP) due to the effect of
writing-down resource interest expenditures for U.S. GAAP
purposes.  The Company concluded that the amendment was material to
the 2006 U.S. GAAP reconciliation note and has, accordingly, restated the
reconciliation.





As a
result of the restatement, total liabilities in 2006 for U.S. GAAP purposes
decreased by $1.134 million with an equivalent increase in shareholders’ equity.
This restatement had no impact on the statement of operations or the statement
of cash flows under U.S. GAAP for 2006.





(a)
            Resource
      Interests





For the
purposes of U.S. GAAP, the Company is considered to be an Exploration Stage
Enterprise.  U.S. GAAP requires that exploration costs relating to
resource interests be expensed until there is substantial evidence of
economically recoverable resources, whereas Canadian GAAP allows resource
interest costs to be deferred during the exploration process. Accordingly,
exploration costs are expensed for U.S. GAAP purposes as the Company is at
present exploring its properties for economically recoverable ore
reserves.





(b)
            Income
      Taxes





Under
Canadian GAAP, future income taxes are calculated based on enacted or
substantively enacted tax rates applicable to future years.  Under
U.S. GAAP, only enacted rates are used in the calculation of future income
taxes.  This difference in GAAP did not result in a difference in the
financial position, results of operations or cash flows of the Company for the
years presented.


CANADIAN
ZINC CORPORATION
 (a
development stage company)
 Notes to
the Financial Statements
 December
31, 2007
 (Tabular
amounts are in thousands of Canadian dollars, except for shares, price per share
and per share amounts)


14.
            Reconciliation
      of Canadian and United States Generally Accepted Accounting Principles
      (continued)




(c)           Flow-through
Shares





Under
Canadian GAAP, no liabilities are recorded on flow-through shares until
expenditures have been renounced.  Under U.S. GAAP, a liability on
flow-through shares is required at the time such shares are issued for the
excess of the shares over quoted market value.  In 2006, $1.5 million
was recognized as a difference between U.S. GAAP and Canadian GAAP for the
6,956,522 flow-through shares issued in November, 2006 at $1.15 per share
(compared to a quoted market value of $0.93).  The tax benefits
related to these shares were renounced by the filing of Canada Revenue Agency
Form T101A, “Claim for Renouncing Exploration Expenditures (CEEs) and Canadian
Development Expenditures (CDEs)” in 2007 and accordingly, there was an inclusion
to income (for U.S. GAAP) of the previously recorded $1.5 million
liability.  Under U.S. GAAP, unexpended flow-through funds as at the
balance sheet date are separately classified as restricted cash.  At
December 31, 2007, there were $Nil in unexpended flow-through funds (2006 - $6.8
million).





(d)           Newly Adopted Accounting
Pronouncements





On
January 1, 2007, the Company adopted Financial Accounting Standards Board
(“FASB”) Interpretation No. 48, "Accounting for Uncertainty in Income Taxes"
("FIN 48"). This interpretation prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement of
a tax position taken or expected to be taken in a tax return.  FIN 48
also provides guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition.





There was
no impact to opening retained earnings under U.S. GAAP upon the adoption of FIN
48. The Company has no unrecognized tax benefits and does not expect any
significant changes to this position within 12 months of this reporting
date.





The
Company is subject to Canadian federal income tax as well as income tax of
several provincial jurisdictions. The tax years 2000 and beyond remain subject
to examination by the Canada Revenue Agency.





(e)           New Accounting
Pronouncements





The FASB
has issued Statement of Financial Accounting Standards ("SFAS") 157, "Fair Value
Measurements" ("SFAS 157"), which defines fair value, establishes a framework
for consistently measuring fair value under GAAP and expands disclosures about
fair value measurements. SFAS 157 is effective as of the first fiscal year that
begins after November 15, 2007 (i.e. for the Company’s fiscal year beginning
January 1, 2008).  The adoption of SFAS 157 is not expected to have an
effect on the Company's financial position.





In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities.” This Statement permits all entities
to choose, at specified election dates, to measure eligible items at fair value
(the “fair value option”). A business entity shall report unrealized gains and
losses on items for which the fair value option has been elected in earnings (or
another performance indicator if the business entity does not report earnings)
at each subsequent reporting date. Upfront costs and fees related to items for
which the fair value option is elected shall be recognized in earnings as
incurred and not deferred. If an entity elects the fair value option for a
held-to-maturity or available-for-sale security in conjunction with the adoption
of this Statement, that security shall be reported as a trading security under
Statement 115, but the accounting for a transfer to the trading category under
paragraph 15(b) of


CANADIAN
ZINC CORPORATION
 (a
development stage company)
 Notes to
the Financial Statements
 December
31, 2007
 (Tabular
amounts are in thousands of Canadian dollars, except for shares, price per share
and per share amounts)


14.
            Reconciliation
      of Canadian and United States Generally Accepted Accounting Principles
      (continued)




(e)           New Accounting
Pronouncements (continued)





Statement
115 does not apply. Electing the fair value option for an existing
held-to-maturity security will not call into question the intent of an entity to
hold other debt securities to maturity in the future. This statement is
effective as of the first fiscal year that begins after November 15, 2007 (i.e.
for the Company’s fiscal year beginning January 1, 2008). The Company is
currently analyzing the effects of SFAS 159 but does not expect its
implementation will have a significant impact on the Company's financial
condition or results of operations.





In
December 2007, the SEC issued Staff Accounting Bulletin (“SAB”) No. 110 which
amends SAB 107 to allow for the continued use, under certain circumstances, of
the “simplified” method in developing an estimate of the expected term of
so-called “plain vanilla” stock options accounted for under FAS 123R,
“Share-Based Payment.” When SAB 107 was published, the staff believed that more
information about employee exercise behavior (e.g., employee exercise patterns
by industry or other categories of companies) would become available. Therefore,
the staff stated in SAB 107 that it would not expect the simplified method to be
used for stock option grants after December 31, 2007. The staff now understands
that such information will not be widely available by December 31, 2007.
Accordingly, the SEC staff will accept, under certain circumstances, the use of
the simplified method beyond December 31, 2007 for "plain vanilla" options (as
described in SAB 110). The Company does not believe that SAB 110 will have a
significant impact on its financial statements.





15.           Commitments





The
Company has entered into operating lease agreements for office space and
equipment. These agreements require the Company to make the following lease
payments:





Office
      Leases
            
            Office
      equipment
            
            TotalYear
      ending December 31, 2008
            $
            115
            $
            7
            $
            122Year
      ending December 31, 2009
            
            122
            
            7
            
            129Year
      ending December 31, 2010
            
            133
            
            -
            
            133Year
      ending December 31, 2011
            
            133
            
            -
            
            133Year
      ending December 31, 2012
            
            78
            
            -
            
            78$
            581
            $
            14
            $
            595





In
addition, as at December 31, 2007, the Company had a commitment in the amount of
$100,000 to a contractor at the Prairie Creek Mine Site with regard to the cost
of demobilizing equipment used in the 2007 drill program.


CANADIAN
ZINC CORPORATION
 (a
development stage company)
 Notes to
the Financial Statements
 December
31, 2007
 (Tabular
amounts are in thousands of Canadian dollars, except for shares, price per share
and per share amounts)


16.           Subsequent
events




Subsequent
to December 31, 2007:





(a)
            471,101
      warrants were exercised at a price of $0.72 per common share for proceeds
      of $339,192.





(b)
            49,798
      warrants exercisable at $0.72 per common share and 7,333,332 warrants
      exercisable at $1.00 per common share
expired.





(c)
            50,000
      stock options at an exercise price of $0.94 per common share were
      cancelled.





(d)
            Mining
      equipment to a value of $350,000 was
purchased.